5. Responses to Strategic Risk

Question 1

What are the 4 costing systems?

Answer 1

1. Activity based costing
2. Standard costing
3. Target costing
4. Life cycle costing

Question 2

What 5 HR policies can control the quality of employees?

Answer 2

1. Recruitment policies
2. Contracts of employment
3. Adequate day to day policies and procedures
4. Discipline and reward
5. Performance appraisal and feedback

Question 3

What are the 2 main advantages of profit related pay?

Answer 3

1. Profit is an understandable measure/target
2. Using profit aligns the interests of managers and shareholders

Question 4

What are the 3 main disadvantages of using profit related pay?

Answer 4

1. Profits can be manipulated
2. Can lead to short term behaviour
3. Other non financial factors are also important

Question 5

What are the 5 main advantages of outsourcing?

Answer 5

1. Allows company to focus on core strengths
2. Gives access to expert knowledge and skill
3. Saves company time and money
4. Passes risk of turnover to outsourced entity
5. Improved independence

Question 6

What are the 5 main disadvantages of outsourcing?

Answer 6

1. Quality of supplier needs to be vouched
2. Company loses in house skill
3. Probable redundancies
4. Potential confidentiality issues
5. Supplier in good bargaining position at end of contract

Question 7

What is the ideal transfer price between cost centres?

Answer 7

Cost

Question 8

What are the 4 goals of transfer pricing?

Answer 8

1. Goal congruence (optimise group)
2. Divisional autonomy (motivation)
3. Appraise divisional performance
4. Minimising the overall tax liability

Question 9

What are the main conflicting goals in transfer pricing?

Answer 9

Goal congruence and autonomy

Question 10

What does setting at market price tend to ensure in transfer pricing?

Answer 10

Goal congruence

Question 11

What are the 2 benefits of using standard cost in a cost based transfer pricing system?

Answer 11

1. Incentive to control costs (over selling at actual cost)
2. Buying division knows in advance

Question 12

What is the pro and con of using full cost in a cost based transfer pricing system?

Answer 12

Pro - cover all costs
Con - may charge more than external so lead to worse decision overall

Question 13

For which party is using marginal cost as the basis for a cost based transfer pricing system demotivational?

Answer 13

The selling division (could make more elsewhere)

Question 14

What is a dual pricing system?

Answer 14

Selling division is credited market price, buying division charged at variable cost and a central adjustment for the difference

Question 15

What is the equation for ROI?

Answer 15

Divisional Profit / Total Assets Less Current Liabilities

Question 16

What is the equation for RI?

Answer 16

Divisional Profit - Notional interest charge

where N.I. charge is divisional investment x cost of capital

Question 17

What 4 reasons is ROI usually preferred in businesses, over RI, for?

Answer 17

1. Takes understood figures from P&L and SoFP
2. Easy to understand % measure
3. Relative measure so can make interdivisional comparisons
4. Does not need cost of capital estimate (RI does)

Question 18

What 2 reasons should use of RI be considered over ROI?

Answer 18

1. Linked to cost of capital
2. Fewer dysfunctional decisions

Question 19

What are the 5 benefits of the balanced scorecard?

Answer 19

1. Helps provide more comprehensive view
2. Emphasis on medium and long term
3. Aligns business activities to strategy
4. Improves internal and external comms
5. Monitors organisation performance against strategic goals