Chapter 9: Performance Evaluation and Pricing

Question 1

3 things accounting must do to be more closely tied to strategic planning

Answer 1

1. be more outward looking eg. business environment, customers
2. greater concern for developing methods that give competitive advantage
3. must be concern to monitor strategies and pring to sucessful conclusion ie have more emphaisis on long term planning and act as guardian of business strategy

Question 2

Competitor Analysis - 2 methods

Answer 2

Competitor Array - identify key success factors for industry and rank businesses. subjective
Competitor profiling - find out waht drives competitors and predict how they resond to change look at
1. mission and objectives
2. strategies
3. assumptions
4. resource and capabilities

Question 3

Customer profitability requires

Answer 3

total costs of selling and distributing to be known

uses customer related costs and their cost drivers

Question 4

In practice -

Answer 4

small proportion of customers produce most profit
less profitable customers could be targeted for price increase
big companies do customer analysis in groups but hard to do

Question 5

Competitive advantage through cost leadership

Answer 5

businesses compete on price
so need to compete in costs
need strategy commitment linked to managing cost base
eg. kaizen, target costing etc

Question 6

Non financial measures can be

Answer 6

lead indicators

Question 7

4 areas to Balanced scorecard

Answer 7

1. financial
2. customer
3. internal business process (eg. product cycle times, speed of response to complaints
4. Learning and Growth - people, systems

Question 8

BSC can be applied to company, division, subdivision etc

Answer 8

known as cascading, should link to each tier

Question 9

Requirements

Answer 9

non financial measures must be evident, often intrinsically linked to financial performance
concern for financial measures - must be a cause and effect relationship

Question 10

Nature of BS

Answer 10

aims to strike balance between:
internal and external measures
existing outcomes and future performance
hard and soft, financial and non financial

Question 11

4 steps to create Shareholder value

Answer 11

1. set objectives that centralise maximising shareholder returns
2. establish methods to measure
3. manage business in such a manner as to promote shareholder returns
4. measure returns over time and assess.

Question 12

4 issues with accounting profit

Answer 12

1. measured over short period of time
2. risk is ignored
3. does not take into account cost of capital
4. can vary according to different accounting practices

Question 13

Changes to be made to financial statements to eliminate conservative base

Answer 13

1. R + D costs written off at time they benefit, not period occured
2. restructuring costs should be viewed as future investment

Question 14

Max profit when:

Answer 14

marginal revenue = marginal cost of production

Question 15

Practical considerations with trying to optimise

Answer 15

• demand notoriously difficult to predict
• cost difficult to estimate
• labour in short supply so element of opportunity cost should exist
• optimal level derived from short term profit max, may not be in line with long term goals

Question 16

Full cost pricing

Answer 16

logical as means break even
but suppliers price takers, not makers
market may not agree, does not take into account demand function
still useful info - LRAC, helps with entry decisions, basis for negotiation for fixed price contracts

Question 17

Marginal Cost

Answer 17

minimum price, assumes fixed costs not affected by decision to produce, airlines use for offpeak
short term/ limited approach

Question 18

Target pricing

Answer 18

use market research to set target price, find reasonable profit

Question 19

Price skimming

Answer 19

• very high to capture highest customers with low sensitivity to high prices
• lowers price to capture next cascade once saturated

Question 20

Penetration pricing

Answer 20

sold cheap to discourage competitors, once market leader then raise prices