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PERFORMANCE MANAGEMENT (Flash Cards) 1.

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

2.

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.

3.

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

4.

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

5.

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.

6.

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.

7. 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. 8.

What are the main factors influencing the selling price decision? * costs * competitors * customers

9. What is meant by the return per factory hour in throughput accounting? Return per factory hour = Throughput /Time on key resource 10. What is meant by total factory costs for throughput accounting? Total factory costs = all production costs except materials 11. 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. 12. 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. 13. What are the three levels of planning and control in an organisation? * Strategic * Tactical * Operational 14. What are the six dimensions in Fitzgerald & Moons’ building block model? * Financial performance * Competitive performance * Quality * Flexibility * Resource Utilisation * Innovation 15. What are the four perspectives that the Balanced Scorecard focuses on? * Financial * Customer * Internal * Innovation and Learning 16. What are ‘key performance indicators’? Key performance indicators are the measures used to determine whether or not the critical success factors are being achieved. 17. 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. 18. 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. 19. 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. 20. 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. 21. When measuring Value for Money for a not-for-profit organisation, what are the three

E’s? * Economy * Efficiency * Effectiveness 22. 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

23. For theoretical transfer pricing, how is the minimum transfer price calculated? The minimum transfer price is the marginal cost of the transferring division plus any lost contribution. 24. How is the RI (residual income) of a division calculated? The RI is the division profit (before interest and tax) less a notional interest charge on the capital invested in the division. 25. How is the ROI (return on investment) of a division calculated? The ROI is the divisional profit (before interest and tax) as a percentage of the capital invested in the division. 26. 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. 27. In the context of divisionalisation, what is meant by a division? A division is an area of the business over which the divisional manager has a degree of autonomy (power to make decisions). 28. What is mean by the term ‘transfer price’? A transfer price is the price at which one division charges another division for goods or services provided. 29. What are the three categories of stakeholders in a business? Internal (employees, management) Connected (shareholders, suppliers, customers, lenders) External (government, community etc..) 30. What are characteristics of a service business that distinguish services from

manufacturing? Intangibility Simultaneity / inseparability Perishability Heterogenuity No transfer of ownership 31. 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. 32. 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. 33. 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. 34. What are operational variances measuring? Operational variances are comparing the actual results with the revised standard. 35. What are planning variances measuring? Planning variances are comparing the revised standards with the original standards.

36. 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. 37. 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. 38. 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. 39. 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 40. 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 41. 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 42. 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 43. 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. 44. What is a flexed budget? A flexed budget is where the original budget is re-written for the actual level of activity. 45. 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).

46. 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. 47. 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).

48. What is the difference between feedback and feedforward control? Feedback control compares actual results with budget. Feedforward control compares budget results with forecast. 49. 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). 50. 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. 51. 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 52. What are the principal aims / uses of budgeting? * Planning * Control * Communication * Co-ordination * Evaluation * Motivation * Authorisation and delegation 53. 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. 54. 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. 55. What is the attitude to risk of a decision maker who uses the maximax approach?

Or What is the attitude to risk of a decision maker who uses the expected value approach? The decision maker is a risk seeker. 56. What is the attitude to risk of a decision maker who uses the maximin approach? The decision maker is a risk avoider 57. 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. 58. 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

59. 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 60. 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. 61. 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. 62. 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). 63. What is meant by price discrimination? Price discrimination is when the same product or service is sold at different prices in different markets. 64. What is meant by volume discounting pricing strategy? Volume discounting is the strategy of offering a discount to customers who purchase a large quantity

65. 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. 66. 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) 67. 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). 68. What is the definition of the CS ratio? The CS ratio = contribution / sales 69. What is meant by the term ‘margin of safety’? The margin of safety is the difference between the budgeted sales volume and the breakeven sales volume. It can be expressed in units, or in $’s of revenue. or as a percentage of the budgeted sales volume. 70. 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 71. 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. 72. What is meant by the term breakeven sales revenue? The sales revenue at which the profit is zero (i.e. no profit / no loss) 73. 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)

74. 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 75. 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 76. What is the definition of the throughput accounting ratio (TPAR) for a product? TPAR = throughput contribution per hour / factory cost per hour 77. 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 78. 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) 79. 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 80. What are the phases in a product’s life cycle? * Development phase * Introduction / launch phase * Growth phase * Maturity phase * Decline phase 81. 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.

82. 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 83. What is meant by a ‘cost gap’ in the context of target costing? The cost gap is the excess of the estimated cost of production over the target cost 84. 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. 85. 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. 86. List four standards in Standard costing? * Ideal standard * Basic standard * Expected standard * Current standard

87. 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...