Managing And Controlling The Performance Of Organisational Units - 30% Flashcards
What are the pros of responsibility accounting?
Profit centre managers are made aware of the significance of other overhead costs
Profit centre managers are made aware that they need to earn a sufficient profit to cover a fair share of other overhead costs
What are the cons of responsibility accounting?
Profit centre managers are made accountable for a share of other overhead costs, but they can do nothing to control them
The Apportionment of other overhead costs between profit centres is usually a matter of judgement lacking any economic or commercial justification.
What are some KPI for profitability?
ROCE
Operating profit margin
Asset turnover
What are some KPI for liquidity?
Current ratio
Quick ratio
What measures are used to assess performance in a cost centre division?
Total cost and cost per unit
Cost variances
Non financial indicators related to quality, productivity and efficiency
What measures are used to assess the performance of a revenue centre?
Total revenue and revenue per unit
Revenue sales variance
What measures are used to assess a profit centre?
Total sales and market share
Profit
Sales variance
Working capital ratios
What measures are used to assess the performance of an investment centre?
ROI
RI
How do u calculate ROI?
Divisional controllable profit before tax and interest/divisional capital employed x 100%
What are the pros of ROI?
Widely used and accepted
Enables comparisons between divisions
Can be broken down into secondary ratios
What are the cons if ROI?
May lead to dysfunctional decision making
ROI increases with the age of the asset
It may encourage the manipulation of profit and capital employed figures
Different accounting policies
How do u calculate RI?
Controllable profit - notional interest on capital
What are the pros of RI?
RI resolves the dysfunctional aspect of the ROI measure
Cost of financing a division is brought home
Risk can be incorporated
What are the cons of RI?
Does not facilitate comparisons between divisions
Does not relate the size of a divisons profit to the assets employed
Increase over time as asset depreciates
Subject to manipulation
What are the advantages of EVA?
Performance measure that attempts to put a figure to the increase that should have arisen during a period
It can be measured for each financial reporting period
Based on economic profit and economic value of assets not accounting profits and asset values
What are the five key principles for effective report visualisation that should be considered?
Ensure data is optimised for report visualisation
Relevant visualisation tool must be applied
Appropriate report layouts must be chose
Reader experience must be optimised
Visualisation to the appropriate delivery channel must be optimised
What are the problems associated with the use of traditional financial performance metrics?
Only tell what has happened over a limited period in the immediate past
Give no indication of what is going to happen in the future
Vulnerable to manipulation and to choice of accounting policy
Do not relate to the strategic management of the business
What are non performance indicators?
Measures of performance based on non financial information that may originate in and be used by operating departments to monitor and control their activities without any accounting input
What are some non performance indicators for competitiveness?
Sales growth by product or service
Size of customer base
Market share by product, service or customer group
What are some non performance indicators for activity level?
Number of units sold
Labour and machine hours worked
Number of passengers carried
Number of overdue debts collected
What are some non performance indicators for productivity?
Manufacturing cost per unit produced
Capacity utilisation of facilities and labour force
Average number of units produced per day or per man day
Average setting up time for new production run
What are some non performance indicators for quality of service?
Number of units rejected in manufacturing
Number of units failing service
Number of visits by representatives to customer premises
Number of new accounts gained or lost
Number of repeat customer orders received
What are the 3E’s in the 3E’s concept?
Economy - measures relationship between money spent and the inputs
Efficiency - measure the maximum output is achieved from resources used
Effectiveness - measures to what extent the outputs generated achieve the objective of the organisation
What is benchmarking?
Establishment trough data gathering of targets and comparators that permit relative levels of performance to be identified.
What are the reasons for benchmarking?
To receive an alarm call about the need for change
Learning from others in order to improve performance
Gaining a competitive edge
Improving services
What are the five types of benchmarking?
Internal benchmarking
Competitive benchmarking
Functional benchmarking
Strategic benchmarking
Customer benchmarking
What are the four items on a balanced scorecard?
Financial perspective
Internal business process perspective
Learning and growth perspective
Customer perspective
Why is the transfer price significant for inter-divisional transactions?
Determines how the total profit is shared between the two divisions
In some circumstances it could affect decisions by the divisional managers about whether they are willing to sell to or buy from other divisions
What are the objectives of transfer pricing?
Goal congruence
Performance measurement
Maintaining divisional autonomy
Minimising the global tax liability
Recording the movement of goods and services
A fair allocation of profits between divisions
What are the three bases for setting a transfer price?
Market based prices
Cost based prices
Negotiated prices
What is the general rule when calculating the transfer price?
Marginal costs of selling division + opportunity cost of selling division
What is the optimum transfer price in a competitive market for an intermediate product?
Market price +/- any small adjustments
How do you calculate the optimum transfer price when the selling division has surplus capacity?
Marginal cost of the selling division
What is a 2 part tariff in transfer pricing?
Marginal cost, but in addition a fixed sum is paid per annum or per period to the supplying division
What are the disadvantages of a two part tariff?
May not provide motivation to selling division manager
Measurement of the performance of the selling division may not be fair
Negotiation process may be time consuming and a fair profit may have to be imposed by head office
What is dual pricing in transfer pricing?
One transfer price is recorded by supplying division and a different transfer price is recorded by buying division.
How do you calculate transfer price when there are production constraints and the division has no spare capacity?
Marginal cost of selling division + shadow price
How do you calculate minimum transfer price?
Marginal cost of selling division + any lost contribution
How do you calculate the maximum transfer price?
Lower of:
External purchase price
And the net marginal revenue of selling on final product
