performance measurement and control 2

Question 1

what are the issues with using surrounding the use of financial performance indicators to monitor performance

Answer 1

• Short-termism
• Manipulation of results
• Do not convey the full picture

Question 2

what non financial indicators are important to show fully how successful a business is

Answer 2

Competitiveness
* Flexibility
* Resource utilization
* Quality
* Innovation
* Customer Satisfaction

Question 3

what is a balanced scorecard

Answer 3

it is a performance measurement tool that creates a balance between financial and non-financial aspects

Question 4

how can having a financial perspective help create value for a company

Answer 4

Three core financial themes which will drive the business strategy:

• Revenue growth and mix,
• Cost reduction and
• Asset utilization

Question 5

what is customer perspectives

Answer 5

his considers how the organization appears to customers.

The organisation should ask itself:
‘to achieve our vision, how should we appear to our customers?

Question 6

how can a company use knowledge of customer perspectives to achieve its goals

Answer 6

If customer objectives are achieved, revenue objectives should be too. companies should do mr and optimize their selling to meet exact needs of the customers to give them a competitive advantage

Question 7

what revenue objectives will be achieved if customer objectives are achieved as well

Answer 7

• On time delivery
• Percentage of sales from new products
• Customer retention rate (Customer
  satisfaction)
• Number of rejections

Question 8

how can a business use internal perspective to achieve its aims and goals

Answer 8

This requires the organisation to ask itself: ‘what must we excel at to achieve our financial and
customer objectives?

Question 9

what processes must the company look at to inmporve its internal functions ( 3 processes)

Answer 9

These will include:
* Innovation process (Development of new products)
* Operations process
* The post-sales process

Question 10

how does having a Learning and growth perspective help the business in achieving its goals and aims

Answer 10

This requires the organisation to ask itself whether it can continue to improve and create value.
The organisation must continue to invest in its infrastructure that is people, systems and
organisational procedures in order to improve the capabilities which will help the other three
perspectives to be achieved.

Question 11

what 3 aspects should a company look at to improve In this area

Answer 11

Staff Training
* Staff abseentism
* Employee satisfaction

Question 12

what does the building block model show

Answer 12

The Building Block model was proposed by Fitzgerald and Moon in 1996. it focussed on
performance measurement in service businesses.

Question 13

what 3 areas are looked at for the building block model

Answer 13

Dimensions - relevant aspects of the business to set measures for
* Standards - what characteristics the system should have
* Rewards - benefits of adopting the structured process

Question 14

what principles does a good building block model need to follow

Answer 14

1. clear targets need to be set for staff
2. the targets must be challenging to be motivational but still be achievable
3. the targets should be fair and should be based on things staff can control so they can achieve it within their control

Question 15

what dimensions does the building block model measure

Answer 15

• profit
  -competitiveness
  -quality
  -resource utilisation
  -flexibility
  -innovation

Question 16

what standards must the model adhere to

Answer 16

• employees must be involved so they take ownership. of their work
• tasks must be challenging but achievable
• tasks set should be fair and there must be controllability within the tasks

Question 17

what are the important qualities of the rewards in this model

Answer 17

• there should be clarity on what the rewards are and how to achieve them,
• the rewards must be substantial so they motivate the staff
• the rewards must be within the control of staff to achieve

Question 18

what is divisional performance measurement

Answer 18

The way in which the central management of an organization measures the performance of each of the individual divisions in a divisionalized structure.

Methods used include return on capital employed, residual income, and profit-to-sales ratio

Question 19

what are the different responsibility centers in a business

Answer 19

cost centre

revenue center

profit center

investment center

Question 20

what is Return on investment ROI

Answer 20

ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost

Question 21

how to calculate ROI

Answer 21

Controllable profit / capital employed. x 100

Question 22

what is controllable profit

Answer 22

it is profit taken after depreciation but before tax

Question 23

what to remember about how you will be given controllable profit in the exam

Answer 23

if controllable profit is not given in exam you can use the profit figure closest to this. assume the profit is controllable unless told otherwise

Question 24

what is capital employed formula

Answer 24

total assets - current liabilities

or

total equity + long term debt

Question 25

advantages of using ROI as a performance measure

Answer 25

• as a relative measure given as a percentage it enables comparisons to be made with divisions or companies of different sizes
• it can be broken down into smaller secondary ratios for more detailed analysis like prof margin or asset turnover

Question 26

disadvantages of using ROI as a performance measure

Answer 26

-may lead to dysfunctional decision making e.g a division with 30% ROI want take an investment with 22% ROI even if not would meet company goals as the manager doesn’t wan tot reduce his ROI ratio as that’s how he gets his bonus

-ROI increases with the age of the asset if NBVs are used, thus giving managers an incentive
to hang on to possibly inefficient, obsolescent machines

-It may encourage the manipulation of profit and capital employed figures to improve results,
e.g. in order to obtain a bonus payment.\

• Different accounting policies can confuse comparisons (e.g. depreciation policy).

Question 27

how to calculate Residual Income

Answer 27

Controllable profit – Notional interest on capital

Question 28

what is national interest on capital

Answer 28

capital employed x national cost of capital OR Interest rate

Question 29

what are the advantages of using RI

Answer 29

• It encourages investment center managers to make new investments if they add to RI. A
  new investment might add to RI but reduce ROI. In such a situation, measuring performance
  by RI would not result in dysfunctional behavior, i.e. the best decision will be made for the
  business as a whole.
• Making a specific charge for interest helps to make investment center managers more aware
  of the cost of the assets under their control.
• Risk can be incorporated by the choice of interest rate used: different interest rates for the
  notional cost of capital can be applied to investments with different risk characteristics

Question 30

what are the disadvantages of using RI

Answer 30

• It does not facilitate comparisons between divisions since the RI is driven by the size of
  divisions and of their investments.
• It is based on accounting measures of profit and capital employed which may be subject to
  manipulation, e.g. in order to obtain a bonus payment.

Question 31

what is transfer pricing

Answer 31

Transfer pricing refers to the prices of goods and services that are exchanged between companies under common control

Question 32

what are the objectives of transfer pricing?

Answer 32

• goal congruence- where everyone moves towards the same final goal
• it is a performance measurement as one company may make a profit or loss but the overall profit between the business is increasing
• autonomy
• maximisations of overall group objectives

Question 33

what are the types of transfer pricing

Answer 33

• marginal cost approach - this covers the direct costs of producing an extra unit and selling as fc doesn’t change
• full cost approach
• market based approach
• opportunity cost approach

Question 34

when would we pay marginal cost for tp

Answer 34

If Cole has spare capacity, then the opportunity cost will be zero and TP will simply be set at marginal cost

Question 35

when would we pay opportunity cost

Answer 35

Opportunity cost will be based on what contribution Cole would be earning if it did not have to make and sell the balls to Crouch

Question 36

what is the problem of non-quantifiable objectives

Answer 36

The not-for-profit sector incorporates a diverse range of operations, including national government, local government, charities, executive agencies, trusts and so on. The critical thing about such operations is that they are not motivated by a desire to maximize profit

Question 37

what is the problem of multiple objectives

Answer 37

The primary objective in not-for-profit organizations is not to make money, but to benefit prescribed groups of people. As with any organizations, NFPs will use a mixture of financial and non-financial objectives

Question 38

what is the use of value for money

Answer 38

A common method of assessing public sector performance is to assess value for money (VFM).
This comprises three elements:

• Economy – an input measure. Are the resources used the cheapest possible for the quality
  required?
• Efficiency – here we link inputs with outputs. Is the maximum output being achieved from
  the resources used?
• Effectiveness – an output measure looking at whether objectives are being met.