Performance management and control

Question 1

System Process

Answer 1

Input (data) - processing - output (information)

Question 2

Management information system - MIS

Answer 2

Any system which provides information for decision making

Question 3

Executive information system - EIS

Answer 3

Information on strategic decisions at board level

Question 4

Expert systems

Answer 4

Support with tax and legal requirements etc

Question 5

Decision supports systems - DSS

Answer 5

What if analysis at management level

Question 6

Enterprise resource planning systems - ERPS

Answer 6

Used to manage internal and external resources (financial material and human) integrates multiple business functions into one system

Question 7

Transaction processing systems

Answer 7

Day to day transactions

Question 8

Customer relationship management - CRM

Answer 8

Used to manage customer data for existing and potential future customer

Question 9

Privacy and security of information systems

Answer 9

Two types of control
General controls - access to building, segregation of duties
Application controls - automatic checks for completeness and validity, authorisation checks

Question 10

Big data

Answer 10

Processing of data on a large scale to be utilised by an organisation.
Three V’s of big data
Volume - large pools of information heavily driven by social media
Velocity - Real time processing on data to information
Variety - data from different systems for example text, email ,video and audio, and social media

Question 11

Information controls

Answer 11

Input control = passwords and formatting checks
Processing controls = audit trail of users and updates
Output controls = distribution to authorised personnel and password protection

Question 12

Profitability equations 
ROCE
Gross profit margin
Net profit margin 
Asset turnover

Answer 12

Return on capital employed (ROCE) = (profit before interest and tax / total assets less current liabilities) x 100
Gross profit margin = (Gross profit / revenue) x 100
Net profit margin = (profit before interest and tax / revenue) x 100
Asset turnover = revenue / total asset less current liabilities

Question 13

Profitability meanings 
ROCE
Gross profit margin
Net profit margin 
Asset turnover

Answer 13

ROCE measures return made based on the amount of available capital an indication of the organisations efficiency. To improve efficiency needs to increase.
Gross profit margin measures the ability to sell products above the cost. To improve prices increase or production costs decrease.
Net profit margin ability to make overall profit on goods, low profit margin can be overlooked if high volume of sales. To improve either price increase or total cost fall.
Asset turnover measures how well assets are being used to generate sales.

Question 14

Liquidity equations 
Current ratio
Quick ratio (acid test)
Inventory turnover 
Inventory days 
Receivable collection period 
Payables payment period

Answer 14

Current ratio = current assets / current liabilities
Quick ratio = (current assets - inventories) / current liabilities
Inventory turnover = cost of sales / inventories
Inventory days = (inventory / cost of sales) x 365
Receivable collection period = (trade receivables / credit turnover) x 365
Payables payment period = (trade payables / credit purchases or cost of sales) x 365

Question 15

Liquidity meanings 
Current ratio
Quick ratio (acid test)
Inventory turnover 
Inventory days 
Receivable collection period 
Payables payment period

Answer 15

CR - working capital to meet short term debts
QR - meeting short term debts when inventory can be hard to turn into cash
IT and ID - how long you are holding items in inventory
RCP - how long debtors take to pay
PPP - how long you take to pay creditors

Question 16

financial risk equations and meaning
Debt to equity
Gearing
Interest cover

Answer 16

Gearing refers to a businesses dependency on loans compared to shares and reserves known as financial risk
Debt to equity = long term debt / equity
Gearing = long term debt/( equity + long term debt)
Interest cover = profits before income and tax divided by interest payable
Interest cover is the number of times your company can pay its interest charges out of its profits

Question 17

Balance score card four perspectives

Answer 17

Financial - shareholder value (profit margins, earnings per share)
Customer - value to customers (delivery time, complaints)
Internal business processors - what do we need to excel at internally (quality control rate, turnaround time)
Innovation learning - future value (new products, % of revenue of new products in the last 2 years)

Question 18

Building block model - performance measures

Answer 18

Dimensions - aspects of business to focus on (profit, quality, innovation)
Standards - characteristics the system should have (achievability, ownership of the target)
Rewards - benefits of adopting it (motivation, clarity and controlability)

Question 19

Transfer pricing overview

Answer 19

Price one function of the business charges another.
Internal functions (HR/IT) will be charged cost.
A profit or investment centre you will need to agree a transfer price

Question 20

Transfer pricing cost methods 
Standard cost 
Full cost
Marginal cost 
Dual pricing 
Two-part tariff 
Opportunity cost approach

Answer 20

Market price - charge same as you would charge to customer (possibly minus a small amount for savings from being internal)
Problems - no external market, opportunity cost?
Cost based approach - either standard, actual, full, marginal costs or dual pricing
Standard cost - better than actual as it keeps the departments focusing on reducing costs, buying department will know the price from the standard.
Full cost - include fixed costs, may be more expensive than external market
Marginal cost - buying division would always make optimum decision for group, selling would not earn any contribution towards fixed costs.
Dual pricing - two prices internally, the seller gets credit with market price and the buyer only pays the variable cost. Requires admin to true up figures at head office.
Two-part tariff - charge variable cost but also periodically charge a fixed fee to recover some fixed costs
Opportunity cost approach - what is the minimum the seller will accept, maximum the buyer will pay and let the two negotiate.

Question 21

Return on investment (ROI)

Answer 21

(Profit before interest and tax/investment or total assets less current liabilities) x100
Compare % to set targets

Question 22

Residual income (RI)

Answer 22

Net profit of a division after deducting a charge for interest on investment.
RI = Divisional profit before interest and tax - (investment x cost of capital)
If positive then it will be profit making

Question 23

RI vs ROI

Answer 23

ROI is generally preferred because:
% answer easy to understand
RI requires an estimate of cost of capital