Performance measurement tools were developed with the aim to recognise the goals of the business, the success of the business processes in achieving them, and in the investment decisions. These tools are of immense help to the management, and the investors to know the way the business is being run. In the traditional methods of costing which was labour-intensive, the cost was allocated on the basis of the labour. But the increased dependence of technology brought with it an immense increase in the overhead expenses, thereby making the allocation by labour ineffective. ABC or activity based costing was developed with the aim of allocating the overheads to the products and services or the customers on the basis of the resources consumed by the activities involved. It is defined as “a methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use. Activity-based costing recognizes the causal relationships of cost drivers to activities.” - strategicsourcing .It moves on the assumption that it is the activities related to the cost object, which can be a product, or service that can be controlled and not the cost. This tool is highly effective in planning and control. The tool provides a more accurate allocation of the costs than the traditional method. A more accurate cost allocation provides the necessary information to diagnose the product on the basis of its profitability. Some products will render more profitable than others. This tool also gives an insight on when the product will break even. This tool has the disadvantage of not taking into account the direct costs of production.
Balanced scorecard is defined as “an analysis technique, developed by Robert Kaplan and David Norton, designed to translate an organization's mission statement and overall business strategy into specific, quantifiable goals and to monitor the organization's performance in terms of achieving these goals’. - oranz . This is a management tool that concentrates on the goals of the company and expects it to be measurable and attainable. The tool analyses the set goals and the actual outcome to make the necessary modifications to reduce the variance. Balanced scorecard considers learning through training and growth through mentoring, the internal processes coinciding with the goals, the metrics based on the customer needs, and the financial indicators for wealth maximisation as responsible for the effective functioning of the organisation.
EVA or the Economic Value Added tool is the registered trademark of Stern Stewart and Co. While ABC ignores the capital expenditures of the company, EVA is a management tool that analyses the value provided by the company to its shareholders. A positive EVA denotes a positive investment while a negative EVA denotes those that are of the least worth to the company. A negative EVA denotes those investments that are to be restructured. EVA is used by companies to provide the variable pay to its employees. With the variable portion dependent on how the individual projects contributes to the overall profitability of the concern, the employees are persuaded to put in the best of their effort to their work. EVA calculates the economic value by making certain adjustments to the traditional system of accounting. But as this method utilises the past data, and with the rapid changes brought into the system by the changes in the technology, frequent evaluation is required to make it effective.
A performance tool by itself has many flaws in the system. Now tools like a combination of ABC and EVA, etc are developed to negate the mistakes and to give a better picture of the way the business is being operated. Thus this helps the management, its employees and the shareholders to realise the worth of the business.
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