# ACCA P5 flashcards – set 4

### Draw Lynch and Cross’s performance pyramid

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What is the expected profit arising from the following and what are the problems using expected values in project appraisals?
Outcome I p = 0.3 Profit = 3000
Outcome II p = 0.7 Profit = 5000

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0.3 x 3000 + 0.7 x 5000 = 4400

Problems:
How are probabilities estimated
The expected value is usually not ‘expected’
Risk is not captured (eg a poor outcome of 3000 is quite possible in the above case)

### What is a data warehouse and data mining?

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A data warehouse is a vast collection of historic transaction data (eg, sales by a supermarket).
Data mining is searching though that looking for patterns and associations that might be helpful in increasing profits.

A company produces 20,000 units of Product A. The product is produced in batches of 1,000 units. The company also produces 50,000 units of Product B and this is produced in batches of 5,000 units. Total set-up costs amount to \$90,000.
What is the set up cost per unit of Product A and per unit of product B?

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Number of set ups = 20,000/1,000 + 50,000/5,000 = 30
Cost per set-up = 90,000/30 = 3,000
For one set-up 1,000 units of A are produced: set-up cost per unit = \$3
For one set-up 5,000 units of B are produced: set-up cost per unit = \$0.6

### What are the main differences between information for strategic decisions and information for operational decisions?

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Strategic: often forward looking, highly summarised, often non-routine, estimates, external.
Operational: historical, detailed and very accurate, routine, internal.

### Describe what is meant by ‘annuity depreciation’?

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The sum of the annual interest charge on the book value of the asset and the annual depreciation is constant throughout the life of the asset. The total annual charge is calculated y dividing the cost of the asset by the appropriate cumulative discount rate.

### What are three aims of a good transfer price?

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* Goal congruence
* Profit for each division (motivation)
* Autonomy for each division (head office specifies only the transfer price and then lets divisions make their own decisions.

### What is the ‘rule’ for sensible transfer pricing? For intra-group transfers to occur:

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Transferring out company: transfer price must be no lower than marginal cost plus lost contribution of transferring internally
Transferring in company: transfer price must be the lower of net marginal revenue and the outside buy in price.

### What additional factors need to be taken into account when international intra-company transfers are taking place?

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* Taxation in the different countries
* Import tariffs
* Exchange controls
* Exchange rates
* Anti-dumping legislation
* Competitive pressures
* Repatriation of funds

### What is the target costing approach?

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* Identify what a product can be sold at (eg by comparing to competitors’ prices).
* Determine the margin required
* Work back to the maximum allowable cost
* Seek to reduce actual production costs to the maximum allowable cost

### What are four potential approaches to environmental accounting?

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* input / output analysis: record material flows to discover what happens to the material
* flow cost accounting:concentrates more on where material losses are occurring within the business
* environmental activity based costing:to determine what drives/causes costs
* life cycle costing:all costs are taken into account over the product’s life- including costs such as waste disposal.

### What methodology is suggested by the six sigma approach for improving quality?

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DMAIC: define, measure, analyse, implement, control

### In performance measurement systems what is the potential problem with “Ossification”

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Ossification: The unwillingness to change a performance measure scheme once it has been set up.

### In performance measurement systems what is the potential problem with “Gaming”

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Gaming: Deliberate distortion of the measure in order to achieve some strategic advantage.

### In performance measurement systems what is the potential problem with “Misrepresentation”?

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Misrepresentation: Using creative reporting to suggest that performance measures have been achieved

### In performance measurement systems what is the potential problem with “Measure fixation”

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Measure fixation: Behaviour and activities in order to achieve specific performance measures, that may not be effective

### In performance measurement systems what is the potential problem with “Myopia”

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Myopia: Focussing on the short-term resulting in the ignoring of the long-term

### In performance measurement systems what is the potential problem with “Sub-optimisation”

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Sub-optimisation: Undue focus on some objectives resulting in other objectives not being achieved

### Define total quality management

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Total quality management: “the continuous improvement in quality, productivity and effectiveness obtained by establishing management responsibility for processes as well as outputs.
In this every process has an identified process owner and every person in an entity operates within a process and contributes to its improvement.”

### In performance measurement systems what is the potential problem with “tunnel vision”

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Tunnel vision: Undue focus on performance measures to the detriment of other areas

### What are the costs associated with quality?

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Costs of conformance:
* Prevention
* Appraisal

Costs of non-conformance
* Internal failure costs
* External failure costs

### What are six potential problems with performance measurement systems?

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* Tunnel vision
* Sub-optimisation
* Myopia
* Measure fixation
* Misrepresentation
* Gaming
* Ossification

### What factors are included under the heading of ‘Symptoms’ in Argenti’s A score?

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* Financial signs (such as the Z score)
* Creative Accounting
* Non-financial signs (e.g. low morale)
* Terminal signs

### What factors are included under the heading of ‘Mistakes’ in Argenti’s A score?

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* High gearing
* Too much reliance on one big project

### What factors are included under the heading of ‘Defects’ in Argenti’s A score?

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* Chief Executive is an autocrat
* Chief Executive is also the chairman
* Passive board of directors
* Lack of skills balance in the board
* Lack of management depth
* No budgets or budgetary controls
* No cash flow plans
* No costing system
* Poor response to change

### What are the three groups of variables that are used in Argenti’s A score for predicting corporate failure?

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* Defects
* Mistakes
* Symptoms

### What factors should be taken into account when comparing divisional performance?

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Many factors could be relevant. Here are some:
* Transfer prices
* Age of assets
* Ability of managers
* Controllability of costs, revenues and investment
* Allocation of head office charges

### What are the 3Es used in performance measurement in not-for profit organisations?

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* Effectiveness
* Efficiency
* Economy

### What are the typical problems with performance measurement in the not-for profit sector?

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* Multiple objectives
* The difficulty of measuring outputs
* Financial constraints
* Political, social and legal considerations
* Little market competition and no profit motive.

### What are the four perspectives of Kaplan and Norton’s balanced scorecard?

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(Present in the proper hierarchy.)
* Financial perspective
* Customer perspective
* Innovation and learning perspective

### In respect of assessing performance, what did Fitzgerald and Moon suggest are the components of the building blocks of standards and rewards?

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Standards: ownership, achievability, equity

Rewards:
clarity, motivation, controllability