E Theory Flashcards
(154 cards)
1
Q
First perspective in balanced scorecard?
A
Financial perspective. How do we look to shareholders?
2
Q
Second perspective in balanced scorecard?
A
Customer perspective. How do our customers see us?
3
Q
Third perspective in balanced scorecard?
A
Internal business process perspective. At what must we excel?
4
Q
Fourth perspective in balanced scorecard?
A
Innovation and learning perspective
5
Q
What is meant by the financial perspective?
A
Measurement of traditional financial performance: sales, costs, gross profit percentage, earnings per share, share price
6
Q
Example of customer perspective?
A
Why do customers return? It is because the company is achieving excellence in areas that are important to customers
7
Q
Example of internal business process perspective?
A
Excellent quality might be the goal, but this would need to be measured by metrics such as the number of reworked items, number of sales returns and number of warranty claims
8
Q
Example of customer perspective?
A
Held in awe by many customers as the designer and supplier of ‘cool’, high quality products that work well
9
Q
Example of innovation and learning?
A
The iPod, iTunes, iPhone, iPad and Apple Watch provide ample evidence for continual innovation
10
Q
Advantage of balanced scorecard (financial)
A
Helps to clarify how sustained, good financial performance can be achieved
11
Q
Advantage of balanced scorecard (different aspects)
A
How do different aspects of the business result in good financial performance?
12
Q
Advantage of balanced scorecard (poor performance)
A
It can highlight how poor performance in any area can damage long-term prosperity.
13
Q
Advantage of balanced scorecard (important)
A
All important aspects of a company’s existence are measured and monitored
14
Q
Advantage of balanced scorecard (targets)
A
Targets are set for current and future performance across a wide range of important activities and measures.
15
Q
Advantage of balanced scorecard (objectives)
A
Short-term objectives often take precedence over long term objectives such as when a company reduces research and development expenditure or reduces the number of customer-facing staff to achieve this year’s budgeted profit
16
Q
Disadvantage of balanced scorecard (information)
A
Potential information overload. There are four perspectives and even just five measures for each will result in 20 overa
17
Q
Disadvantage of balanced scorecard (arbitrary)
A
Picking or inventing measures can be difficult and perhaps arbitrary. Can staff morale be measured accurately?
18
Q
Disadvantage of balanced scorecard (cost)
A
Difficulty and cost in obtaining the information needed.
19
Q
Disadvantage of balanced scorecard (conflict)
A
For example, flexibility in supplying a customer with a product might adversely affect the quality of the product if it is made in a rush
20
Q
Disadvantage of balanced scorecard (external)
A
Too little attention to external factors such as competitor activity. It is very much our innovation, our processes, our customers.
21
Q
What do profit-based performance metrics measure
A
Past performance
22
Q
What do performance management experts argue?
A
In the increasingly competitive modern business environment, organisations now need forward-looking performance measurement systems, linked to their critical success factors, to achieve long-term success
23
Q
Dimensions factors?
A
Financial performance
Competitiveness
Quality
Innovation
Flexibility
Resource utilisation
24
Q
Standards factors?
A
Ownership
Achievability
Equity
25
Rewards factors?
Clarity
Controllability
Motivation
26
What are results in dimensions?
Outcome of decisions and actions taken by management in the past. These are captured under the first two dimensions of the model, financial performance and competitiveness.
27
What are determinants in dimensions?
What areas of future performance are most important for a company to achieve positive financial and competitive results? Quality, innovation, flexibility and resource utilization are the determinants of future success
28
What comes after an organisation's dimensions are understood?
Standards can be set
29
What is meant by ownership?
Managers should take ownership of (believe in) the targets. Managers who participate in setting targets will be more likely to believe in them.
30
What is meant by achievability?
Targets should be challenging but achievable; otherwise, managers will dismiss them rather than be motivated to achieve them
31
What is meant by equity?
The organisation should maintain a realistic level of difficulty for its standards across all business areas and be fair and unbiased in its performance assessment
32
What is meant by clarity?
Is the system understandable to all employees
33
What is meant by motivation?
Will the system drive employees to achieve their objectives
34
What is meant by controllability?
Do employees have control over their areas of responsibility
35
What should rewards be?
Sufficiently desirable so that employees are motived to work hard towards gaining them
36
What is meant by decentralisation?
Delegation of decision-making responsibility
37
Dangers of decentralisation?
Managers may use their decision-making freedom to make decisions that are not in the best interests of the overall company
38
What is divisionalisation?
Delegation of profit-making responsibility
39
What is a good performance measure (incentive)
Provide incentive to the divisional manager to make decisions which are in the best interests of the overall company
40
What is a good performance measure (accountable)
Only include factors for which the manager (division) can be held accountable
41
What is a good performance measure (objectives)
Recognise the long-term objectives as well as short-term objectives of the organisation.
42
What does standard costing variance analysis commonly use?
In the measurement of cost centre performance
43
Issue with standard costing variance analysis? (short-term)
It focuses almost entirely on short-term cost minimisation which may be at odds with other objectives
44
Issue with standard costing variance analysis? (responsibility)
Who is responsible for which variance
45
Issue with profit statements?
Difficulty in deciding what is controllable or traceable
46
What is done when assessing the success of the division?
Our focus should be on costs and revenues that are traceable to the division and hence judge the division on traceable profit
47
What responsibilities do managers have in an investment centre?
Managers have the responsibilities of a profit centre plus responsibility for capital investmen
48
Issue with residual income?
Return on investment is a relative measure and hence suffers accordingly
49
What will residual income lead you to do?
Select the project that maximises your wealth
50
What does the present value of a project's residual income equal to?
The project's NPV
51
issue with residual income in terms of division size?
The manager of the larger division will generally show a higher residual income because of the size of the division rather than superior managerial performance
52
Issue with ROI and residual income (controllable)
Identifying controllable (traceable) profits and investment can be difficult
53
Issue with ROI and residual income (controllable)
Identifying controllable (traceable) profits and investment can be difficult.
54
Issue with ROI and residual income (short-term)
If used in a short-term way they can both overemphasise short-term performance at the expense of long-term performance
55
Issue with ROI and residual income (net book value)
If assets are valued at net book value, ROI and residual income figures generally improve as assets get older. This can encourage managers to retain outdated plant and machinery
56
Issue with ROI and residual income (performance)
Both techniques attempt to measure divisional performance in a single figure
57
Issue with ROI and residual income (cost of capital)
Both measures require an estimate of the cost of capital, a figure which can be difficult to calculate
58
Issue with single factor measures (distortion)
Capable of distortion by unscrupulous managers
59
Issue with single factor measures (measure)
If ROI is used as a performance measure to promote the maximisation of shareholder wealth some managers will see ROI (not shareholder wealth) as the objective and dysfunctional consequences may follow
60
Issue with single factor measures (why)
If ROI or residual income fall they simply tell you that performance has worsened, they do not indicate why.
61
What are Critical success factors (CSFs)?
Performance requirements which are fundamental to an organisation's success
62
What are Key performance indicators (KPIs)?
Measurements of achievement of the chosen critical success factors
63
What is meant by specific in KPI?
Measure profitability rather than 'financial performance', a term which could mean different things to different people
64
What is meant by measurable in KPI?
Capable of having a measure placed upon it
65
What is meant by relevant in KPI?
That they measure achievement of a critical success factor
66
Balanced scorecard advantage (variety)
Measures performance in a variety of ways, rather than relying on one figure
67
Balanced scorecard advantage (managers)
Managers are unlikely to be able to distort the performance measure as bad performance is difficult to hide if multiple performance measures are used
68
Balanced scorecard advantage (perspective)
It takes a long-term perspective of business performance
69
Balanced scorecard advantage (long-term)
Success in the four key areas should lead to the long-term success of the organisation
70
Balanced scorecard advantage (flexible)
It is flexible as what is measured can be changed over time to reflect changing priorities
71
Balanced scorecard (disadvantage)
Setting standards for each of the KPIs
72
Balanced scorecard (trade-off)
Allowing for trade-offs between KPIs can also be problematic
73
When are transfer prices needed?
Whenever a business is divided into more than one department or division
74
What should the transfer price set encourage?
Divisions to trade in a way that maximises profits for the company as a whole
75
What will a higher transfer price lead to (Buying division)?
Lower profits in the buying division and make its performance look poorer than it would otherwise be
76
What will a higher transfer price lead to (Selling division)?
Appear to be performing better. A lower transfer price on the other hand will favour the buying division
77
What is meant by performance-related pay?
The remuneration of employees in each division will be linked to the performance of the division and this will be affected as profits change
78
What happens if divisional performance is poor because of something manager cannot control?
Could seriously damage their morale and could lead to a lack of motivation to do the job well which could have a knock-on effect on the real performance of the division
79
Characteristics of a good transfer price? (autonomy)
Preserve divisional autonomy
80
Characteristics of a good transfer price? (profits)
Encourage divisions to make decisions which maximise group profits
81
Characteristics of a good transfer price? (permit)
Permit each division to make a profit
82
Why encourage divisions to make decisions which maximise group profits?
All divisions must want to do the same thing. There’s no point in transferring divisions being very keen on transferring out if the next division doesn’t want to transfer in
83
Issue with transfer pricing when it comes to divisions?
Can favour one division over another and can make it difficult for divisions to earn a profit. This is unfair if divisional performance and bonuses are based on profit measurements.
84
What does a transfer price set equal to the variable (marginal) cost of the transferring division produce?
Very good economic decisions
85
Question to ask during exam (selling division)
What would the selling division prefer to do and how would this affect the buying division and the company?
86
Question to ask during exam (buying division)
What would the buying division prefer to do and how would this affect the selling division and the company?
87
What needs to be looked at when setting the minimum transfer price?
Look at transfer pricing from the point of view of the selling division
88
When is the opportunity cost at zero for spare capacity?
Because workers and machines are not fully utilised
89
What is the minimum transfer price where a selling division has spare capacity?
The minimum transfer price is effectively just marginal cost
90
Why is the minimum transfer price probably not going to mae manager's happy?
They will want to earn additional profits
91
What is the question when the seller doesn’t have any spare capacity, or it does not have enough spare capacity to meet all external demand and internal demand?
How can the opportunity cost be calculated?
92
What does the opportunity cost represent?
Represents contribution foregone
93
What must the buying division be charged?
The same price as the external buyer would pay, less any reduction for cost savings that result from supplying internally
94
What is the maximum price that the buying division will want to pay?
The market price for the product – ie whatever they would have to pay an external supplier
95
What is meant by Effectiveness?
How well the organisation provides the service it aims to produce
96
An example of Economy?
Staff cost of each procedure
97
What is Economy?
Whether resources are acquired at the required quality for the lowest price
98
What is Efficiency?
Links inputs and outputs and considers whether the maximum outputs are obtained given the level of inputs
99
An example of Efficiency?
Temporary staff usage (hours) as a percentage of total staff hours
100
What does ROI measure for a project?
The return, but not the risk of a project
101
An example of a goal incongruent decision?
Where a manager rejects a project because it yields a lower ROI than the manager’s existing ROI, even if the return on the project exceeds the company’s hurdle ROI
102
What is meant by the controllability principle?
Managers should only be judged on things within their control
103
What does increased depreciation do to the capital employed?
Reduce it
104
What does a lower capital employed from increased depreciation give to the ROI?
An artificially high ROI
105
What is optimal transfer price?
Marginal cost plus opportunity cost
106
What should the transfer price promote?
Transfer price should promote goal congruence
107
WHen is an adjusted transfer price used?
Where the market price is taken and adjusted to reflect savings that are made on internal transfers
108
Issue with market prices in transfer pricing?
May lead to goal incongruence and, therefore, will not always maximise overall company profits
109
If a cost plus price is used, what incentive does the selling division have in transfer pricing?
No incentive to reduce its costs
110
What is primary objective of a transfer pricing system?
Goal congruence
111
When transfer price is equal to the market price?
Neither the buyer nor the seller will pay more or sell for less than for an external purchase or sale
112
Objectives in balanced scorecard?
What are the main objectives?
113
Measures in balanced scorecard?
How can the performance be measured against the objectives?
114
Targets in balanced scorecard?
What targets should be set for each measure?
115
Initiatives in balanced scorecard?
What actions could be taken to improve performance?
116
What is meant by lagging indicators?
Show the effect of decisions long after they are made (e.g. financial measures)
117
What is meant by leading indicators?
These are the non-financial performance indicators relating to customers, internal business processes and learning and growth
118
What is simultaneity?
Services are consumed as they are produced
119
What is heterogeneity?
Each service provided could be unique because people are involved, and the quality of service cannot be standardised
120
What is intangibility?
The service may have no physical aspects
121
What is perishability?
Services cannot be stored. A service must be provided when the customer wants; it cannot be prepared in advance
122
What is meant by decentralisation?
Delegation of authority to make decisions
123
Decentralisation with revenue centres?
Managers are responsible for decisions about revenue generation
124
Decentralisation with cost centres?
Managers are responsible for decisions about costs
125
Decentralisation with profit centres?
Managers are responsible for decisions about costs and revenues
126
Decentralisation with investment centres?
Managers are responsible for cost, revenues, and asset investment decisions
127
Benefits of decentralisation (decision-making)
Specialist managers will likely understand their part of the business better than senior management
128
Benefits of decentralisation (motivation)
Divisional managers are given responsibility and status and may increase effort
129
Benefits of decentralisation (senior management)
Senior management can concentrate on strategy
130
Disadvantage of decentralisation (congruence)
Lack of goal congruence − the risk that divisional managers will make decisions inconsistent with overall organisational objectives.
131
Disadvantage of decentralisation (information)
Increased information requirements − reporting systems must be introduced to monitor divisional performance
132
Disadvantage of decentralisation (economies of scale)
Lost economies of scale − costs may rise through duplication of common activities.
133
Goal congruence for a good performance management system?
Performance measures should encourage decisions consistent with company objectives.
134
Timeliness for a good performance management system?
Performance reporting must be fast enough to allow any required corrective action
135
Controllability for a good performance management system?
Evaluation should assess only divisions and divisional managers on performance under their control
136
Examples of non-financial measures?
Training time per employee
Staff turnover
Customer waiting times
New products developed
137
What is meant by controllable profit?
Assess the manager's performance
138
What is meant by traceable profit?
Assess the division's performance
139
What is ROI?
A return on capital employed which compares income with the operational assets used to generate that income.
140
Why is profit before interest and tax in ROI?
Interest is affected by financing decisions, and tax is an appropriation
141
What is the decision rule ROI?
Divisional performance is favorable if ROI is greater than the cost of capital
142
How does ROI compare to ROCE?
ROI is the divisional version of company ROCE. It is a measure of divisional performance
143
Advantage of ROI (capital)
Focuses attention on scarce capital resources
144
Advantage of ROI (relative)
As a relative measure, it is easy to compare divisions
145
Advantage of ROI (investment)
Encourages reduction in non-essential investment by. Selling off unused non-current assets; and minimising the investment in working capital
146
Disadvantage of ROI (window-dressing)
Risk of window-dressing; boosting reported ROI by: under-investing, cutting discretionary costs
147
Disadvantage of ROI (subjective)
The definition of capital employed is subjective. For example, should non-current assets be valued using:
carrying value or historical cost?
148
What is residual income?
Pre-tax profit less imputed interest charge for capital invested
149
What is decision rule RI?
Accept a project/investment if residual income is positive
150
Benefits of RI (cost of capital)
A risk-adjusted cost of capital can reflect different risk positions of different divisions
151
Benefits of RI (ROI)
Residual income overcomes some of the problems associated with ROI (dysfunctional behaviour and holding on to old assets)
152
Disadvantage of RI (percentage)
Less easily understood than a percentage
153
Disadvantage of RI (divisions)
It is challenging to compare divisions of different sizes. The manager of the larger division will generally show a higher residual income because of the size of the division rather than superior managerial performance
154
Disadvantages of RI and ROI?
Definition of capital employed
Window dressing
