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CPA Australia SMA study materials
CPA Australia SMA study resources

CPA Australia SMA: Performance measurement and management

CPA Australia SMA · Work through your exam, one topic at a time.

All guide sections

Performance measurement and management

Domain 3 - Performance measurement and management - tests whether you can select financial and non-financial measures that align behaviour with strategy. Expect ROI, residual income (RI), EVA, the balanced scorecard, performance prism and transfer pricing.

Financial measures

  • ROI = divisional profit / invested capital. It is comparable and simple but can cause underinvestment when a project earns above the cost of capital yet below the division's current ROI.
  • RI = profit - (invested capital x required return). It promotes goal congruence but is an absolute amount, so large divisions look better.
  • EVA = NOPAT - (WACC x adjusted capital). Adjustments capitalise R&D and leases and remove accounting distortions, making it closer to economic profit.
  • Transfer prices should preserve autonomy and goal congruence. The general rule is transfer price = outlay cost + opportunity cost. Market, cost-plus, negotiated and dual pricing are common.

Non-financial and integrated measures

  • The balanced scorecard has financial, customer, internal process, and learning and growth perspectives. A strategy map shows cause-and-effect links; lead measures predict, lag measures confirm.
  • The performance prism widens the view to stakeholders: stakeholder satisfaction, strategies, processes, capabilities and stakeholder contribution.
  • KPIs should be linked to strategy, controllable, measurable and balanced. Benchmarking compares against internal, competitive or best-practice standards.

Worked example

A division earns $600,000 on capital of $3 million; the required return is 10%. ROI = 20%; RI = $600,000 - $300,000 = $300,000. A new project needs $1 million and earns $150,000. Its ROI is 15%, below 20%, so an ROI-managed division rejects it. Its RI is $150,000 - $100,000 = $50,000, so RI accepts it. The project earns more than the 10% cost of capital, so acceptance is goal-congruent. EVA would give the same signal after adjusting profit and capital.

Traps

Letting ROI drive out profitable investment; comparing RI across divisions of different size; setting a transfer price without the opportunity cost of scarce capacity; rewarding one scorecard perspective in isolation; using non-financial KPIs with no causal link to strategy.