Chapter 6

Question 1

What is sub-systems?

Answer 1

Within a system there will usually be sub-systems. For example, if a company is a system, then the finance department is a sub-system. Within the finance department will be a sub-sub-system such as the management accounting system, and so on.

Question 2

What is closed systems?

Answer 2

There are systems that accept no input from the environment, are self-contained and cannot respond to change. These do not exist in business

Question 3

What is open systems?

Answer 3

These are systems which accept inputs from their environment and provide output to the environment. They react to their environment, e.g. a company

Question 4

What is objective? (in terms of characteristics of systems)

Answer 4

A system must have an objective to function correctly. For example, a company’s objective might be to maximise shareholder wealth. The objective allows the system to be monitored or controlled.

Question 5

Wha tis feedback control?

Answer 5

It is defined as the measurement of differences between planned outputs and actual outputs achieved, and the modification of subsequent action and / or plants to achieve future required results. This is the more common type of control system.

Question 6

What is feedforward control?

Answer 6

it is defined as the forecasting of differences between actual and planned outcomes and the implementation of actions before the event to prevent such differences. E.g. budgeting system: A cash budget might predict that an overdraft will be required in a particular month.

Question 7

Differentiate between primary, secondary, negative and positive feedbacks.

Answer 7

• Primary feedback - could be reported to line management in the form of control reports, comparing actual and budgeted results. If the variances are small or can be corrected easily, then the information may not be fed back to anyone higher in the organisation.
• Secondary feedback - is where feedback is sent to a higher level in an organisation and can lead to a plan being reviewed and possible changed; for example, the revision of a budget after a large variances were discovered due to price changes over time.
• Negative feedback - is feedback taken to reverse a deviation from standard. This could be by amending the inputs or process so that the system reverts to a steady state; for example, a machine may need to be reset over time to its original settings.
• Positive feedback - is feedback taken to reinforce a deviation from standard. The inputs or process would not be altered.

Question 8

Differentiate between open loop system and closed loop systems.

Answer 8

• Open loop systems - are where there is scope within the control mechanism for outside involvement; for example, a manager might decide what action should be taken from, say, three options
• Closed loop systems - are where the control action is automatic, for example, the thermostat on a central heating system

Question 9

Feedback reported to a high level in an organisation that can lead to the revision of a plan is called…?

Answer 9

Secondary feedback

Question 10

Systems that accept no input from the environment, are self-contained and cannot respond to change are called…?

Answer 10

Closed system

Question 11

The type of organisational structure where employees have two or more managers is called…?

Answer 11

Matrix

Question 12

Differentiate between Management control and Management control systems.

Answer 12

Management control is defined as the process of guiding organisations into viable patterns of activity in a changing environment.

Management control systems are defined as the processes by which managers attempt to ensure that their organisation adapts successfully to its changing environment.

Question 13

What is a management accounting control systems?

Answer 13

it is an information system that helps managers to make planning and control decisions.

Question 14

Performance measures for investment centres are:?

Answer 14

ROI; Residual income (RI) and Economic value added (EVA)

Question 15

ROI for an investment centre is similar to the ROCE for an organisation as a whole. Write down the formula.

Answer 15

ROI = (PBIT / operations management capital employed) x 100

Question 16

What is residual income? Write down formula

Answer 16

RI is a measure of the profitability of an investment centre after deducting a notional or imputed interest cost. This interest cost is a notional charge for the cost of the capital invested in a division.

RI = Accounting profit - notional interest on capital

Question 17

Differentiate between Traditional and Modern manufacturing

Answer 17

Traditional manufacturing:

• standardisation of product
• long production runs
• acceptable level of quality
• slow product environment

Modern manufacturing:

• globalisation
• competition
• JIT and TQM
• intelligent machines

Question 18

What are the conditions for successful JIT adoption?

Answer 18

• Stable high volume of demand
• Co-ordination of daily production programmes of supplier and consumer
• Co-operation of supplier who has to be reliable on both delivery and quality
• Suitable factory layout
• Reliable transport system

Question 19

What are the operational requirements of JIT?

Answer 19

• High quality and reliability. JIT relies on getting things right first time, and preventing scrap or re-working.
• Speed of throughput. Throughput in a manufacturing operation must be fast, so that customer orders can be met by production rather than out of inventory.
• Flexibility. In order to respond immediately to customer orders, production must be flexible, and in small batch sizes. The ideal batch size is 1.
• Lower cost. Lower inventory, faster throughput and better quality will drive down costs.

Question 20

What is TQM and what it’s philosophy aimed at?

Answer 20

TQM is total quality management and it’s business philosophy is aimed at:

• minimising errors (ideally to zero) as the cost of getting things right first time is always less than the costs of correction; and
• maximising customer satisfaction such that every customer’s expectations are met or exceeded.

Question 21

To achieve philosophy of TQM a firm should have an appropriately installed quality culture and very good systems that are documented and adhered by all staff. What are it’s fundamental features?

Answer 21

• Prevention of errors before they occur
• Continual improvement
• Real participation by all
• Commitment of senior management

Question 22

What are the costs of quality for TQM?

Answer 22

• Prevention costs
• Appraisal costs
• Internal failure costs - These are the costs arising within the organisation when the predetermined specifications are not met. They include the cost of reworking or rectifying the product, the net cost of scrap and etc.
• External failure costs - costs of inadequate quality that are incurred once the product has been sold. They include dealing with customer complaints, warranty claims costs of repairing or replacing returned faulty goods.

Question 23

Modern manufacturing generally includes: (select all that apply)

A Intelligent machines
B Short production runs
C JIT
D TQM

Answer 23

All

Question 24

Features of JIT system include: (Select all that apply)

A Fluctuating demand
B Low volumes
C Reliable transport system
D A flexible workforce

Answer 24

C and D

Question 25

Within TQM, a training cost is:

A A prevention cost
B An appraisal cost
C An internal failure cost
D An external failure cost

Answer 25

A

Question 26

Techniques in JIT and TQM environments include: (select all that apply)

A Throughput accounting
B Backflush accounting
C Non-financial performance indicators
D Activity based budgeting

Answer 26

ABC. Throughput accounting tries to remove bottlenecks - a problem in JIT. Backflush accounting requires inventory levels to be low - a condition for JIT. Non-financial performance indicators are used to measure factors such as the number of rejects - which is found in TQM.

Question 27

The philosophy of management based on cutting out waste and any unnecessary activities is:

A Throughput accounting
B Backflush accounting
C Lean accounting
D Management accounting

Answer 27

C

Question 28

What is EVA?

Answer 28

Economic value added is a measure of performance, basic concept of which is that the performance of a company as a whole, or of investment centres within a company, should be measured in terms of the value that has been added to the business during the period.

Question 29

What is the major difference between EVA and RI?

Answer 29

• residual income is calculated using accounting profit and an accounting value for capital employed
• EVA is calculated using an estimated value for economic profit and an estimated economic value of capital employed.

Question 30

What is EVA formula?

Answer 30

EVA = NOPAT minus Capital charge

Capital charge = Economic value of business assets x Cost of capital %

Question 31

List and explain objectives of transfer pricing.

Answer 31

1. Goal congruence - it is the task of the management accounting system in general and the transfer pricing policy in particular to ensure that what is good for an individual division is good for the company as a whole.
2. Performance measurement - they transfer pricing system should result in a report of divisional profits that is reasonable measure of the managerial performance.
3. Maintaining divisional autonomy - decentralisation is done to allow managers to exercise greater autonomy.
4. Minimising global tax liability
5. Recording the movement of goods and services.
6. A fair allocation of profits between divisions - most of the advantages claimed for divisionalisation are behavioural. Insofar as transfer pricing has a material effect on divisional profit it is essential that managers perceive the allocation of corporate profit as being fair if the motivational benefits are to be retained.

Question 32

What are the 4 perspectives of Balanced scorecard?

Answer 32

1. Financial perspective
2. Customer perspective
3. Internal business perspective
4. Innovation and learning perspective

Question 33

What are the financial perspectives of BSC?

Answer 33

• ROI
• EVA
• Profit target
• Operating cash flow target
• Cost reduction target

Question 34

What are the customer perspectives of BSC?

Answer 34

• Target for new customers
• Target for retention of existing customers or repeat orders
• Percentage of orders met within X days
• Percentage of orders delivered on time
• Market share target
• Target for customer satisfaction (quantifiable measure of satisfaction)

Question 35

What are the internal business perspectives of BSC?

Answer 35

• Percentage of tenders accepted by customers
• Percentage of items produced that have to be re-worked
• Production cycle time

Question 36

What are the Innovation and learning perspectives os BSC?

Answer 36

• Number of new products launched
• Target for employee productivity
• Percentage of total revenue coming from new products
• Revenue per employee
• Time from identifying a new product idea to market launch

Question 37

There are dysfunctional consequences of non-financial performance measures. What are those unintended consequences of performance measurements? (8)

Answer 37

• Tunnel vision: the emphasis on quantifiable data at the expense of qualitative data
• Sub-optimisation: the pursuit of narrow local objectives at the expense of broader organisation-wide ones.
• Myopia: the short-term focus on performance may have longer term consequences
• Measure fixation: an emphasis on measures rather than the underlying objective
• Misrepresentation: the deliberate manipulation of data so that reported behaviour is different from actual behaviour
• Misinterpretation: the way in which the performance measure is explained
• Gaming: an employee can pursue a particular performance standard when that is what is expected of him/her, even though s/he knows that this is not in the organisation’s best interests in terms of its strategy.
• Inflexibility: performance measurement can inhibit innovation and lead to paralysis of action.

Question 38

There is a risk that when performance targets are selected for each of the four perspectives. What are those? These are problems with BSC.

Answer 38

• the targets for the different perspectives could be contradictory and inconsistent with each other;
• non-financial performance targets could become an end in themselves, rather than a means towards the overall financial objective of maximising shareholder wealth or shareholder returns.

Question 39

Which of the following cover all four perspectives of the BSC? (Select all that apply):

A Number of new customers; market share; production cycle time; time to market
B Profit; ROI; Production cycle time; time to market
C Profit; market share; training costs; time to market
D Profit; market share; production cycle time; time to market

Answer 39

D - because it covers all four PERSPECTIVES of BSC

Question 40

What is SMA?

Answer 40

SMA - Strategic management accounting - the preparation and presentation of information for decision-making laying particular stress on external factors.

Question 41

How Lord (1996) characterised SMA?

Answer 41

• collection of competitor information (such as pricing, costs and volume)
• Exploitation of cost reduction opportunities (a focus on continuous improvement and non-financial performance measures)
• Matching the accounting emphasis with the firm’s strategic position.

Question 42

What is lean organisation and lean accounting?

Answer 42

• Lean manufacturing is a philosophy of management based on cutting out waste and unnecessary activities.
• Organisations can become lean and mean if they can get rid of their unnecessary ‘fat’.
• Two elements in lean manufacturing are JIT and TQM

Question 43

How does lean management accounting help the organisation?

Answer 43

• Provides information to control and improve the value stream (focus on value streams rather than traditional departmental structures)
• Provides information for performance measurement and cost reporting purposes (non-financial measures, continuous improvement and techniques such as target and lifecycle costing).
• Provides relevant cost information for financial reporting purposes (only that which is required, eliminating non-value added information (via implementing techniques such as backflush accounting)
• Ensures that management are provided with statements that are: instantly accessible through an IT system and simple to read.

Question 44

What are issues with modern management accounting?

Answer 44

JIT - some big manufacturers has been accused of holding smaller suppliers to ransom by dictating the way they operate. The big customer expects the small supplier to forego other work to undertake their order immediately. Meanwhile the prices paid for the good supplied might be quite low, but the smaller company reluctantly accepts this in order to keep the business in the hope they can grow on the back of it.

TQM - the idea of continual improvement can be hard to ensure. Management often have other important issues to deal with and in many companies TQM is put aside for long periods of time

BSC - the criticism of the BSC is that management are asked to meet so many different objectives that they lose all perspective. There is a risk that the maximisation of shareholder wealth may be forgotten.