APM Revision Quiz

Which of the following are advantages of rolling budgets?

Choose one or more:

• A. There is always a budget which extends for several months ahead.

• B. They are more realistic than fixed annual budgets.

• C. They involve less time, effort and money in budget preparation than other budgets.

• D. They reduce the element of uncertainty in budgetingStar

Answer explanation

The correct answers are: A, B and D.

If a high rate of inflation or major changes in market conditions or any other change is likely which cannot be quantified with accuracy, rolling budgets concentrate detailed planning and control on short-term prospects where the degree of uncertainty is much smaller.

For example, if rolling budgets are prepared quarterly, there will always be a budget extending for the next 9 to 12 months. This is not the case when fixed annual budgets are used.

Planning and control will be based on a recent plan instead of a fixed annual budget that might have been made many months ago and which is no longer realistic.

After adjusting for the external factors outside the manager's control, in which category/categories is there evidence of poor performance?

• Material cost only

• Sales volume and sales price

• Sales price and material cost

• Sales price only

Answer explanation

Which of the following are characteristics of services, which distinguish them from traditional manufacturing products?

Choose all that apply:

• A. Simultaneous - production and consumption occurs at the same time.

• B. Homogenous – quality remains the same.

• C. Perishable – services cannot be stored.

• D. Intangible – services involve no physical offering.

Answer explanation

The correct answer is: A, C and D.

The characteristics which distinguish services from manufactured products are: simultaneity; heterogeneity (not homogeneity); perishability; and intangibility.

The issue of heterogeneity refers to the fact that the service a customer receives can vary from day to day, or from employee to employee, which means that one of the key problems service businesses face is ensuring consistency in the level of service provided.

An organisation has identified a group of stakeholders who need to be kept informed of a new performance initiative it is developing.

Based on the classifications in Mendelow’s matrix, what level of power and interest in the organisation will this group of stakeholders have?

Choose one:

• 
  A. Low power; low interest.

• B. Low power; high interest.

• C. High power; low interest.

• 
  D. High power; high interest.

Answer explanation

The correct answer is: B.

Stakeholders who need to be kept informed have low power, but high interest.

Stakeholders with high power and low interest need to be kept satisfied. Stakeholders with high power and high interest (key players) need to be managed closely, and might have already been consulted about the proposed initiative.

An organisation only needs to give minimal effort to stakeholders with low power and low interest.

The profitability of Beez Co has fallen in recent years, but it has noticed that the profitability of its main rivals has also fallen.

Which two of the following are the most likely explanations for the reduction in profitability in the industry?

Choose two:

• A. One of Beez Co’s competitors has recently ceased trading.

• B. The number of suppliers to the industry has increased, with the new suppliers being relatively small compared to Beez Co.

• C. Several key patents held by firms in the industry (included Beez Co) have recently expired.

• D. New technologies have reduced the level of capital required by new entrants to join the industry.

Answer explanation

The correct answers are: C and D.

The expiry of a patent would remove a major barrier to entry into the industry, and the reduction in capital requirements would also make it easier for new companies to enter the industry. As new competitors enter the industry, the level of competition will increase, which in turn would be likely to reduce the level of profitability which can be sustained in the industry.

If existing competitors leave the industry (Option A) the level of competition could be expected to reduce.

Option B describes a situation in which the bargaining power of suppliers would be expected to be low (which should increase Beez Co’s profitability).

Which TWO of the following statements about responsibility centres are true?

• (1) It is not appropriate for a revenue centre to be given responsibility for managing any costs.

• (2) Converting a profit centre to a cost centre will encourage higher levels of quality.

• (3) A cost centre should also be given responsibility for managing controllable non-financial performance.

• (4) It can still be appropriate for a division to be set up as an investment centre even though Head Office have influence over whether investments are approved.

• (5) Converting a division from a profit centre to an investment centre is an indication of decreasing decentralisation within a company.

Answer explanation

The correct answers are: Statements 3 and 4.

Statement 3 is correct because control of non-financial performance (e.g. staff turnover) is often essential in controlling costs.

Statement 4 is correct if divisions have responsibility for suggesting additions and disposals in their investment, even if authorisation is required from Head Office.

Notes on incorrect answers:

Statement 1 - not true if the cost relates to revenue generation (e.g. salesforce costs)
Statement 2 - profit centre managers will care about revenue generation and this requires good quality levels
Statement 5 - converting a division from a profit centre to an investment centre increases the responsibility of divisional management and is therefore an indication of increasing decentralisation within a company.

Different types of information systems help to provide the information which organisations need for performance management and control.

Which of the following statements are correct?

1. (i)Management information systems (MIS) summarise internal and external data into periodic reports.

2. (ii)Radio frequency identification (RFID) enables organisations to monitor and control inventory on a real-time basis.

3. (iii)Executive information systems (EIS) utilise dashboard facilities and interactive graphics.

4. (iv)Decision support systems (DSS) draw on a computerised knowledge base to give factual answers to specific queries

5. Choose the correct combination:

• A. (i) and (ii) only

• B. (iii) and (iv) only

• C. (i), (ii) and (iii) only

• D. (i), (ii), (iii) and (iv)

Answer explanation

The correct answer is: C.

Management information systems convert data from internal and external sources into information, and communicate that information, in an appropriate form, to managers in order to enable them to make timely and effective decision.

One of the main benefits of RFID is that it provides real-time inventory and asset tracking.

Executive information systems provide management with summarised data, drawn from an organisation’s MIS. They usually have dashboards and interactive graphics to help present information in a more user-friendly manner.

Expert systems (not decision support systems) draw on a computerised knowledge base to give factual answers to specific queries.

Which of the following are typically characteristics of operational information as opposed to strategic information?

Choose one or more:

• A. Internal focus.

• AB. Largely qualitative.

• C. Relatively unstructured.

• D. Short time frame.

• E. Focus on planning rather than control.

Answer explanation

The correct answers are: A and D.

Operational information typically has an internal focus, and is internally generated. Its focus is short term (often on day to day transactions).

Operational information is typically quantitative, however, and tends to be narrowly defined and highly structured. The main focus of operational information is on control rather than planning.

A company has two divisions, X and Y, which are both considering new investments costing $150,000 each. The company’s cost of capital is 12%. The project being considered by Division X will produce a net annual return of $19,000. The project being considered by Division Y will produce a net annual return of $16,000.

The division’s performance is measured by residual income, using the company’s cost of capital.

What will the divisions wish to do in relation to their potential investments?

Choose one or more:

• B. Division X: invest; Division Y: do not invest.: do not invest.

• AB. Division X: invest; Division Y: do not invest.

• C. Division X: do not invest; Division Y: invest.

• D. Division X: do not invest; Division Y: do not invest.

Answer explanation

Which of the following statements about the earnings per share (EPS) ratio is/are correct?

1. i-The existence of employee share options and convertible debt can indicate that EPS may be diluted and thus reduced in the future.

2. ii-EPS can only be used effectively when comparing the performance of the same company over time or if comparing the performance of companies of similar sizes.

3. iii-The EPS ratio is reduced if the company has preference shares in issue because there are more shares by which to divide the profit.

Choose one:

• A. (i) only

• B. (i) and (ii) only

• C. (ii) and (iii) only

• D. (i), (ii) and (iii)

Answer explanation

The correct answer is: A.

Share options and convertible bonds give the right to potential investors to buy new ordinary shares at some point in the future.

The number of shares in issue is no indicator of success for a company therefore it is not possible to carry out a useful comparison of two different companies using the EPS.

The EPS only divides profits by the number of ordinary shares in issue so the existence of preference share capital does not dilute the EPS.