A public health clinic is the subject of a scheme to measure its efficiency and effectiveness. Amonga number of factors, the 'quality of care provided' has been included as an aspect of the clinic'sservice to be measured. Three features of 'quality of care provided' have been listed.

(1) Clinic's adherence to appointment times

(2) Patients' ability to contact the clinic and make appointments without difficulty

(3) The provision of a comprehensive patient health monitoring programme

Required

(i) Suggest a set of quantitative measures which can be used to identify the effective level ofachievement of each of the features listed.

(ii) Indicate how these measures could be combined into a single 'quality of care' measure.

Non profit seeking organisations

【論述題】

The absence of the profit measure in non profit seeking organisations causes problems for themeasurement of their efficiency and effectiveness.

Required

(i) Explain why the absence of the profit measure should be a cause of the problems referredto.

(ii) Explain how these problems extend to activities within business entities which have a profitmotive. Support your answer with examples.

What general objectives of non profit seeking organisations are being described in each of the following

(a) Maximising what is offered

(b) Satisfying the wants of staff and volunteers

(c) Equivalent to profit maximisation

(d) Matching capacity available

One of the objectives of a local government body could be 'to provide adequate street lighting throughoutthe area'.

(a) How could the 'adequacy' of street lighting be measured

(b) Assume that other objectives are to improve road safety in the area and to reduce crime. Howmuch does 'adequate' street lighting contribute to each of these aims

(c) What is an excessive amount of money to pay for adequately lit streets, improved road safety andreduced crime How much is too little

What objectives might the following not for profit organisations have

(a) An army (d) A political party

(b) A local council (e) A college

(c) A charity

Which of the following is an example of an internal stakeholder

Shareholders

Employees

Suppliers

Financiers

Which TWO of the following are most likely to be performance measures for a not for profitorganisation

(1) Efficient resource allocation.

(2) Return on investment (ROI) and residual income (RI)

(3) Minimising the cost of resources used.

(4) Success measured against competition

1 and 2

2 and 3

3 and 4

1 and 3

A government body uses measures based on the 3Es to measure value for money generated by apublicly funded hospital. It considers the most important performance measure to be 'cost persuccessfully treated patient'

Which of the 3Es best describes the above measure

Externality

Economy

Efficiency

Effectiveness

For a not for profit organisation with multiple objectives, which aspect of performance is the mostdifficult to assess

Financial

Economy

Efficiency

Effectiveness

Economy means cost cutting. True or false

True

False

The public service funding system operates on the basis that performance against non-financial objectivesleads to a reduction in the level of funding. True or false

True

False

Stakeholders will have different objectives and companies may deal with this by having arange of performance measures to assess the achievement of these objectives.

Which of the following statements is true in relation to stakeholders

The aim of all performance measures should be to increase short term profit

The only interest of the government is that companies pay their taxes

Shareholders will be looking for increasing dividends and increased share price

Only internal stakeholders need to be considered by companies

When setting performance measurement targets it should be considered that there is thepossibility that managers will take a short term view of the company and may even betempted to manipulate results in order to achieve their targets.

Which of the following would assist in overcoming the problems of short-termism andmanipulation of results

Rewards should be linked to a wider variety of performance measures includingsome nonfinancial measures

Managers should only be rewarded for the results achieved in their own departments

Any capital investment decision should be judged using the payback method ofinvestment appraisal

Setting targets involving the overall performance of the company will be moremotivating for managers

Which of the following statements regarding standard setting is correct

Imposed standards are more likely to be achieved

Managers across the organisation should be targeted using the same standards

Standards should be set at an ideal level with no built in stretch

Participation in standard setting is more motivating than where standards areimposed

The senior manager is suspicious of a local manager’s accounts and thinks that the profitperformance may have been overstated.

Which of the following would be a plausible explanation of an overstatement of profit

Delaying payments to payables

Shortening the useful economic life of a non-current asset

Overstatement of a prepayment

Overstatement of an accrual

The following statements have been made about measuring performance in not-for-profitorganisations:

(1) Output does not usually have a market value, and it is therefore more difficult tomeasure effectiveness.

(2) Control over the performance can only be satisfactorily achieved by assessments of‘value for money’.

Which of the above statements is/are true

(1) only

(2) only

Neither (1) nor (2)

Both (1) and (2)

A government is trying to assess schools by using a range of financial and non-financialfactors. One of the chosen methods is the percentage of students passing five exams ormore.

Which of the three Es in the value for money framework is being measured here

Economy

Efficiency

Effectiveness

Expertise

Which of the following statements, regarding the existence of multiple objectives in not-for-profit organisations, is/are correct

(1) They ensure goal congruence between stakeholders.

(2) Compromise between objectives can be problematic.

(1) only

(2) only

Both (1) and (2)

Neither (1) nor (2)

A government is looking at assessing hospitals by reference to a range of both financial andnon-financial factors, one of which is survival rates for heart by-pass operations andanother is ‘cost per successfully treated patient’.

Which of the three E’s in the ‘Value For Money’ framework is not measured here

Economy

Effectiveness

Efficiency

Externality

Explain the potential benefits of operating a transfer pricing system within a divisionalisedcompany.

Division Y of Chardonnay currently has capital employed of $100,000 and earns an annual profitafter depreciation of $18,000. The divisional manager is considering an investment of $10,000 inan asset which will have a ten-year life with no residual value and will earn a constant annual profitafter depreciation of $1,600. The cost of capital is 15%.

Calculate the following and comment on the results.

(i) The return on divisional investment before and after the new investment

(ii) The divisional residual income before and after the new investment

Divisional performance measures

【論述題】

Compare and contrast the use of residual income and return on investment in divisionalperformance measurement, stating the advantages and disadvantages of each.

There are two profit centres, A and B. Profit centre A transfers a product to profit centre B, butcould also sell the product in an external market at a price of $30. The marginal cost of making theproduct in profit centre A is $8 per unit and the full cost is $14 per unit. There would be a variablecost of $1 per unit for sales and distribution to customers in the external market, but no such costsfor internal transfers.

To avoid disputes between the profit centre managers, what should be the transfer price for theproduct

$ _______

Fill in the blanks.

Ideally, a transfer price should be set that enables the individual divisions to maximise their profits at alevel of output that maximises ……………………. .

The transfer price which achieves this is unlikely to be a ……………….. transfer price or a……………. transfer price.

If optimum decisions are to be taken, transfer prices should reflect …………………. .

An investment centre with capital employed of $570,000 is budgeted to earn a profit of $119,700 nextyear. A proposed fixed asset investment of $50,000, not included in the budget at present, will earn aprofit next year of $8,500 after depreciation. The company's cost of capital is 15%. What is the budgetedROI and residual income for next year, both with and without the investment

ROI Residual income

Without investment ……………….. ………………..

With investment ……………….. ………………..

Choose the correct words from those highlighted.

ROI based on profits as a % of net assets employed will (a) increase/decrease as an asset gets older andits book value (b) increases/reduces. This could therefore create an (c) incentive/disincentive toinvestment centre managers to reinvest in new or replacement assets.

The transfer pricing system operated by a divisional company has the potential to make a significantcontribution towards the achievement of corporate financial objectives.

Required

Explain the potential benefits of operating a transfer pricing system within a divisionalised company.

A division with capital employed of $400,000 currently earns an ROI of 22%. It can make an additionalinvestment of $50,000 for a five year life with nil residual value. The average net profit from thisinvestment would be $12,000 after depreciation. The division's cost of capital is 14%.

What are the residual incomes before and after the investment

This question appeared in the June 2015 exam.

At the start of the year, a division has non-current assets of $4 million and makes no additions ordisposals during the year. Depreciation is charged at a rate of 10% per annum on all non-currentassets held at the end of the year. Working capital is $0.5 million at the start of the year althoughthis is expected to increase by 20% by the end of the year. The budgeted profit of the division afterdepreciation is $1.2 million.

What is the expected ROI of the division for the year, based on average capital employed

27.59%

26.37%

18.39%

31.58%

This question appeared in the June 2015 exam.

A division is considering investing in capital equipment costing $2.7m. The useful economic life ofthe equipment is expected to be 50 years, with no resale value at the end of the period. Theforecast return on the initial investment is 15% per annum before depreciation. The division's costof capital is 7%

What is the expected annual residual income of the initial investment

$0

($270,000)

$162,000

$216,000

SWAL has two divisions, SW and AL, which operate as profit centres and have full autonomy inmaking, buying and selling decisions.

SW manufactures SW+ at a cost of $12 per unit. The market price of SW+ is $16 per unit.

AL uses SW+ in manufacturing its own product. The transfer price of SW+ when transferred fromDivision SW to Division AL is set at full production cost plus 20%.

Which one of the following independent circumstances represents dysfunctional behaviourarising from SWAL's transfer pricing policy

SW refuses to sell SW+ to AL as there is unlimited demand for SW+ in the external market.

AL refuses to order from SW as it can buy SW+ from the open market at lower than currenttransfer price. As a result, SW sells all its units on the open market.

SW refuses to transfer below market price so AL is forced to buy from the external market.

SW agrees to sell to AL but has to cancel the sale in order to fulfil an urgent customer orderwho is willing to pay a higher price for immediate delivery.

The following information relates to an investment centre, which is a separate product division in alarge company.

$

Net current assets 60,000

Non-current assets 240,000

Profit before depreciation 50,000

Depreciation 10,000

The company's cost of capital is 10%. What is the most appropriate measure of the centre's Returnon Investment (ROI)

3.3%

13.3%

16.7%

20.8%

Which of the following is not a disadvantage of using market value as a transfer price

The market price might be a temporary one.

Use of market price might act as a disincentive to use up spare capacity.

Many products do not have an equivalent market price.

The external market might be perfect.

To prevent dysfunctional transfer price decision-making, profit centres must be allowed to makeautonomous decisions. True or false

True

False

'The use of residual income in performance measurement will avoid dysfunctional decision-makingbecause it will always lead to the correct decision concerning capital investments.'

True

false

Division B of a company makes units which are then transferred to other divisions. Thedivision has no spare capacity. The following statements have been made regarding theminimum transfer price that will encourage the divisional manager of B to transfer units toother divisions:

(1) Any price above variable cost will generate a positive contribution, and will thereforebe accepted.

(2) The division will need to give up a unit sold externally in order to make a transfer;this is only worthwhile if the income of a transfer is greater than the net income of anexternal sale.

Which of the above statement(s) is/are true

(1) only

(2) only

Neither (1) nor (2)

Both (1) and (2)

Perrin Co has two divisions, A and B.

Division A has limited skilled labour and is operating at full capacity making product Y. It hasbeen asked to supply a different product, X, to division B. Division B currently sources thisproduct externally for $700 per unit.

The same grade of materials and labour is used in both products. The cost cards for eachproduct are shown below:

Product Y X

($)/unit ($)/unit

Selling price 600 –

Direct materials ($50 per kg) 200 150

Direct labour ($20 per hour) 80 120

Apportioned fixed overheads ($15 per hour) 60 90

Using an opportunity cost approach to transfer pricing, what is the minimum transferprice

$270

$750

$590

$840

Oxco has two divisions, A and B. Division A makes a component for air conditioning unitswhich it can only sell to Division B. It has no other outlet for sales.

Current information relating to Division A is as follows:

Marginal cost per unit $100

Transfer price of the component $165

Total production and sales of the component each year 2,200 units

Specific fixed costs of Division A per year $10,000

Cold Co has offered to sell the component to Division B for $140 per unit.

If Division Baccepts this offer, Division A will be shut.If Division B accepts Cold Co’s offer, what will be the impact on profits per year for thegroup as a whole

Increase of $65,000

Decrease of $78,000

Decrease of $88,000

Increase of $55,000

Dust Co has two divisions, A and B. Each division is currently considering the followingseparate projects:

Division A Division B

Capital required for the project $32.6 million $22.2 million

Sales generated by the project $14.4 million $8.8 million

Operating profit margin 30% 24%

Cost of capital 10% 10%

Current return on investment of division 15% 9%

If residual income is used as the basis for the investment decision, which division(s)would choose to invest in the project

Division A only

Division B only

Both Division A and Division B

Neither Division A neither Division B

EJET is an airline company that operates domestically and internationally using a fleet of 20aircraft. Passengers book flights using the internet or by telephone and pay for their flights at thetime of booking using a debit or credit card.

EJET currently measures its performance using financial ratios. The new Managing Director hassuggested that non-financial measures are equally important as financial measures and providefurther insights into company performance.

Indicate the statements shown below that are valid:

A Non-financial measures are less likely to be manipulated than traditional financial ratios.

B Non-financial measures may discourage dysfunctional behaviour by airline staff.

C Financial ratios do not need to be linked with non-financial measures.

D Non-financial measures are a better indicator of future prospects than financial ratios whichfocus on the short term.

E Internal efficiency can be measured by the number of flight take-offs that are on time.

F Non-financial performance measures do not need to be developed and refined over time asthey always remain relevant.

G Customer satisfaction can be measured in terms of the number of failed attempts to make abooking due to website crashes.

What are the three most important features of the balanced scorecard approach

Fill in the blanks.

NFPIs are less likely to be …………………. than traditional profit-related measures and they shouldtherefore offer a means of counteracting ………………………….. .

Choose the correct words from those highlighted.

In general, a current ratio in excess of 1/less than 1/approximately zero should be expected.

How do quantitative and qualitative performance measures differ

Give five examples of a financial performance measure.

Suggest two separate performance indicators that could be used to assess each of the following areas of afast food chain's operations.

(a) Food preparation department

(b) Marketing department

This question appeared in the June 2015 exam.

The following ratios have been calculated for a company:

Gross profit margin 42%

Operating profit margin 28%

Gearing (debt/equity) 40%

Asset turnover 65%

What is the return on capital employed for the company

27.3%

18.2%

11.2%

16.8%

A government department is responsible for monitoring the performance of schools providingeducation for pupils aged between 11 and 18.

There is a separate government department that sets final examinations that help determine entryto university and support pupils' job applications.

The head teachers at individual schools are responsible for teaching and submitting selected pupilsfor these examinations.

Which of the following statements is valid in the context of this scenario

Poor performance in terms of financial indicators should be ignored if a school isperforming well in non-financial terms.

Non-financial performance indicators cannot be manipulated by school head teachers.

It is generally valid to compare the pass rates of different schools in the final examinations.

Non-financial indicators are generally more important than financial indicators in the publicsector

Which of the following elements in the Building Block model of performance management(Fitzgerald and Moon) relates to setting standards of performance

Achievability

Competitiveness

Controllability

Motivation

The following statements have been made about a balanced scorecard (BSC) performancereporting system.

(1) There must be just one key performance indicator (KPI) for each of the four perspectives ofperformance.

(2) A performance target to reduce the amount of wastage in production would relate to theinnovation and learning perspective of the BSC.

Which of the above statements is/are true

1 only

2 only

Neither 1 nor 2

Both 1 and 2