Benchmarking is the practice of comparing actual performance results with a standardize performance goal or number--a benchmark. Benchmarking is generally used in business for setting budgetary and financial performance goals. A benchmark or base number is used to compare actual results and judge the improvement of the company.
There are a few different kinds of benchmarking. Cost accountants generally use internal benchmarking. In other words, cost accountants look at the company past performance and set standards for future performance. For example, a cost accountant or managerial accountant might analysis the level of fixed and variable costs in a production process for the last three years. Managers can then use the average costs over the past three years as a benchmark. It can then judge the current performance against the benchmark and find new way to improve.
Another form of benchmarking is external benchmarking. Companies often compare themselves to other companies in the industry or industry averages. For instance, a retailer might take an industry sales average and use that as a benchmark to judge how well they are doing for the year. External benchmarking can be used for broad goals like overall sales or more focused goals like debt to equity or gross margin.
Benchmarking is a great way for managers to gauge how well their department or company is performing internally and in the industry as a whole. Benchmarking is also used by external users of the financial statements like investors and creditors to see if a business' performance meets expectations.
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