Suggested languages for you:

Americas

Europe

Problem 2

# What are the three steps in designing accounting-based performance measures?

Expert verified
The three steps in designing accounting-based performance measures are: 1. Identify the objective of the performance measure: Define the desired outcome that the organization wants to achieve, such as improving efficiency or increasing profitability. 2. Select appropriate accounting variables: Choose financial metrics relevant to the performance measure's objective, such as net income or return on investment (ROI). 3. Design the performance measure formula: Combine the selected accounting variables in a systematic manner that best represents the organization's performance concerning the stated objective, using ratios or growth rates as needed.
See the step by step solution

## Step 1: Identify the Objective of the Performance Measure

The first step in designing accounting-based performance measures is to identify the objective or purpose of the measure. This involves understanding the desired outcome that the organization wants to achieve through the implementation of the performance measure. The objective can be anything, such as improving efficiency, increasing profitability, or maintaining a healthy cash flow. It is essential to clearly define the objective, as it lays the foundation for the selection of appropriate accounting variables and the evaluation of the measure's effectiveness.

## Step 2: Select Appropriate Accounting Variables

After identifying the objective of the performance measure, the next step is to select the appropriate accounting variables (also referred to as financial metrics) that are closely related to the defined objective. These variables will be used to calculate the performance measure and thereby help assess the extent to which the objective is being met. Some common examples of accounting variables include net income, total revenue, operating expenses, and return on investment (ROI). It is important to select variables that are applicable to the specific context of the organization and relevant to the performance measure's objective.

## Step 3: Design the Performance Measure Formula

The final step in designing accounting-based performance measures is to determine the formula or calculation that will be used to compute the performance measure. This involves combining the selected accounting variables in a systematic manner that best represents the organization's performance concerning the stated objective. Often, this could involve calculating the ratio of two variables (such as operating income to total revenue) or the growth rate of a particular variable over time (such as the year-over-year increase in net income). Carefully designing the formula ensures that the performance measure accurately reflects the organization's performance and enables meaningful comparisons, evaluations, and decision-making.

We value your feedback to improve our textbook solutions.

## Access millions of textbook solutions in one place

• Access over 3 million high quality textbook solutions
• Access our popular flashcard, quiz, mock-exam and notes features

## Join over 22 million students in learning with our Vaia App

The first learning app that truly has everything you need to ace your exams in one place.

• Flashcards & Quizzes
• AI Study Assistant
• Smart Note-Taking
• Mock-Exams
• Study Planner