Performance Management Flashcards
When comparing service businesses with manufacturing businesses, what is the relevance of intangibility?
Services are intangible and it is therefore harder to measure the quality.
What are the three levels of planning and control in an organization?
- Strategic
- Tactical
- Operational
What are the six dimensions in Fitzgerald & Moons’ building block model?
- Financial performance
- Competitive performance
- Quality
- Flexibility
- Resource Utilization
- Innovation
What are the four perspectives that the Balanced Scorecard focuses on?
- Financial
- Internal
- Innovation and Learning
- Customer
What are ‘key performance indicators’?
Key performance indicators are the measures used to determine whether or not the critical success factors are being achieved.
What are ‘key performance indicators’?
Critical success factors are those areas that the business must focus on if it wishes to succeed.
In pricing, how is the price elasticity of demand calculated?
The price elasticity of demand is the % change in demand divided by the % change in price.
What is the difference between ‘mark-up’ and ‘margin’?
Mark-up is the gross profit as a percent of cost. Margin is the gross profit as a percent of sales.
In the context of linear programming, what is meant by ‘slack’?
Slack occurs when the optimum solution uses less of a resource than the maximum that is available.
When measuring Value for Money for a not-for-profit organization, what are the three E’s?
- Economy
- Efficiency
- Effectiveness
For theoretical transfer pricing, how is the maximum transfer price calculated?
The maximum transfer price is the lower of:
* the selling price less the marginal costs of the receiving division
* the price for which the receiving division could buy the goods externally
For theoretical transfer pricing, how is the minimum transfer price calculated?
For theoretical transfer pricing, how is the minimum transfer price calculated?
How is the RI (residual income) ?
profit before interest and tax- ( Capital Employed* cost of capital (cost of borrowing))
How is the ROI (return on investment)?
profit before interest and tax/ capital employed
In the context of divisionalisation, what is meant by an ‘investment centre’?
An investment centre is a division for which the divisional manager has control over costs, revenues, and investment in non-current assets and net current assets.
What are the three categories of stakeholders in a business?
Internal (employees, management)
Connected (shareholders, suppliers, customers, lenders)
External (government, community etc..)
What are characteristics of a service business that distinguish services from manufacturing?
Intangibility
Simultaneity / inseparability
Perishability
Heterogenuity
No transfer of ownership
Why is important that non-financial performance is measured rather than concentrating solely on financial performance?
Non-financial performance measures (such as quality) and important for achieving future growth. Financial measures concentrate on the past rather than the future.
What is meant by TQM (total quality management)?
TQM is a strategy aimed as creating an awareness of quality in all aspects of a business, thus reducing wastage and inefficiencies.
What is meant by the JIT (just in time) inventory strategy?
JIT involves keeping minimum inventories – producing goods when they are needed and eliminating large inventories of raw materials and finished goods.
What are operational variances measuring?
comparing the actual results with the revised standard.
What are planning variances measuring?
comparing the revised standards with the original standards.
When considering planning and operational variances, what is meant by the revised standard cost?
The revised standard cost is a realistic standard cost after taking into account permanent changes since the original standard cost was calculated.
What is the purpose of an operating statement?
An operating statement is a statement reconciling the actual profit to the budgeted profit, and explaining the reasons for the difference.
If absorption costing is being used, what is the cause of a fixed overhead volume variance?
A fixed overhead volume variance arises when the actual production is different from the budgeted production.
Suggest three possible reasons for the existence of a labour efficiency variance.
*The employment of higher or lower skilled workers.
*The use of better or worse quality materials
*More or less training of workers
Suggest three possible reasons for the existence of a materials usage variance.
The purchase of better or worse quality materials (resulting in less or more wastage)
Greater or lesser efficiency of the production department in controlling waste
A change in the mix of materials
Suggest three possible reasons for the existence of a materials price variance.
A change in the price charged by the supplier
A change of supplier
The deliberate purchase of better/worse quality material
Suggest three possible reasons for the existence of a sales volume variance.
A higher or lower selling price
A change in market share
A change in the size of the overall market
What is the purpose of a flexed budget?
The purpose of a flexed budget is control – the actual results can be compared with the flexed budget results.
What are the main uses of the standard cost of a product?
The main uses are the valuation of inventory, and to act as control (comparing actual with standard costs).
In relation to learning curves, What does Wrights Law (or the ‘doubling rule’) state?
As total output doubles, the average time per unit will fall to a fixed percentage of the previous average time per unit.
Learning curve theory is useful when budgeting for which costs?
Learning curve theory allows the average labour time per unit to be estimated and is therefore useful when budgeting costs that vary with the labour time per unit (the cost of labour, and possibly variable overheads if these are incurred on an hourly basis).
What is the difference between feedback and feedforward control?
Feedback control compares actual results with budget.
Feedforward control compares budget results with forecast.
What is meant by a ‘rolling budget’?
Rolling budgets involve always having a budget for the following twelve months, which involves updating the existing budget and adding an additional period (usually month).
What is meant by incremental budgeting?
Incremental budgeting involves taking the results for the previous period and adjusting for inflation and changes in the expected level of activity.
What is the difference between top-down budgeting and bottom-up (or participative) budgeting?
Top-down budgeting is where the budget is imposed on the budget holder
Bottom-up budgeting is where the budget holder participates in preparing the budget
What are the principal aims / uses of budgeting?
- Planning
- Control
- Communication
- Co-ordination
- Evaluation
- Motivation
- Authorisation and delegation
What is the difference between sensitivity analysis and simulation?
Sensitivity analysis looks at the effect of changes in just one variable at a time.
Simulation attempts to look at the effect of all possible combinations of variables.
What is the attitude to risk of a decision maker who uses the minimax regret approach?
The decision maker is said to be a risk avoider.
What is the attitude to risk of a decision maker who uses the maximax approach?
The decision maker is a risk seeker.
What is the maximax decision rule?
For each course of action, the best outcome is identified (maximum)
The chosen course of action is the one that gives the best (maximum) of the best outcomes.
What is the attitude to risk of a decision maker who uses the maximin approach?
The decision maker is a risk avoider
What is the maximin decision rule?
For each course of action, the worst outcome is identified (minimum)
The chosen course of action is the one that gives the best (maximum) of the worst outcomes
What are the limitations of using expected values for decision making?
1 It is usually impossible for the probabilities to be estimated accurately
2 For a one-off decision, the actual outcome will not be the expected value
3 Expected values ignore the risk and the decision makers attitude to risk
What is meant by the term ‘expected value’ in the context of decision making under uncertainty?
The expected value is the weighted average of the possible outcomes, weighted by their respective probabilities.
What is the difference between risk and uncertainty?
Risk is measurable – several outcomes are possible and the probability of each outcome is known.
Uncertainty is not measurable – there are several possible outcomes, but the probabilities of the outcomes are not known.
What is meant by the term ‘sunk cost’?
A sunk cost is a cost that has already been incurred (and is therefore not affected by any future decision).
What is meant by price discrimination?
Price discrimination is when the same product or service is sold at different prices in different markets.
What is meant by volume discounting pricing strategy?
Volume discounting is the strategy of offering a discount to customers who purchase a large quantity
What is meant by the penetration pricing strategy?
Penetration pricing is the strategy of charging a low price when a product is first launched in order to gain market share, with the intention of increasing the price later.
What is meant by the market skimming pricing strategy?
Market skimming is the strategy of charging a high price when a product is first launched, with the intention of reducing the price over time. (A popular strategy for new technology – rich people are prepared to pay higher prices to be the first to own the new technology)
What is meant by the term shadow cost (or shadow price)?
The shadow cost of a resource is the most extra (i.e. the premium) that the business would be prepared to pay for one extra unit of the resource.
(calculated as the extra contribution that would be generated by having one extra unit of the resource at its original cost).
What is the definition of the CS ratio?
The CS ratio = contribution / sales
What is meant by the term ‘margin of safety’?
budgeted sales volume - breakeven sales volume= Margin of safety.
It can be expressed in units, or in $’s of revenue. or as a percentage of the budgeted sales volume.
What are the labels of the axes on a profit volume graph?
The vertical axis shows the profit (or loss) in $’s.
The horizontal axis either shows the volume in units, or the sales revenue in $’s
What are the labels of the axes on a breakeven chart?
The vertical axis shows the costs and revenues in $’s.
The horizontal axis shows the volume in units.
What is meant by the term breakeven sales revenue?
The sales revenue at which the profit is zero
(i.e. no profit / no loss)
What is meant by the term breakeven sales volume?
The number of units sold at which the profit is zero (i.e. no profit / no loss)
List four methods that may be used to account for environmental costs.
1 Inout / output analysis
2 Flow cost accounting
3 Life cycle costing
4 Activity based costing
In what ways can the throughput accounting ratio of a product be improved?
1 Increase the selling price
2 Reduce material cost per unit
3 Reduce the operating expenses
4 Reduce the time required per unit
What is the definition of the throughput accounting ratio (TPAR) for a product?
TPAR = throughput contribution per hour / factory cost per hour
What is meant by the term ‘bottleneck’ in the context of throughput accounting?
The bottleneck is the operation that is limited the rate of production
What are the two main assumptions in throughput accounting?
1) That the company operates following just-in-time principles (i.e. keeping minimum levels of inventory)
2) That in the short term, all costs are fixed other than the cost of materials (i.e. that the only variable cost is materials)
What are the main steps that should be considered in order to maximise the return over the life cycle of a product?
1 Design costs out of the product
2 Minimise the time to market
3 Maximise the length of the life cycle
What are the phases in a product’s life cycle?
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* Development phase
* Introduction / launch phase
* Growth phase
* Maturity phase
* Decline phase
What is the basic idea of lifecycle costing?
The idea of lifecycle costing is to include all costs over the entire life of a product (and hence the estimated profitability) as opposed to costing over one year at a time.
What steps might be taken in order to reduce the ‘cost gap’ in the context of target costing?
Steps to be considered would include:
1) Value analysis – change the design so as to eliminate costs that do not add value in the perception of the customer
2) Cut material costs by reducing wastage
3) Cut labour costs by finding ways of working faster
4) The use of technology to make production more efficient
What is the cost gap ?
target cost - estimated cost of production = Cost Gap
What are steps involved in calculating a ‘target cost’?
In order to calculate a target cost:
1 Determine a realistic selling price
2 Decide on what profit is required
3 Subtract the profit from the selling price to arrive at the target cost.
What is meant by the term ‘cost driver’ in the context of activity based costing?
The cost driver is the unit of an activity that causes the activity cost to change.
List four standards in Standard costing?
- Ideal standard
- Basic standard
- Expected standard
- Current standard
What are the limitations of standard costing?
Limitations of standard costing are:
* accurate preparation of standards can be difficult
* it may be necessary to use different standards for different purposes
* less useful if not mass production of standard units
* traditional standards are based on company’s own costs where the practices of other organisations are taken into account
* can lead to an over-emphasis on quantitative measures of performance at the expense of qualitative measures
What are the uses of standard costing?
Uses of standard costing are:
* inventory valuation
* as a basis for pricing decisions
* for budget preparation
* for budgetary control
* for performance measurement
* for motivating staff using standards as targets
What is Standard costing?
Standard costing is a system of accounting based on pre-determined costs and revenue per unit which are used as a benchmark to assess actual performance and therefore provide useful feedback information to management.
What are the practical reasons for the learning effect to cease?
Practical reasons for the learning effect to cease are:
(a) When machine efficiency restricts any further improvement
(b) The workforce reach their physical limits
(c) If there is a ‘go-slow’ agreement among the workforce
What are Seasonal variations in time series analysis?
Seasonal variations is the regular rise and fall over shorter periods of time. For example, winter hats sales are likely to be higher than average every winter and lower than average every summer
What are Cyclical Variations in time series analysis?
Cyclical Variations are the wave-like appearance of a number of time series graph when taken over a number of years. Generally this correspondents to the influence of booms and slumps in the industry.
What is Trend in time series analysis?
Trend: is the underlying pattern of a time series when the short term fluctuations have been smoothed out.
What are decision trees?
Decision trees are diagrammatical representations of the various alternatives and outcomes. They are relevant when using an expected value approach and where there are several decisions to be made.
What are the main factors influencing the selling price decision?
- costs
- competitors
- customers
What is meant by the return per factory hour in throughput accounting?
Return per factory hour = Throughput /Time on key resource
What is meant by total factory costs for throughput accounting?
Total factory costs = all production costs except materials
When comparing service businesses with manufacturing businesses, what is meant by simultaneity?
The service is received by the customer at the same time as it is performed.
When comparing service businesses with manufacturing businesses, what is the relevance of intangibility?
Services are intangible and it is therefore harder to measure the quality.
What are the three levels of planning and control in an organisation?
- Strategic
- Tactical
- Operational
What are the six dimensions in Fitzgerald & Moons’ building block model?
- Financial performance
- Competitive performance
- Quality
- Flexibility
- Resource Utilisation
- Innovation
What are the four perspectives that the Balanced Scorecard focuses on?
- Financial
- Customer
- Internal
- Innovation and Learning
What are ‘key performance indicators’?
Key performance indicators are the measures used to determine whether or not the critical success factors are being achieved.
What is meant by the term ‘critical success factor’?
Critical success factors are those areas that the business must focus on if it wishes to succeed.
In pricing, how is the price elasticity of demand calculated?
The price elasticity of demand is the % change in demand divided by the % change in price.
What is the difference between ‘mark-up’ and ‘margin’?
Mark-up is the gross profit as a percent of cost.
Margin is the gross profit as a percent of sales.
In the context of linear programming, what is meant by ‘slack’?
Slack occurs when the optimum solution uses less of a resource than the maximum that is available.
When measuring Value for Money for a not-for-profit organisation, what are the three E’s?
- Economy
- Efficiency
- Effectiveness
1.In absorption costing, as the profitability of a product would be overstated, the company’s marketing effort is likely to be directed towards maximising the sale of this product, with a lesser emphasis on the other products.
is this true or false?
True
In applying throughput accounting to a multi-product decision making problem, one must calculate the throughput per unit for each product (selling price-material cost).
True/False ?
True
What type of environmental cost is this?
Carbon emissions
Health care costs
Use of energy and water
External Environmental Cost
1.To control (comparing actual results against the plan), internal information is required.
2.External information is useful for benchmarking (e.g. competitive benchmarking - comparisons with competitors in the business sector).
true/false/other options
both are true
Which of the 4 levels in the Big Data Pyramid refers to understanding relationships between data? :
Data
Information
Knowledge
Wisdom
Information
General note
1.Absorption costing focuses on the product in the costing process.
2.In ABC, activities are the focus of the costing process.
3.It is possible to identify how much material is wasted in production by using the ‘mass balance’ approach, whereby the weight of materials bought is compared to the product yield. From this process, potential cost savings may be identified.
4.Environmental management accounting can often help to identify savings in terms of business travel and transport of goods and materials.
what is the Throughput Accounting Ratio (TPAR)?
Return per factory hour/cost per factory hour.(inventory /time)
Cost per factory hour = Total factory costs / total time available on bottleneck resource.
What is Environmental failure costs
Environmental failure costs are costs incurred as a result of environmental issues being created either internally or outside the company. These can be financial or societal costs. Compensation, penalties and air pollution are all environmental failure costs.
What are the categories of environmental costs by EPA ?
1.Conventional costs: costs having environmental relevance (e.g. costs of buying energy and other scarce resources).
2.Potentially hidden costs: those environmental costs which are recorded, but simply included in general overheads, so management is not aware of them.
3.Contingent costs: potential future costs (e.g. costs of cleaning up damage caused by pollution). (In financial statements, contingent costs might be disclosed as contingent liabilities or recognised as provisions.)
4.Image and relationship costs: the costs of producing environmental reports and promoting the company’s
What are the categories of environmental costs by Hansen and Mendova ?
1.Environmental prevention costs are the costs of activities undertaken to prevent the production of waste (e.g. spending on redesigning processes to reduce the amount of pollution released into the atmosphere).
2.Environmental detection costs are those incurred to ensure that the organisation complies with regulations and voluntary standards (e.g. costs of auditing the organisation’s environmental activities).
3.Environmental internal failure costs are costs incurred to clean up environmental waste and pollution before it has been released into the environment (e.g. costs of disposing of toxic waste).
4.Environmental external failure costs are costs incurred on activities performed after discharging waste into the environment (e.g. costs of cleaning up an ocean after spilling oil).
What is Big data ?
extremely large data sets that may be analysed computationally to reveal patterns, trends and associations, especially relating to human behaviour and interactions.
What is Structured data ?
Structured data – data stored within defined fields within a defined record, along with similar data, according to the specifications laid down in a data model. The data model limits the data collected and how it can be process
what are the essential characteristics of big data ?
Volume: a very large amount; more than can be easily handled by a single computer; for example retailers having details of all customer purchases and enquiries.
Variety: non-uniform, from internal and external sources, some structured, but mostly unstructured; examples would include customer demand, complaints, reviews on websites, tweets about the business.
Velocity: fast and continuous; it has to be processed quickly to yield useful results.
Veracity: is the data true and can its accuracy be relied upon? Assessment of veracity involves considering the reliability of the data itself and the source providing the data. Machine-generated data may be more reliable than data from human sources which may be easy to manipulate. Veracity links to velocity in that if data is changing rapidly, there is a risk of using out-of-date data.
Value: analysis of big data could be costly in terms of facilities needed and staff time spent. Data specialists may have to be employed. The organisation must therefore consider the value that could be created by analysis of big data.
what is an Information system and what are the three areas that it assist management in?
Information systems – consist of people, procedures and possibly computer hardware and software, working together to collect, store, process and communicate information.
An information system does not simply mean a computerised application. However, the use of Information Technology (IT) is widespread in modern information systems, and IT can support all levels of management.
Information systems provide the information required to assist management in the following areas:
1.Planning: setting the long-term strategic direction of the organisation, as well as planning for the medium and short term.
2.Control of the organisation: management needs to monitor how the organisation is actually performing against the plan, and take actions to correct any significant deviations away from the plan.
3.Decision-making: managers need to make decisions at many different levels. The information systems should provide them with the information to do this.
Elaborate on Strategic Planning
Strategic Planning
This is the highest level of management in an organisation, and it is normally carried out by the board of directors or an equivalent body. This level of management concerns itself with setting goals and objectives for the organisation over the long term (typically 5-15 years).
Strategic planning may include the following:
-Deciding which products or markets to be in.
-Investment decisions.
-Planning for environmental changes.
Identifying the competitive advantage of the organisation.
Elaborate on Tactical Management
Tactical Management
Tactical management, or management control, usually is carried out by a middle level of management. It involves taking the strategic plan and making it happen. The time for planning is normally one year. Tactical management includes the following tasks:
-Ensuring that resources are obtained and used effectively and efficiently in accomplishing the objectives of the organisation;
-Implementing the strategic decisions, often by way of a long-term plan;
-Preparing annual budgets, and comparing actual results with budgets on a monthly basis; and
Recruiting staff.
Elaborate on Operational Management
Operational Management
Operational management focuses on day-to-day running of the business, and operational managers will be responsible for departments within an organisation. Operational managers are involved in:
-Routine planning such as staff rotes (schedules).
-Programmed decisions based on internal, transaction-based information (e.g. ordering inventory when inventory levels fall to reorder levels).
-These are usually actions that are undertaken when certain criteria or rules are met. For example, ordering inventory when inventory levels fall to reorder level.
what is Planning?
Planning is the setting of goals and the selection of the means of achieving these goals. As businesses become large, these procedures need to be formalised.
Short-term plans such as an annual budget show in detail the intended results for the forthcoming year.
Long-term plans, also called “strategic” plans, are usually documents showing the long-term objectives of a business.
What does control mean ?
Control means checking that an organisation is on track to meet its long- and short-term objectives, and taking action to correct any deviations from these.
Long-term control includes strategic performance evaluation, which aims to measure how an organisation is performing against its strategic objectives.
Short-term control focuses on comparing the budgeted results with actual results.
This usually takes the form of an operating statement, which breaks down the difference into its component parts (variances).
What is Decision making?
Decision making usually involves using the information provided by the costing system to make decisions.
For example, an organisation deciding the appropriate price to charge for a contract they are tendering for, or whether it would make financial sense to outsource the production of an essential component.
What is the Transaction Processing Systems?
Transaction Processing Systems (TPS) are used by operational staff to capture data and make processes more efficient, improving the accuracy and timeliness of information.
Data is primarily high frequency and short term and IT allows much of the transaction processing to be performed automatically, with limited human input.
Transactions processing systems use one of two approaches to process the data:
1. Batch processing – individual transactions of the same type are collected (into “batches”) and stored for later (periodic) input to the computer.
2.Processing proceeds in discrete “runs”.
Real time systems processing – transactions are processed immediately as they occur.
Used on operational management level
What is the Management information systems?
Management information systems – systems which convert data from internal and external sources into information used by management to enable them to make decisions. Management accounting systems compose that part of the system which provides management accounting information.
Used on a Tactical management level
nformation from an information system is used for three purposes:
Planning – deciding what the organisation (or that part of the organisation under the control of a particular manager) will do.
Controlling – ensuring that the organisation stays on course to meet its plan.
Decision-making – deciding between different courses of action (e.g. whether or not to develop a new product).
what is the Executive information system ?
Executive information system – a system designed to assist the decision-making of senior management of an organisation by providing summarised information from both internal and external sources relevant to meeting the strategic goals of the organisation. It is a specific type of decision support system.
Used on a strategical management level.
what is the Decision Support Systems ?
Decision Support Systems – computer-based information system that supports managers in decision making, often utilising analytical modelling techniques.Such systems typically analyse large amounts of data and provide information about the likely outcome of decisions based on rules and assumptions programmed into the system. This information may be extracted from a central database, using reporting tools. The systems may also be linked to external data sources (e.g. financial information from Internet sites).
used on a tactical managemrnt level
-Committed costs are never considered to be relevant costs
-An opportunity cost represents the cost of the best alternative forgone
-Avoidable costs would be saved if an activity did not happen and so are relevant
-Common costs are only relevant if the viability of the whole process is being assessed
An opportunity cost does represent the cost of the best alternative forgone, however, if it is an historic (past) cost, it would not be relevant.
Fixed costs can be incremental to a decision and in those circumstances would be relevant.
Committed costs are costs the organisation has already agreed to and can no longer influence and so are not relevant.
Notional costs are used to make cost estimates more realistic; however, they are not real cash flows and are not considered to be relevant.
Avoidable costs are saved if an activity is not undertaken and if this occurs as a result of the decision, then they are relevant.
Common costs are relevant if the whole process is being evaluated; however, they aren’t relevant to a further processing decision.
Differential costs are relevant in a make or buy decision as the organisation is trying to choose between two options
