Managing performance can be visualized as a circle encompassing five steps:

1. Set performance standards and goals
   • Using Key Performance Indicators that align with and promote the organizations larger goals and objectives
   • There are leading and lagging indicators
     • Leading indicators provide information that can be acted upon and that can change results
     • Lagging indicators show only historical results
2. Measure performance
   • KPIs should be based on controllable items for each kind of responsibility center
     • For instance, for a revenue center that is based on sales, a KPI could be the number of sales calls made
     • The purchasing department may be held accountable for negotiating the best price and measured against standard costs
     • The production department may be held accountable for cost overruns due to waste measured by standard volumes
   • Net income is a lagging indicator of financial performance
3. Compare actual performance to established performance standards
   • Management communicates KPIs to responsibility centers, departments, and other managers
     • Each KPI should have a benchmark, target, or goal
4. Take corrective action
   • Managers should be held accountable for the costs and performance measures that they can control
     • For example, the sales manager can control the number of calls made but not the price that competitors are charging
5. Use information gained from the process to set up future performance standards
   • Setting KPIs is an iterative process, and should be constantly reviewed for effectiveness.

Finally, here is a quick overview of the concept:

You can view the transcript for “Responsibility Accounting” here (opens in new window).

Or a longer overview here:

You can view the transcript for “Performance Evaluation and Responsibility Centers” here (opens in new window).