ACCA F1 flashcards – set 4

Strategic benchmarking: comparing with how other companies compete (not usually industry specific).

Financial benchmarking: comparing financial performance with that of competitors.

Product benchmarking: comparing specific products with those produced by competitors.

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)

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.

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

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

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.

* Competitors’ and suppliers’ catalogues and web sites
* The internet (eg search engines such as Google)
* Newspapers, journals, television, radio
* Published accounts
* The stock exchange
* National and market surveys
* Government and industry statistics
* Discussion with customers
* Government publications
* Employees
* Banks

Cost plus
Marginal cost
Market prices

* 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.

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.

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

* 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

* 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.

DMAIC: define, measure, analyse, implement, control

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

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

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

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

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

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

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.”

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

Costs of conformance:
* Prevention
* Appraisal

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

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

Quantitative: Altman’s Z score
Qualitative: Argenti’s A score

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

* High gearing
* Overtrading
* Too much reliance on one big project

* 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

* Defects
* Mistakes
* Symptoms

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

* Effectiveness
* Efficiency
* Economy

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

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

Standards: ownership, achievability, equity

Rewards: clarity, motivation, controllability

* Dimensions
* Standards
* Rewards

* Financial performance
* Competitive performance
* Quality
* Flexibility
* Resource utilisation
* Innovation

Capital employed x WACC. This is a notional charge for the use of capital

* Non-cash expenses
* Expenses such as R&D, training and advertising
* Provisions
* Book depreciation (replaced by economic depreciation)
* Goodwill written-off/amortised
* Interest on debt capital (after adjusting for tax relief)

Add back the interest after tax ie $1.5 million so NOPAT is $11.5 million

Advantages:
* Gives decisions goal congruent with group wishes
* Different rates of interest for divisions of different risks
* Uses readily available accounting figures
Disadvantages:
* Poor for comparing divisions of different sizes
* Profits can be manipulated
* Less intuitive to ROI

Advantages:
* Can be used to compare divisions of different sizes.
* Acceptable/understandable
* Uses readily available accounting figures

Disadvantages:
* Can lead to dysfunctional decisions
* Profits can be manipulated

Residual income (RI) is defined as: controllable divisional profit with a deduction of notional (or imputed) interest based on capital employed times cost of capital.

Return on investment (ROI) is defined as: controllable divisional profit expressed as a percentage of divisional investment.

Cost centre: manager is responsible for only costs
Profit centre: manager is responsible for costs and revenues
Investment centre: manager is responsible for costs, revenues and investmenr in non-current assets.

Divisionalisation is where managers of business areas are given a degree of autonomy over decision making i.e. they are given the authority to make decision without reference to senior management. In effect they are allowed to run their part of the business almost as though it were their own company.

Earnings before interest and tax: before interest to measure the profitability before any distributions to providers and capital, and before tax because tax is not under direct control of management. EBITDA additionally considers profit before depreciation and amortisation to approximate to cash flow, as depreciation and amortisation are non-cash expenses. A major criticism of EBITDA is that it fails to consider the amounts required for fixed asset replacement.

EBITDA stands for ‘earnings before interest, taxes, depreciation and amortisation’.

* With previous years for the same company
* With other similar companies
* With industry averages
* Also, possibly, between branches or divisions of the same company

Profitability – how well a company performs, given its asset base
Liquidity – the short term financial position of the company
Gearing – the long-term financial position of the company
Investors ratios – how well investors will appraise the company

Negative feedback is where the control mechanism reduces any deviation from plans.
Positive feedback seeks to increase a deviation form plan. Eg to ensure that sales increases are repeated

Feedforward control is where a problem is identified and corrective action taken, before the problem occurs.

Feedback control is where the outputs of a process are measured and information is then provided regarding corrective action, after the outputs have been produced.

These are attitudes to uncertainty.
Maximax: an optimist who expects to get the best possible outcome.
Maximin: a pessimist who expects poor outcomes and seeks to limit those.
Minimax regret: someone who looks backwards and often wishes a different choice had been made. Decisions are made to so as to minimise possible regrets.

Risk preference relates to attitude to risk.
A risk seeker will be interested in the best possible outcome, no matter how small the change that they may occur.
Someone who is risk neutral will be concerned with the most likely or ‘average’ outcome.
A risk avoider makes decisions on the basis of the worst possible outcomes that may occur.

Risk exists where a decision maker has knowledge that several possible outcomes are possible – usually due to past experience. This past experience enables the decision maker to estimate the probability or the likely occurrence of each potential future outcome. Uncertainty exists where the future is unknown and where the decision maker has no past experience on which to base predictions.

The contingency approach to management accounting is based on the idea that there is no universally appropriate accounting system applicable to all organisations in all circumstances.

Value analysis tries to reduce costs whilst still delivering the required standard of quality and reliability. The main distinction is between value added and non-value added activities. Value added activities add value to the customer’s perception of a product; non-value added activities do not add value in the eyes of the customer. Costs that do not add value to the product should be targeted for elimination.

Radio frequency identification (RFID) is the use of a wireless non-contact system that uses radio-frequency communication to transfer data from a tag attached to an object, for the purposes of identification and tracking.

MIS = management information system
DSS = decision support system
EIS = executive information system
ERP = enterprise resource planning
ES = expert system

Accurate,
Complete,
Cost-beneficial,
Understandable/user-targeted,
Relevant,
Adaptable/authoritative,
Timely,
Easy to use.

* perishability
* intangibility
* simulaneity
* heterogeneity
* no transfer of ownership

Automation, rationalisation and business process engineering.

Business process reengineering involves re-thinking and radically re-designing of the way an Organisation’s processes operate. It is not simply attempting to improve the existing way of doing things, but starting almost with a blank piece of paper and designing how best to operate the business.

In a matrix structure, each employee has responsibilities to more than one superior.
Eg, in project management an engineer could be responsible to the project manager and to the engineering manager.

By market and by product

This is a functional structure as it organises the business by function (or department).

The span of control (SoC) is the number of people directly reporting to a manager.
In a tall narrow structure the SoC is low;
In a wide flat structure the SoC is large.

Practical reasons for the learning effect to cease are:
* When machine efficiency restricts any further improvement.
* A process cannot be speeded up (eg material solidifying)
* The workforce reaches its physical limits.
* If there is a ‘go-slow’ agreement among the workforce.
* Staff turnover

As cumulative output doubles, the cumulative average time per unit falls to a given percentage of the previous average time per unit.

* There’s a significant manual element in the task being considered.
* The task must be repetitive and fairly complex.
* Production must be at an early stage so that there is room for improvement.
* There must be consistency in the workforce.
* There must not be extensive breaks in production, or workers will ‘forget’ the skill.
* Workforce is motivated and want to improve.

* It takes up a lot of management time
* However well the budget is prepared, it rapidly becomes out of date and therefore of less use
* It provides a framework for managers to work to and they are therefore less keen to consider innovations (that may mean overspending the budget in the short-term even if good for the long-term).

* the organisation may be prevented from borrowing funds or from budgeting for a deficit
* the organisation may not be allowed to transfer funds from one budget head to another
* the budgeting tends to be just for one financial year (i.e. short-term rather than long-term)
* incremental budgeting is the method most widely used

Targets can assist motivation and appraisal if they are set at the right level.
If they are too difficult then they will demotivate
If they are too easy then managers are less likely to strive for optimal performance
Ideally they should be slightly above the anticipated performance level

This is the application of the idea of Activity Based Costing to the process of budgeting, and as such has particular relevance to budgeting for fixed overheads. At the planning stage, attempts are made to identify which activities drive various overheads. Costs are spread over these cost drivers using whatever basis appears to be appropriate in the circumstances.

Incremental: last year’s budget updated for inflation and any other known changes.
ZBB: critically consider each activity on its own merits and draw up the costs and benefits of the different ways of performing it (and indeed whether or not the activity should continue). Then decide on the most effective way of performing each activity.

Fixed: prepared at the expected level of activity
Flexed: adjusted or scaled to that level of activity achieved.
Flexible: prepared in advance at several levels of activity
Rolling: always looking a set period ahead – typically one year.

The principal budget factor limits the activity for the budget period. Normally this is the level of sales and therefore the sales budget is usually the first budget to be prepared – this then leads to the others. However, it could be (for example) a limit on the availability of raw materials that limits activity. In this case raw materials would be the principal budget factor, and this would be the first budget to be prepared.

Backward integration is taking over (or setting up) a supplier;
Forward integration is taking over (or setting up) a customer or supply chain.

Related and unrelated diversification.

Product development

Market development

Market penetration,
Efficiency gains,
Withdrawal, consolidation.

Products (existing and current);
Markets (existing and current)

* Planning
* Co-ordination
* Control
* Authorising and delegating
* Evaluation of performance
* Communicating and motivating

* Structure
* Systems
* Strategy
* Style
* Staff
* Skills
* Shared values

* Cost leadership
* Differentiation
* Focus.

Firm infrastructure,
Human resource management,
Technology development,
Procurement

Inbound logistics,
Operations,
Outbound logistics,
Sales and marketing,
Service.

Some cash cows to generate lots of cash (but cash cows are heading towards market decline), and some problem children needing investment. The cash generated by the cash cows can be used to build the problem children into star products that will become the cash cows of the future.

BCG suggests that only companies with large market shares can survive in the long term so the company has to decide whether to withdraw or to invest to achieve a large market share.
Note that niche or focus companies can survive with what looks like a small market share.

Problem child (or question mark): high market growth rate, low market share.
Star: high market growth rate, high market share.
Cash cow: low market growth rate, high market share.
Dog: low market growth rate, low market share.

Internal: for example, to previous periods or between different branches.
External: to similar businesses or organisations. Can be competitive or non-competitive.
Functional: to specific functions in other businesses such as cost per help-line call
Generic: to different businesses and organisations.

Market growth rate and relative market share (market share/share of market leader)

Fierce competition because the market is not growing. This leads to price pressure and the need to improve specifications to sell to an experienced set of customers. Weaker competitors often drop out and many combine (consolidation) to achieve the economies of scale needed. High profits should be possible for efficient producers (great scale, efficiency and well down the learning curve).

* Development,
* Growth,
* Maturity,
* Decline.