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96 Terms

1
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What are the financial investment measurements?

  • Return on Investment

  • Residual Income

  • Economic Value Added

2
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What is ROI?

  • Use to evaluate the financial performance of investment centres

  • Profit/ investment capital

  • % or a ratio

<ul><li><p><span>Use to evaluate the financial performance of investment centres</span></p></li><li><p><span>Profit/ investment capital</span></p></li><li><p><span>% or a ratio</span></p></li></ul><p></p>
3
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How to improve ROI?

  • Increase return on sales through increase selling price or sales revenue or decrease expense

  • Increase investment turnover through increase sales revenue or reduce invested capital

4
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What are the advantages and limitations of ROI?

Advantages:

  • Focus on both the profit and the assets required to generate those profits

  • Can be used to evaluate the relative performance of investment centres

 

Limitations:

  • May encourage managers to focus on improving short term financial performance = may impact future competitiveness - use multiple measures

  • May encourage managers to defer assets replacement to maintain high ROI - consider alternative ways of measuring invested capital

  • Prevent goal congruence

  • Discourage managers to take on other projects

5
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How to minimise behavioural problems of ROI?

  • Use multiple performance measurements

  • Consider different ways to measure invested capital

6
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What is RI?

  • Profit - (invested capital * imputed interest rate)

  • Required rate of return = imputed interest rate charge

  • $ amount

7
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What are the advantages and limitations of RI?

Advantages:

  • More likely to promote goal congruence compared to ROI

  • Takes into account of the organisation's measurement of required rate of return on performance/ investments

  • Encourages investment in projects that yield a positive RI to the organisation

 

Limitations:

  • Cannot use to compare performance of businesses that are different sizes

  • Formula is biased in larger businesses

  • Can encourage short orientation

8
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What is EVA?

  • Measures the value added over an accounting period

  • The spread between the return generated by business activities and the cost of capital

<ul><li><p><span>Measures the value added over an accounting period</span></p></li><li><p><span>The spread between the return generated by business activities and the cost of capital</span></p></li></ul><p></p>
9
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How can EVA be improved?

  • Increase profitability without employing additional capital

  • Borrowing additional funds

  • Pay off debt by selling assets

10
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What is  Shareholder value added (SVA)?

The worth of the business from a shareholder's perspective

<p>The worth of the business from a shareholder's perspective</p><p></p>
11
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What is Invested Capital?

  • Total assets

  • Total productive assets

  • Total assets less current liabilities

12
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What is Value-based management?

  • Framework for making key business decisions that add economic value to the business

  • Strategies or decisions that achieve a return on capital greater than the cost of capital

13
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What is incentive scheme?

  • Process, practices and systems that are used to provide levels of pay and benefits to employees

  • High incentives can strive high performances

  • Goal congruence

14
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What is Intrinsic motivation?

Derives from the interest and enjoyment of work

15
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What is Extrinsic motivation?

Derives sources outside the individual

16
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What are the Performance-related pay systems?

  • Individual incentive plans

  • Profit sharing plans

  • Employee share plans

  • Gainsharing

  • Team based incentive scheme

17
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What are the disadvantages of using financial performance measures?

  • Focuses on the results rather the causes

  • Only showing one perspective of performance

  • Limited guidance for future actions

  • Some actions does not take into account of shareholder and customer value

18
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List some non-financial measures

  • Customer satisfaction

  • Defect measures

  • Quality

  • Stock status

  • Accident report

  • Multi-skilling

  • Machine downtime

  • Delivery on time

19
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What are the advantages of non financial measures?

  • May emphasise strategy

  • Can be a drivers of future financial performance

  • Easier to investigate

  • May be more timely

  • More understandable and easier to relate to

20
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What are the limitations of non financial measures?

  • Inclusion of non-financial measures can be ad hoc and undirected

  • Trade-off can occur

  • Lack integrity

  • May not easily translate into financial outcomes

21
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What is a balanced scorecard?

  • Performance measurement system

  • Identifies and reports on performance measures of the organisation

  • Translates an organisation's mission, objectives and strategies into performance measures for each key strategic area of the business

  • It is used to implement strategy and to monitor and manage organisational performance

  • May form part of an organisation's planning cycle

22
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What are the perspectives of BSC?

  1. Financial perspective = perspective of the shareholders

  2. Customer perspective = achieving customer's value

  3. Internal business process = focusing specific and critical porcess

  4. Learning and growth = capabilities of the organisation to achieve internal business process

23
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Define lag indicator

  • Measures that help managers monitor progress towards objectives

  • Measurements of past performance

  • Results of the past

24
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Define lead indicator

  • Focus on factors that drive outcomes and provide actionable information

  • Relate to business process and activities

  • Predictors of future success

  • Improvements in these measures should, overtime, improve lag indicators

25
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What is a strategy map?

  • A visual representation explaining the cause and effect relationships linking the objectives of the perspectives of the BSC and the objectives of the organisation

  • It communicates to managers the components of strategy and processes and systems that will help achieve it

26
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What are the types of benchmarking?

Internal benchmarking;

  • Business units within the same company

Competitive benchmarking:

  • Identify weaknesses and strengths of competitors

Industry benchmarking:

  • Company with similar interests and technologies

Best in class or process benchmarking:

  • Best practices in an industry

  • Businesses may try to normalise the measures to make them comparable

27
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Define corporate sustainability

Requires organisation to consider interrelated impacts of their activities on the economy, environment and society

28
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What is sustainability report and what does it highlights?

  • Measure and communicate the economic environmental and social (ESG) impacts

  • Triple bottom line reports

  • Corporate social responsibility reports

  • Social audits

  • Social and environmental reports

29
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What is global reporting initiative (GRI) framework?

  •  recognised + regarded as global standards

  •  it is the representation of the best practice

  • required for all reports published after 1/07/2018

  • Provides guidance to organisations in terms of providing performance measures and methods that they can use to measure and report on sustainability-related impacts and performances

30
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What is the SASB standards?

  • IFRS Sustainability disclosure standards

  • IFRS S1 = General requirements for sustainability related disclosures

  • IFRS S2 = Climate related disclosure

31
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What is international integrated report framework (IIRF)?

  • Broader focus than sustainability reports

  • Aims to explain how an organisation creates value overtime

  • Integrated report: six kinds of capital (financial, manufactured, intellectual, human, social and relationship, natural)

32
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What are the benefits of reporting sustainable performance?

  1. Identify environmental and social changes that impact the organisation and its stakeholders

  2. Develop a strategy to manage risk and opportunities

  3. Create innovative new products and services

  4. Engage in actions to grow their market share

33
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Define natural capital

  • Stock of capital derived from natural resources

  • Issues of materiality and valutation

34
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What is environmental management system (EMS)?

  • Manage environmental performance

  • Report and capture environmental impact of an organisation's activities

  • Environmental performances to be measured against policies, objectives and targets

35
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Define environmental cost and list them.

Incurred to prevent, monitor and report environmental impacts and costs of non-compliance with regulations

  1. Conventional costs 

  • Direct costs associated with capital expenditure, raw materials and other operating and maintenance costs

  1. Hidden costs

  • Activities such as monitoring and reporting of environmental activities and emissions, cost of searching for environmentally responsible suppliers and ongoing cost of cleaning up contaminated land

  1. Contingent costs

  • Arising from failure to clean up contaminated sites, and fines and penalties for non-compliance with regulations

  1. Relationship and image costs

  • Less tangible costs and benefits that relate to consumer perceptions, and employee and community relations

  1. Societal costs

  • Impose on others

  • The environment and society

36
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What is supply chain management?

  • Life cycle analysis = associated impacts on the product

  • May lead to adoption of innovative product and process environment in each stage

  • Suppliers = environmentally responsible supplier cost analysis

  • Customers = work with to reduce the adverse environmental and social impact of products

37
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what is International standard organisation (ISO) 14031 environmental performance evaluation?

  • Provides advice on how to measure environmental performance

  • Eco- intensity and eco-efficiency measures

 

  1. Operational performance indicators

  2. Management performance indicators

  3. Environmental condition indicators

38
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What is capital expenditure analysis?

  • Inclusion of environmental costs and benefits may affect the attractiveness of a project

  • Some capital expenditures driven by need to be environmentally and socially responsible

39
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Define responsibility accounting.

  • A system that is built around a framework of responsibility centres

  • A manager is held accountable for their own responsible centre

40
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What is strategic planning?

  • Long-term planning usually undertaken by senior managers

  • Involves decision about corporate strategy and business strategy

  • Might happen every 3 to 5 years

  • Formulated in broad terms

  • Directly influences the formulation of budgets

41
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What is a budget?

  • Detailed plan of future operating activities

  • Acts as financial model of future operations

  • Core component of an organisation's planning and control system

  • Critical way of providing information to managers

  • Short-term plan, covering year by year

42
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What is the purpose of budgeting?

  • Planning = expresses a plan of action in financial terms

  • Facilitating communication and coordination between all managers

  • Allocating resources

  • Controlling profit and operations = serves as a benchmark for comparing actual results

  • Evaluating performance and providing incentives

43
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What is included in an operating budget?

  • sales budget

  • cost budget for manufacturing business

44
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What does sale budget do?

  • Detailed summary of estimated sales units and revenues

  • Estimating which products will be sold and in what quantities = can be done through market research

  • Internal and external factors should be considered

45
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What does cost budget for manufacturing do?

  • Production budget shows number of units to be manufactured

  • Budgets for direct materials, direct labour and overheads

  • Budget for selling and administrative expenses

46
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What does cost budget for retail and wholesale business consist of?

  • Purchases budget to determine the quantity and costs of goods to be purchased for resale

  • Budgets for selling and administrative expenses

47
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What does cost budget for service firm consist of?

  • Budgets for costs incurred to provide services

  • Overhead budget

48
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What is included in financial budget?

Cash budget:

  • Expected cash receipts and planned cash payments for the budget period

  • Timing of all cash movements

  • Allows businesses to plan financial resources

 

Budgeted income statement:

  • Shows expected revenue and planned expenses

 

Budgeted balance sheet:

  • Shows expected assets and liabilities at the end of the budget period

 

Capital expenditure budget:

  • A plan for the acquisition of long-term assets

  • May involve cash flows over many years

49
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What is budgeting like for not-for-profit organisations and government agencies?

  • No sales budget if services are provided for no charge

  • Other revenue sources may be estimated, including government grants, donations and sponsorships

  • Services levels drive the resources that are needed and form the budget cost

50
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Define administration

  • Formal processes are typically used to collect data and prepare the budget

  • The process is often the responsibility of the senior accounting manager

  • A budget committee consists of key senior executives who advise the accountant during the preparation of the budget

51
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What is a budget manual?

  • Who is responsible for providing information

  • When the information is required

  • What form it will take

52
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What are the main issues for budgeting?

  • participative budgeting

  • Budgetary slack

  • Budget difficulty

53
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Define participative budgeting and its benefits and costs

  • Develop initial budget estimates for own area of operations

  • Negotiation and revisions of budget estimates

  • Managers at all levels have input

  • Top-down budgeting = senior managers impose budget targets

  • Bottom-up budgeting = lower managerial and operations levels active in setting own budgets

 

Benefits:

  • Encourage coordination and communication between managers and wider organisation

  • More accurate budget estimates

  • Individuals identify more closely with budget targets

  • Employee empowerment due to higher degrees of authority and independence

 

Costs:

  • Expensive and time consuming

  • Can cause delays and indecisiveness

  • May aggravated differences and disagreements

  • Provides opportunities for padding budgets

54
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Define budgetary slack and what reduce opportunities for budgetary slack?

  • Managers may intentionally underestimate revenues or overestimate costs

  • Refers to the difference between the revenue or cost projection and a realistic estimate of revenue or cost

Reduce opportunities for budgetary slacks:

  • Use benchmarking

  • Senior managers regularly involve themselves in the tasks of subordinates

  • Promoting and fostering values and norms unfavourable to budgtary slack

  • Linking rewards to predictive accuracy

  • Using stretch targets

55
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What is budget padding and reasons for it?

  • If manager performance evaluations depend on budgetary benchmarks being achieved, managers may try to "beat the budget", manage uncertainty or compete for resources

  • Incentives to underestimate revenue or overestimate costs

  • Deploy tactics to influence budget negotiations, such as witholding information, promising performance improvements, emphasising the role of business conditions, or appealing to decision maker's emotions

There are three primary reasons for padding the budget:

  • Some managers believe their performance looks better when they exceed their budget

  • It is a way of coping with uncertainty

  • To guard against initial budget requests being cut back by senior management

56
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When does budget difficulty occur?

Goal congruence occurs when the organisation's goals coincide with an individual's goals

57
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When is budget acceptance occur?

Budget acceptance is more likely when:

  • Developed participatively

  • Considered achievable

  • There is frequent feedback on performance

  • Employees are held responsible for activities within their control

  • Achievement is accompanied by rewards

58
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What is zero based budgeting?

  • The process where all activities in the organisation are initially set to zero

  • Managers must justify each activity in order to receive an allocation of resources

  • Can be time consuming and expensive to implement

  • Not useful to identify areas of waste, redundant activities or ways to improve performance

  • Can be too introspective

59
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What is program budgeting?

  • Budgets are prepared for individual programs and program objectives as opposed to line item budgeting

  • Control is achieved through quantitative and qualitative performance measures

  • It is often associated with budgeting in government departments

  • Focus on outputs and outcomes

60
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What is rolling budgeting?

  • Continually updated

  • Add a new time period

  • Drop the period just completed

  • Identify any gaps between what it is expected

61
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What is flexible budgeting?

  • Detailed budget prepared for a range of levels if activity = compared to a static budget which relates to one specific planned level of activity

  • Allows us to select the most appropriate benchmark for cost control

  • A valid basis for comparing actual and expected costs to budget, for the actual level of activity

62
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What does a control system consist of?

  • Predetermined performance level

  • Measure of actual performance

  • Comparison between standard performance and actual performance

63
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What is standard cost?

  • Serves as a benchmark

  • Part of the control system

  • Important for planning and control

  • Estimated costs that is going into making a unit of product

  • Budgeted costs, based on estimates of the cost of material, labour and overhead resources

  • Actual cost is compared to standard cost to determine variance cost

64
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Define standard cost variance

  • Used to evaluate actual performance and control costs

65
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Define Setting standards

  • Analysis of historical data

  • Engineering methods

  • Combined approach

66
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What is service organisation?

  • May be non-repetitive

  • Firms may develop standard quantities to capture the time taken for key activities and processes

 

67
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What are the types of standards?

  • perfect or ideal standard

  • practical standard

  • Benchmarking cost standard

68
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Define ideal or perfect standard

  • Peak efficiency

  • Lowest material and labour prices

  • Use of the best quality materials

  • No production disruptions

  • Motivation to achieve the lowest cost = can cause employee to feel discourage as standards are not possible to achieve

  • May sacrifice product quality

69
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Define pratical standard

  • Minimum attainable costs under normal operating conditions

  • Allowances made for downtime and wastage

  • May encourage more positive attitudes towards targets as it is more achievable and realistic

  • May encourage inefficiency and wastage

70
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Define benchmarking cost standard

  • Identify the company that has the best cost performance

  • Identifies areas need to improve cost performance

  • Cost standards may be formulated to achieve external performance standards

  • More difficult to benchmark against competitors = but will create a competitive advantage once succeed

71
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What is static-budget variance?

  • The difference between the actual result and the corresponding static budget (master budget) amount

 

72
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What are the cost and benefits of investigation?

Cost:

  • time spent investigating

  • disruption to the production process

  • cost of implementing corrective actions

Benefits:

  • Reduce future cost if the cause of the variance is eliminated

  • Improve work practice

73
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What is standard costing system?

  • can be used for product costing

  • all inventories recorded at standard cost

  • variances are closed off at the end of the period

74
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Limitation of variance analysis

  • variances are too aggregated

  • variances focused on the consequences rather than the causes of the problems

  • variances report may be too late to be useful

  • tendency to focus on cost minimisation

  • takes departmental rather than a process perspective

75
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What is the purpose of performance measurement?

  • Communicate business' strategy and plans, align employee's goals

  • Track management performance against targets

  • Evaluate and reward subordinate's performances

  • Guide future development of strategies and operations

  • Compare actual results with what's on targets

  • Allows for goal congruence

76
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What is an effective performance measurement system?

  • Links to strategies and goals

  • Recognises controllability

  • Embraces participations and empowerment

  • Simple and understandable measures

  • Emphasises the positives

  • Reported in a timely manner --> to take corrective actions

  • Includes benchmarking

  • Limited number of measures

  • Links rewards

77
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What is decentalisation?

  • Dividing the organisation into smaller units

  • Each unit assigned particular operational and decision making responsibilities

  • Goal congruence = ensuring goals throughout the units are aligned with organisational goals

  • Managers assigned responsibility to run units

  • Managers accountable for performance of their units

78
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What are the benefits for managers in decentralisation?

  • More accurate and complete local information about markets and operations

  • Training for future higher level managers

  • Greater motivations and job satisfaction

  • Corporate managers have more time for strategic issues

  • Delegation allows quicker responses to opportunities and problems as they arise

79
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What are the cost of decentralisation?

  • Narrow focus on own unit's goals

  • Unnecessary duplication

  • Behavioural challenge

80
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What is shared services?

  • Concentration of support services formed into a separate unit to service multiple internal customers

  • Aim to reduce cost and improve quality of service

  • High level of autonomy and incentives

  • Often set up as profit centres with the aim to break even

81
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What is team based structure?

  • Move towards flatter organisational structures

  • Self managed work teams

  • Members of team will be multiskilled

  • Promote employee satisfaction

  • Improved customer satisfaction and improved productivity

82
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What is financial performance reports?

  • Show key financial results appropriate for the type of responsibility centre

  • Contribution margin format

  • Distinguish between profit margin controllable by manager and profit margin attributable to unit

83
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What is transfer pricing?

  • Internal selling used when goods and services are transferred within a decentralised organisation

  • The transfer price is the revenue for the supply unit and cost for the buying unit

  • Result in profits that are reliable and accurate

  • Preserve and encourage autonomy

  • Encourage goal congruent behaviour

84
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Who set transfer price?

  • Managers of profit centres and investment centres may have considerable autonomy

  • Direct intervention by corporate management is contrary to decentralisation philosophy

  • Corporate management may develop general policies to govern transfer pricing practices

85
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What are transfer pricing method?

  • Market based prices = used if there are competitive external markets

  • Cost plus prices = no reliable external market prices, such as intermediate products

  • Negotiated prices = profit and/or investment managers negotiated transfer prices

86
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What is the general transfer pricing rule?

  • Provide guidance on the appropriate transfer price

  • Represents a minimum transfer price

<ul><li><p><span>Provide guidance on the appropriate transfer price</span></p></li><li><p><span>Represents a minimum transfer price</span></p></li></ul><p></p>
87
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What happen when An external market and spare capacity in the supplying unit?

  • Additional profit for supply unit

  • Negotiation may occur to provide incentives for the buying unit

88
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What happen when An external market and no spare capacity in the supplying unit?

Take into account of opportunity cost of lost profits

89
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What happen when there is no external market and spare capacity in the supplying unit?

  • No opportunity cost

  • May be based on cost plus

90
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What happen when there is no external market and no spare capacity in the supplying unit?

Account for opportunity cost on lost sales

91
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What is quality?

  • The degree to which a product meets customers' needs and expectations

  • Total features and characteristics of a product or service made or performed according to specifications to satisfy customer at the same time

92
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What are the layers of quality?

Quality of design:

  • Degree to which a product's design specifications meet customers' expectation

 

Quality of performance:

  • Degree to which a product meet its design specification

93
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What are the types of quality cost?

 

Internal failure costs:

  • Detective products or services are detected before leaving the business

 

External failure costs:

  • Defective products or services provided to customers

 

Appraisal costs:

  • Determine whether defects exist

 

Prevention costs:

  • Prevent internal or external failures and minimise appraisal activities

94
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What is cost of quality report?

  • Places a dollar figure on the costs of poor quality to quantify them

  • Looks at trends over time

  • Classifies costs as fixed or variable

  • Considers interactions between the four categories

95
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What is total quality management and what does it consist of?

  • Structured approach to achieving continuous improvement in process to meet customer expectations

 

  1. Organisation-wide

  • Infiltrates all aspects of the business and involve employees

 

  1. Customer driven

  • Define by the needs and expectation of the customers

 

  1. Involves empowerment

  • Want employees to manage their own quality inspections and correct problems

 

  1. Process perspective

  • Focus on the smooth flow across the organisation

 

  1. Quality management system

  • Supported by documented quality procedures and practices to keep the TQM process under control

 

  1. Continuous improvement

96
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What is six sigma?

  • Approach to manage quality

  • Business improvement methodology that focuses on identifying and eliminating defects

  • Structured approach and rigorous data analysis

  • Company can achieve quality accreditation - ISO 9000