Chapter 5 - Performance Indicators

Question 1

What is benchmarks?

Answer 1

Standards or targets set for one or more areas of activity and should be related to what is important to the organisation.

Question 2

What does quantitative data mean?

Answer 2

Data which can be stated in numbers which can be split into financial or monetary data.

Question 3

Examples of financial quantitative data

Answer 3

1) turnover
2) selling prices
3) variances
4) costs
5) costs per unit/hour

Question 4

Examples of non financial quantitative data?

Answer 4

1) production units
2) number of rejects
3) number of complaints
4) number of orders placed

Question 5

What does qualitative data mean?

Answer 5

Data which cannot be put in numerical terms. It consists of peoples judgement and opinions which is used for performance measuring.

Question 8

What is the gross profit margin (%) formula?

Answer 8

Gross profit / sales X 100%

Question 9

What is the net profit margin formula?

Answer 9

Net profit / sales X 100%

Question 10

What is the operating profit margin formula?

Answer 10

Operating profit / Sales X 100%

Question 11

Examples of performance measures?

Answer 11

1) sales
2) profit
3) costs
4) cost per employee
5) cost per hour
6) cost per unit of output

Question 12

Why are performance indicators used?

Answer 12

1) to identify a problem
2) to control expenses
3) measuring the performance of an individual
4) to create plans within an organisation

Question 13

What is ‘return on capital employed’?

Answer 13

Money being used to finance the running costs of the business which is represented by the owners capital and long term liabilities.

Question 14

What is the ‘return on capital employed’ formula?

Answer 14

Operating profit / (non current assets + net current assets) X 100%

Or

Operating profit / (capital + long term liabilities) X 100%

Question 15

What is the ‘return on net assets’ formula?

Answer 15

Operating profit / net assets X 100%

Question 16

What is value added?

Answer 16

The difference between value of output (sales) and value of inputs (materials/bought in services).

Value added = sales - (cost of materials used and bought in services)

Question 17

What is asset turnover and the formula?

Answer 17

The number of times the value of the assets has been obtained in turnover.

Asset turnover = turnover(sales) / (non current assets + net current assets)

Question 18

What is working capital?

Answer 18

The part of a business which circulates between inventory, receivables, cash and trade payables.

Question 19

Current ratio meaning and formula

Answer 19

This shows the number of times the current liabilities are covered by the current assets.

Current assets / current liabilities

Question 20

Quick ratio (acid test) meaning and formula

Answer 20

This ratio is used to compare the current assets other than inventory with the current liabilities.

(Current assets - inventory) / current liabilities

Question 21

Inventory holding meaning and formula

Answer 21

This shows how well the stock is being managed or the length of time taken to sell the inventory

Inventory / cost of goods sold X 365

Question 22

Inventory turnover meaning and formula?

Answer 22

This shows the number of times the inventory is sold in the year.

Cost of sales / inventory

Question 23

What is gearing and the formula?

Answer 23

What proportion of total funding comes from sources that demand regular payments of interest or dividends.

Debt / (debt + equity) X 100

Question 24

What is gearing (debt to equity) and the formula?

Answer 24

Compares the loans or debts directly to he equity instead of capital employed.

Debt / (Share capital + reserves) X 100

Question 25

What is the main and individual formulas for control ratios?
(ECA)

Answer 25

Activity ratio = capacity X Efficiency

Efficiency = standard hrs for actual production / Actual hours

Capacity = Actual hours / budgeted hours

Activity(Volume) = standard hours for actual production / budgeted hours

Question 26

Is it better to have low or high working capital cycle and why??

Answer 26

High - this indicates greater investment in working capital.

Question 27

What causes the gross profit margin to change??

Answer 27

• sales price
• sales volume (depending on whether you’re comparing flexed budgets)
• material prices
• labour costs

Question 28

Control ratio formulas ..
Efficiency
Activity
Capacity

Answer 28

Eff - S / A = standard hrs/actual hrs

Act - S / B = standard hues/actual hours

Cap - A / B = actual hrs / budget hrs

Question 29

What is a balanced scoreboard?

Answer 29

A way of viewing the performance of a profit making organisation from 4 perspectives.

Question 30

What 4 perspectives are included in the balanced scoreboard?

Answer 30

1) financial - satisfying shareholders
2) customers - satisfaction and loyalty
3) internal - technical excellence and needs
4) innovation and learning - continual improvement

Question 31

Examples of qualitative measures in service organisations

Answer 31

• Average waiting time for customers

* customer complains/satisfaction

Question 32

Advantages of using variances?

Answer 32

• to help monitor the use of resources
• to help with control of the business
• to help with planning for the future