Accounting Cost and Performance Management Essay

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Q1. Explain the differences between cost-effectiveness and performance management. Which performance elements are essential for assessing financial soundness of a nonprofit?



Although sound financial performance is clearly critical for an organization to flourish, cutting costs is not synonymous with performance management itself. An organization can be maximizing its cost effectiveness but not necessarily its performance. Performance management sets specific goals for employees. Goals must be measurable to be clear and effective but not necessarily tangible in nature. “Performance management is a whole work system that begins when a job is defined as needed” (Heathfield, 2018, par.3). It starts with the hiring process, beginning with an effective job description of each employment position. Each employment position should be linked to specific organizational needs. This is followed up by training and monitoring that evaluates the candidate’s performance over time based on those needs. Presumably the performance markers are also linked to financial solvency (for example, in the case of a nonprofit, soliciting a certain amount of donations from givers through effective marketing campaigns with strong ROI) but again solvency is not the sole objective.



Financial soundness of a nonprofit is assessed slightly differently than a for-profit organization. Nonprofits are not beholden to shareholders but they must still remain financially solvent and stable.

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It is important to remember that being a nonprofit does not mean the organization has a lack of concern for financial data. “Nonprofit is a tax status, not a way of operating: Positive operating results (unrestricted revenue consistently exceeding expenses) are an indicator of strong financial management” (Kramer, 2013, par.6). The ways of tracking financial success may be slightly different for the institution—for example, versus, “overly focusing on the ratio of earned to contributed revenue” reliability and a steady revenue stream may be a better indicator, indicating that the organization consistently has enough funds to support its activity (Kramer, 2013, par. 5). But that does not mean ignoring revenue needs entirely.



Q2. How do the board and audit committee utilize activity-based cost reduction information in governance?



Without activity-based cost reduction approaches, a firm is able to lack a “clear view of what drives costs…and profitability of business units transparent across the enterprise” (“Using ABC,” 2018, par.1). In contrast to other methods, activity-based costing, “focuses on activities not responsibilities. It depersonalises the cost review and enables management to value….....

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References

Heathfield, S. (2018). Performance management. The Balance. Retrieved from: https://www.thebalance.com/performance-management-1918226

Kramer, P. (2013). Top indicators of nonprofit financial health. Nonprofit Finance Fund. Retrieved from: https://www.nonprofitfinancefund.org/blog/top-indicators-nonprofit- financial-health

Using ABC to reduce costs. (2018). Global FS Consulting. Retrieved from: http://www.globalfsconsulting.com/display.php?page=1086

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