8. Performance Management

Question 1

Describe the feedback control loop

Answer 1

1. Plans and targets are set for the future
2. Plans are put into operation
3. Actual results are recorded and analysed
4. Actual results are fed back to management
5. Management compare actual results to the plan / targets
6. Management can then take control action or alter the plan / targets

Question 2

What are the features of effective feedback? (8)

Answer 2

Question 3

What are three distinct ways of using budgetary information to evaluate performance? What term is given to this style of evaluation

Answer 3

Hopwood’s styles of evaluation

Question 4

Outline what effect the three Hopwood’s styles of evaluation will have on the following: i) Involvement with costs ii) Job-related tension iii) Manipulation of reports (bias) iv) Relations with the supervisor v) Relations with colleagues

Answer 4

Question 5

What is divisionalisation?

Answer 5

Splitting the company into divisions, e.g. according to location or according to the product or service provided.

Divisional managers are then given the authority to make decisions concerning the activities of their divisions.

Question 6

What is meant by decentralisation?

Answer 6

Management structure where decision-making authority is delegated to lower-level managers and employees - i.e. not all controlled by head office

Question 7

What factors affect the degree of decentralisation? How? (7)

Answer 7

• Management style - the more authoritarian the management, the less chance for decentralisation
• The size of the organisation - the smaller the organisation, the less chance for decentralisation
• The extent of activity diversification
• Effectiveness of communications - the more effective the communication, the more chance for decentralisation
• The ability of management - the more experienced the management, the more chance for decentralisation
• The speed of technological advancement - the greater the speed of technological advancement, the more chance for decentralisation
• The geography of locations and the extent of local knowledge needed - the more geographically diverse and the greate the need for local knowledge, the more chance for decentralisation

Question 8

Outline the advantages (5) & disadvantages (5) of decentralisation

Answer 8

Question 9

What are the types of centres/departments within an organisation? (4)

Answer 9

1. Cost
2. Profit
3. Revenue
4. Investment

Question 10

For each type of centre/department within an organisation, give a brief description, what a manager of that division has control of with regards to the company, and the principle performance measures that can be used to appraise them

Answer 10

Question 11

What is return on investment (ROI)? Give the equation

Answer 11

A measure of how much profit has been earned in relation to the amount of capital invested in the centre

Question 12

Define capital employed

Answer 12

Question 13

What is important to remember regarding the assets and liabilities included in ROI calculations for divisions?

Answer 13

Centrally controlled assets and liabilities should be excluded - i.e. head office

Question 14

What is residual income (RI)? Give the equation

Answer 14

A measure of the centre’s profits after deducting a notional or imputed interest cost of the capital invested in the centre

Question 15

Define imputed interest cost of capital

Answer 15

The fraction of capital employed, where the fraction is controlled by the cost of finance (i.e. interest cost)

Question 16

What are the advantages of RI over ROI? Explain each (2)

Answer 16

• Residual income will increase when investments earning above the cost of capital are undertaken (hence, as long as the return on a project beats the notional cost of capital it will be undertaken). - divisions may be put off from making desisions that will dilute ROI
• Residual income is more flexible since a different cost of capital can be applied to riskier investments

Question 17

What are the advantages of ROI over RI? Explain each (2)

Answer 17

• It does not facilitate comparisons between investment centres.
• it does not relate the size of a centre’s income to the size of the investment - two divisions may have the same RI but it is much easier for a larger division to generate a further RI

Question 18

What are the four perspectives used in the balance scorecard apporach to identify critical success factors?

Answer 18

• Financial perspective – how do we create value for our shareholders?
• Customer perspective – what do new and existing customers value from us?
• Innovation and learning perspective – can we continue to improve and create value?
• Internal business perspective – at what must we excel?

Question 19

Outline how a balance scorecard is displayed and include some key performance indication examples

Answer 19

Question 20

What is a fixed budget? What is a flexible budget? Why is a flexible budget necessary to prepare?

Answer 20

A fixed budget is one that is prepared for the expected level of production or output and then not adjusted for actual production or output.

A flexible budget recognises different cost behaviour patterns and is designed to change as the volume of activity changes.

In order to make a meaningful comparison of actual results to our expectations, we need to compare them to a budget that is based on the actual activity levels (i.e. the actual units sold)

Question 21

Outline the method for preparing a flexible budget

Answer 21

METHOD

Question 22

What is a shared service centres (SSC)?

Answer 22

A shared service center (SSC) is a centralized unit that handles specific business functions for multiple business units within an organization - functions such as human resources, payroll, accounting and IT may be carried out in a shared service centre

Question 23

What are the advantages (4) and disadvantages (4) of using a shared service centre?

Answer 23

Question 24

What is cloud computing?

Answer 24

Cloud computing is the model enabling on demand access to application, storage, networks at anytime from anywhere online.

Question 25

What is cloud accounting?

Answer 25

Cloud accounting is an application of cloud computing where accountancy software is provided in the cloud and is often delivered in an as-a-service model.

Question 26

What are the different types of '-as-a-service model'? Define each (3)

Answer 26

* **Software-as-a-Service (SaaS)** is access via web browsers to ready-to-use, cloud-hosted application software. This is how most cloud accounting applications are provided. * **Platform-as-a-Service (PaaS)** is a cloud-hosted platform that allows users to develop, run, maintain and manage applications. * **Infrastructure-as-a-Service (IaaS)**provides access to cloud-hosted infrastructure (physical and virtual servers, storage and networking) on which the user installs the software of their choice.

Question 27

What are the advantages (9) and disadvantages (5) of using cloud accounting?

Answer 27

Question 28

What is real-time monitoring? Why is it advantageous?

Answer 28

Real-time monitoring is the process of continuously observing, measuring, and analyzing data, events, or processes as they happen - i.e. when a sale is made a real-time accounting system will update receivables data, sales data and so Advantages of having instant access (anytime, anywhere via a cloud accounting system) to up-to-date financial data include: * Faster, more informed decision making * Fast reaction to market fluctuations Improved cash flow management * Improved accuracy (as time lags in traditional accounting systems are removed) * Adherence to regulatory compliance

Question 29

What is a sustainability report and what areas should it cover?

Answer 29

A sustainability report is a report published by companies on the environmental, social and governance (ESG) impacts of their activities. A sustainability report should cover the three ESG areas and include a range of ESG metrics (actual performance against targets and targets for the coming year).

Question 30

What is the Taskforce on Climate-related Financial Disclosures (TCFD)?

Answer 30

A voluntary set of recommendations for improved disclosure of climate-related risks and opportunities for decision-useful, climate-related financial information. They ask organisations to identify climate-related risks and opportunities, to consider the financial implications and to assess the resilience of the business strategy to future climate outcomes

Question 31

What elements have the TCFD provided guidance and recommendations of climate-related risk disclosure around? Define each (4)

Answer 31

Question 32

What are the climate-related risk types? Define each (2)

Answer 32

Question 33

Why is ESG performance hard to measure? (4)

Answer 33

A business may measure its performance using key performance indicators (KPIs). However, in practice, it can often be difficult or impossible to quantify ESG performance for the following reasons: * The choice of KPIs often involves a certain degree of subjectivity. * Qualitative effects can be difficult to measure (e.g. employee satisfaction). * KPIs that are not sufficiently specific may be hard to measure (eg reducing environmental damage). * It can be difficult to compare the ESG metrics of different businesses because different industries may lead to different impacts.