1. Explain the purpose and benefits of performance evaluation. It is important for companies to develop measures that guide the organization to successful strategy execution. These measures may be either financial (drawn directly from the financial statements) or nonfinancial (qualitative indicators that drive performance). Performance measurement systems provide three primary benefits: accountability, feedback, and decision guidance.
   
   
2. Define and explain the use of responsibility centers. Responsibility centers describe any point in an organization where control (and the related responsibility) resides over revenues, expenses, or both. Four types of responsibility centers generally are recognized: revenue, cost, profit, and investment centers. A manager of a revenue center would be responsible only for the revenues generated by his or her unit, while a manager of a cost center would be responsible only for the costs. Profit center managers are evaluated on both revenues and costs, whereas investment center managers are responsible for all of these as well as for the level of invested assets in their unit.
   
   
3. Demonstrate how firms evaluate responsibility center performance. A performance report for operating segments typically includes three types of margins: contribution margin, performance margin, and segment margin. Each is useful in a different way. Contribution margin is used to evaluate a segment's product or service line. When comparing individual managers across segments, performance margin is used. Segment margin facilitates comparisons of operating units to each other or to a budgeted segment profit margin. Return on investment (ROI) also can be used to compare segments with different sized asset bases.
   
   
4. Illustrate the use of cost-benefit analysis for business decision making. Understanding costs and performance evaluation expectations helps managers to make routine business decisions. This chapter illustrates two common decision contexts: make-or-buy and special offers. To make such decisions, managers use cost-benefit analysis. Cost-benefit analysis compares incremental benefits to relevant costs. In addition to quantitative analysis, managers must consider qualitative strategic factors regarding a decision that also may affect the firm.
   
   
5. Describe and illustrate the use of the balanced scorecard for performance measurement and evaluation. The balanced scorecard is a model that integrates financial and nonfinancial measures to help managers implement strategy and measure performance. The balanced scorecard translates the organization's strategy into an integrated, balanced set of performance measures that cut across traditional functional areas. Management determines the appropriate targets for these measures and frequently compensates employees based on their ability to meet these objectives.