A performance measure should be a way to motivate company employees and manager to work towards which will benefit the entire firm and just not their division. Therefore, the performance measure should be one which evaluates each manager based on their own decisions and not punish them for decisions or costs out of their control. Hence, we will see two ways to implement the performance measure by using unadjusted values, and second is adjusting for other factors that may significantly affect profits.
Firstly, we can discuss the advantages of using the unadjusted values as a form of performance measure. These values can be compared to as the practical capacity of the company. Therefore, the advantage of using a practical capacity level for evaluation helps because it considers normal wastage and inefficiencies that will change cash flow for the year. That means any unexpected factor will not be blamed on the manager making it a good evaluation technique. Furthermore, using this values makes the managers want to be more efficient and work harder to make those sales as these values are higher than a normal capacity level requirement. This means if the managers can reach closer to a practical level they will be goal oriented and efficient.
Yet, it does have its downfall as it may punish a manager for a situation that may not have been in his control or a situation that is normal, expected but the degree of its expectancy is not guaranteed. This will discourage managers to obtain a goal as they are evaluated based on a factor out of their reach as temperature is uncontrollable. There may be a certain prediction but uncertain if that is what it actually will be. In addition, that means there is no
Secondly, there is performance measurements using adjusted for temperature and transfer pricing values. This is beneficial as it gives the managers a heads up for any changes that would affect their daily routines. Taking account changes for temperature is a good idea because it might not be accurate but will surely help take precautions and reduce the loss by a certain amount. This method also incorporates the factor that employees are not wrongly punished over decisions out of their control. For instance, ” take into account all normal wastage and inefficiencies and can therefore be used for inventory planning and forecasting cash flows”. This was a way to make Spain take responsibility for the situation but led a decision concerning the France division that it totally out of its control. Therefore, punishing or rewarding France on that decision would not have been a good measure.
The disadvantages of this method is that, using a single factor responsible for a certain effect might not be the best. This is because temperature might have caused an effect but the total effect might have been due to a multiple factors working together. For example, ” take into account all normal wastage and inefficiencies and can therefore be used for inventory planning and forecasting cash flows”. The case shows that there was an effect due to a temperature change but other factors made the situation worse which were not accounted for. Therefore, using a single adjuster would make it unreasonable as that means other important factors making the changes were disregarded.
Lastly, while the adjustments were being done, a lowed prediction compared to what the actual performance was attained. This shows managers are giving a greater risk probability than what it actually would be. Therefore this means, if rewards are based on the adjusted values they might be unfair as managers were able to reach a higher capacity but predicted low as to show profit. In this case, Italy had “adjusted for temperature 2460 and actual performance 2480, France had 3938 and actual 4618”.
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