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ACCA Performance Management > Chapter 4 - Performance Measurement & Control > Flashcards

Chapter 4 - Performance Measurement & Control Flashcards

1
Q

What are the main purposes of information systems?

A
  • Support day to day operations via processing and storing transactions
  • Support the managerial activities of planning, decision making, performance management and control
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2
Q

What is a system?

A

A set of interacting components that operate together to accomplish a purpose

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3
Q

What is an information system?

A

All systems and procedures involved in the collecting, storage, production and distribution of information

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4
Q

What is information technology?

A

The equipment used to capture, store, transmit or present information. IT provides a large part of the information systems infrastructure.

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5
Q

What is a system boundary?

A

A system boundary separates the information system from its environment. Anything outside the system boundary belongs to the systems environment and not the system itself.

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6
Q

What is a management information system (MIS)?

A

Any system which provides information for use in the decision making at all levels within an organisation

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7
Q

What is an executive information system (EIS)?

A

They provide board level with summarised information for strategic decisions

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8
Q

What is an expert system?

A

They provide access and assistance with tax legislation, companies act requirements, etc.

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9
Q

What is a decision support system (DSS)?

A

They provide information in a flexible format to facilitate “what if” analysis. Often used to assist resource planning at a management/tactical level.

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10
Q

What is an enterprise resource planning system (ERPS)?

A

An inter grated computer-based system used to manage internal and external resources, including tangible assets, financial resources, materials and Human Resources. It integrates the various business functions into one system and is usually looked after by information management specialists centrally. Management can directly access informations rather than relying on management accounts.

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11
Q

What is a transaction processing system?

A

Systems that are used to capture all the day-to-day routine transactions within a business, mostly at an operational level.

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12
Q

What is a customer relationship management system (CRM)?

A

It helps to manage customer data, the business can use it to track and organise its contacts with both existing and potential future clients.

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13
Q

What are the costs of information systems?

A
  • The equipment or software cost
  • Implementation/maintenance
  • Training costs
  • Management and staff time required (opportunity cost)
  • Expert knowledge/time required
  • System security
  • Costs associated with a reduction in the size of the workforce
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14
Q

What are the benefits of information systems?

A
  • Management and staff time saved
  • Increased knowledge and expertise
  • Improvement in customer experience
  • Reduction in other costs (e.g. bad debts)
  • Increased quality of information (more likely to be ACCURATE)
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15
Q

What are some examples if privacy and security risks?

A

Natural disasters, malfunction of computer hardware or software, computer viruses, hackers, electronic eavesdropping or human errors

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16
Q

What are the two types of controls organisations should have in place to safeguard against threats?

A
  • General controls

- Applications controls

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17
Q

What are general controls?

A

Controls over the IT environment such as access controls, segregation of duties and business continuity planning (e.g. passwords)

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18
Q

What are application controls?

A

Transaction processing controls automatically performed by the system such as, completeness checks, data validity checks and authorised checks.

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19
Q

What is a LAN?

A

Local area network

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20
Q

What is a WAN?

A

Wide area network

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21
Q

What is included within the networked enterprise?

A
  • Internet
  • Intranet
  • Extranet
  • Wireless Technology (WI-FI)
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22
Q

What is the internet?

A

An electronic communications network that connects computer networks, individual users and organisational computer facilities around the world

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23
Q

What is the intranet?

A

An internal ‘mini’ internet sines the company’s own networked computers and internet technology.

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24
Q

What is the extranet?

A

A secure extension of a company’s private intranet. It can be accessed by authorised outsiders.

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25
Q

What is wireless technology?

A

Technology enabling the linking of devices to networks wherever WI-FI networks are available

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26
Q

What is an open system?

A

Systems that interact with other systems or the outside environment

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27
Q

What is a closed system?

A

Systems having relatively little if not no interaction with other systems or the outside environment

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28
Q

What are the internal sources of management information?

A
  • The accounts
  • Original budget
  • Supplier and customer databases
  • Meetings (formal and informal)
  • Inventory management systems
  • Payroll department/systems
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29
Q

What are the costs of internal sources of management information?

A
  • Direct data capture costs
  • Processing costs
  • Indirect costs
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30
Q

What is Big Data?

A

The capturing and processing of data on a vast scale and converting it into information that is able to be utilised by the organisation

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31
Q

What is structured data?

A

Data stored within defined fields, often with defined lengths, within a defined record, in a file or similar records

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32
Q

What is unstructured data?

A

Data does not have a prescribed format, it comes in all shapes and sizes and is therefore much more difficult to analyse. Unstructured data may be ‘tagged’ using meta data to make organising and analysis of data easier.

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33
Q

What is metadata?

A

Other data

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34
Q

What are the characteristics of big data?

A
  • Volume
  • Velocity
  • Variety
  • Veracity
  • Value
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35
Q

What are the 5V’sand what do they show?

A
  • Volume (Amount)
  • Velocity (Speed)
  • Variety (Different formats/systems)
  • Veracity (Accuracy)
  • Value (The data needs to be able to be analysed and information extractable)

It shows the characteristics of Big Data

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36
Q

What does the DIKW pyramid show?

A

How we can extract value from big data

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37
Q

What is data?

A

Raw facts and figures

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38
Q

What is information?

A

Adding value to raw data

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39
Q

What is knowledge?

A

Putting information into context

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40
Q

What is wisdom?

A

Understanding the knowledge and using it in future decisions

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41
Q

What is data analytics?

A

The processing of big data?

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42
Q

What is data mining?

A

Analysing data to identify patterns in the data to turn it into useful information

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43
Q

What is predictive analytics?

A

Using the patters identified from data mining to make predictions

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44
Q

How can you use big data?

A
  • To obtain a competitive advantage
  • To identify and/or analyse opportunities to increase revenues
  • Build a more complete picture if their customers
  • Systems need to ensure information is available and acted upon quickly
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45
Q

What are the uses and benefits of big data, data mining and data analytics for planning?

A
  • Help make budget estimates more accurate by providing missing data
  • Provides more reliable information about the impact of factors in the wider environment
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46
Q

What a re the uses and benefits of big data and data analytics for costing?

A
  • Help identify ways of reducing costs through process efficiencies or removing non-value-adding activities
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47
Q

What are the uses and benefits of big data and data analytics for decision making?

A
  • Better decisions can be made due to the new insights into areas
  • Information becomes more transparent and more accessible
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48
Q

What are the uses and benefits of big data and data analytics for performance management?

A
  • Provide more detailed and up to date performance management
  • Provide a better idea of non-financial performance, indicating better long- term direction and earlier corrective action
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49
Q

What are the challenges and risks of implementing and using big data and data analytics in an organisation?

A
  • Significant costs involved in setting up a system to effectively use big data
  • organisations need to adhere to the relevant data protection legislation
  • Risk the data may contain data outliers
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50
Q

What controls are used for internal information?

A
  • Input controls
  • Processing controls
  • Output controls
51
Q

What are the controls for highly sensitive information?

A
  • Keeping passwords or other codes securely
  • Staff contracts specifying procedures and actions to be taken if the person fails to adhere to the security standards
  • Storing physical documents in locked cabinets in secure locations
  • IT department monitoring file access on a regular basis
52
Q

What are the profitability ratios?

A
  • Return on capital employed
  • Gross profit margin
  • Operating profit margin
  • Asset turnover
53
Q

What is the equation for return on capital employed?

A

PBIT/TALCL X100%

54
Q

What does return on capital employed measure?

A

The amount of available capital, giving an indication as to how efficient the organisation is generating profits from its capital

55
Q

What is the equation for gross profit margin?

A

Gross profit / revenue X100%

56
Q

What does the gross profit margin measure?

A

The ability of the business to sell goods for more than they cost to make

57
Q

What is the equation for operating profit margin?

A

PBIT / Revenue X100%

58
Q

What does the operating profit margin measure?

A

The ability to make an overall profit on the goods as it sells

59
Q

What is the equation for asset turnover?

A

Revenue / TALCL

60
Q

What does asset turnover measure?

A

How well your assets are being used to generate sales

61
Q

What is another equation for return on capital employed?

A

Asset turnover X operating profit margin

62
Q

What are the liquidity ratios

A
  • Current ratio
  • Quick ratio
  • Inventory turnover
  • Inventory days
  • Receivables collection period
  • Payables payment period
  • Working capital cycle
63
Q

What is the equation for current ratio?

A

Current assets / current liabilities

64
Q

What does the current ration measure.?

A

The working capital of the organisation and assesses its ability to meet its short-term debts

65
Q

What is the equation for quick ratio?

A

(Current assets - inventories)/ current liabilities

66
Q

What does quick ratio measure?

A

An organisations liquidity, especially where inventory cannot be turned into cash very quickly

67
Q

What is the equation for inventory turnover?

A

Cost if sales / inventories

68
Q

What is the equation for inventory days?

A

Inventory / cost of sales X365

69
Q

What does inventory days measure?

A

How long, on average, you are holding items in inventory

70
Q

What is the equation for receivables collection period?

A

Trade receivables / purchases or cost of sales X365

71
Q

What does receivables collection period measure?

A

How long your debtors take to pay

72
Q

What is the equation of payables payment period?

A

Trade payables / purchases or cost of sales X365

73
Q

What does the payables collection period measure?

A

How long your company takes to pay its creditors

74
Q

What is the equation for working capital cycle?

A

Inventory days + Receivables days - Payables days

75
Q

What does the cost working capital cycle measure?

A

The time taken to purchase inventories, then sell them and collect the cash

76
Q

What does gearing refer to?

A

The extent to which a business is dependent on loans and preference shares, as opposed to ordinary shares and reserved

77
Q

What are the risk ratios?

A
  • Debt to equity ratio
  • Gearing
  • Interest cover
78
Q

What is the equation for debt to equity ratio?

A

Long term debt / equity %

79
Q

What is the equation for gearing?

A

Long term debt / (equity + long term debt) %

80
Q

What does gearing show?

A

What proportion of the assets of the company have been financed by lenders rather than shareholders

81
Q

What is the equation for interest cover?

A

PBIT / Interest payable

82
Q

What does interest cover measure?

A

The number of times that the company can afford to pay its interest charges out of its current year profits

83
Q

What could rations be compared to to become meaningful?

A
  • Previous years
  • Other companies
  • Other divisions within the company
  • Industry standards
84
Q

What are the commonly used non-financial performance indicators include?

A
  • Customer satisfaction
  • Flexibility
  • Quality
  • Delivery
85
Q

What is short-termism caused by?

A

The natural human activities to be more concerned about today than about tomorrow. It leads to decisions being made that improve short term profit but damage the long term profit

86
Q

What can a company do to encourage a long term view?

A
  • Set long-term strategic goals
  • Offer long-term incentives
  • Have long term contracts of employment
  • Make more use of non-financial measures in performance assessment
87
Q

Who made the balanced scorecard?

A

Kaplan and Norton 1992

88
Q

What are the four perspectives of the balanced scorecard?

A
  • Financial
  • Customer
  • Internal business processes
  • Innovation & Learning
89
Q

Who made the building block model?

A

Fitzgerald and Moon 1996

90
Q

What do the building blocks cover?

A
  • Dimensions
  • Standards
  • Rewards
91
Q

What do the dimensions section of the building block model cover?

A

Relevant aspects of the business to set measures for

92
Q

What does the standards section of the building blocks model cover?

A

What characteristics the system should have

93
Q

What does the rewards section of the building blocks model cover?

A

The benefits of adopting the structured process

94
Q

What is included in the dimensions section of the building blocks model?

A
  • Profit
  • Competitiveness
  • Flexibility
  • Innovation
  • Resource utilisation
  • Excellence/Quality
95
Q

What is included in the standards section of the building blocks model?

A
  • Ownership
  • Achievability
  • Equity
96
Q

What is included in the rewards section of the building blocks model?

A
  • Clarity
  • Motivation
  • Controllability
97
Q

What are the problems with setting qualitative targets?

A
  • Quantifying the targets
  • Measures can be subjective
  • It may be hard to actually record responses/performance
  • A qualitative target might not be as tangible as a quantitive one
98
Q

What needs to be ensured for a transfer pricing system to be successful?

A
  • Goal congruence
  • Autonomy
  • Performance evaluation
99
Q

What is the market price approach for transfer pricing?

A

When the selling division charges receiving divisions the market price for the product. The selling division would make the same return as if they sold to a third party and the recovering department would pay a fair price based on market conditions. Ensures goal congruence.

100
Q

What are the problems with a market price approach?

A
  • what if there is no external market for the product?
  • what if the selling division is at full capacity and makes a number of other highly profitable products that it sells to third parties as well?
101
Q

What variations need to be considered for a cost based approach for transfer pricing?

A
  • Do we use actual cost or standard cost?
  • Do we use full cost or marginal cost?
  • Do we add a mark-up onto the cost?
102
Q

What type of cost should be used for transfer pricing?

A

Standard cost should be used!

103
Q

What may happen if we use the full cost for a cost based approach for transfer pricing?

A

All the costs of the selling department will be covered. Including the fixed costs may result in dysfunctional decisions being made.

104
Q

What may happen if we us marginal cost for a cost based approach for transfer pricing?

A

The receiving department would make the optimum buying decision from the group perspective. However, the selling department would not earn any contribution towards fixed costs and profitability, this is demotivating for the selling department.

105
Q

What is a dual pricing system?

A

Where the selling division gets credited with the market price for the transfer item, and the receiving department gets charged the variable cost. There is then an adjustment at the head office.

106
Q

What is the two-part tariff?

A

Where the selling division charges the receiving division the variable cost but each receiving division contributes a lump sum fixed fee monthly to the selling division to help cover the cost of fixe costs and earn a profit.

107
Q

For an opportunity cost approach to transfer pricing, what is the minimum the selling division will accept?

A

Marginal cost + Opportunity cost
The opportunity cost depends on whether there is spare capacity:
- If there is spare capacity then the opportunity cost is zero
- If there is no spare capacity then the opportunity cost is the contribution the selling division would earn if it did not have to make and sell the product to the receiving division

108
Q

For an opportunity cost approach for transfer pricing, what is the maximum cost the receiving division will be willing to pay?

A

The lower of:

  • External purchase price
  • Divisional net revenue (selling price - additional costs in receiving division)
109
Q

What is the equation for return on investment?

A

Divisional profit / Divisional investment

110
Q

What is divisional profit?

A

Profit before head office allocations (PBIT)

111
Q

What is divisional investment?

A

Capital employed (TALCL) or net assets

112
Q

What is residual income?

A

The net profit of a division after having deducted a notional charge for interest based on the amount of investment tied up in the division.

113
Q

What is the equation for notional (imputed) interest?

A

Divisional investment X cost of capital

114
Q

What is the calculation for residual income?

A

Divisional profit - notional interest

115
Q

What does residual income compare?

A

The profit actually made within the minimum acceptable profit to investors

116
Q

What does it mean if residual income is positive?

A

Profit generated over is over and above that required by the capital providers.

117
Q

Why is return on investment preferred to residual income?

A
  • It gives a % answer which is easier to understand
  • Inter division comparisons are easier to do as ROI is a relative measure not an absolute one like RI
  • Not felt that dysfunctional behaviour happens often enough to be a real problem
  • RI needs an estimate of cost if capital to be made
118
Q

What are the problems with return on investment and residual income?

A
  • Which profit figure to use

- Which investment figure to use

119
Q

What needs to be considered when comparing divisional performance?

A
  • When was the division established?
  • How long has the current divisional manager been in place?
  • What are the market conditions for the divisions goods/services?
  • How old are the assets used by the division?
120
Q

What are the problems of non-quantifiable objectives for non for profit organisations and the public sector?

A
  • Objectives can be viewed differently by different stakeholders
  • Interpreting actual results becomes subjective
  • It may be harder to identify a step by step guide to improving the performance
  • Lack if suitable benchmarks
121
Q

What are the problems with not for profit organisations and the public sector having multiple objectives?

A
  • It may not be possible to simultaneously achieve all objectives, prioritising may be necessary
  • The importance of individual objectives may change overtime
122
Q

What ways can performance be measured for not for profit organisations and the public sector?

A
  • Comparing actual performance to non-financial targets
  • Questioning users
  • Appointing regulators/experts to monitor performance
123
Q

What are the most common ways of measuring performance to identify whether they are offering value for money?

A
  • Economy (cost if resourced used)
  • Efficiencies (outputs Vs inputs)
  • Effectiveness (achieving targets)

ACCA Performance Management (8 decks)

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