Performance Management MCQ Quiz - Objective Question with Answer for Performance Management - Download Free PDF

(a) TIP's financial performance can be assessed in a number of ways:
Sales growth
Sales are up about 1·3% (W1) which is a little above the rate of inflation and therefore a move in the right direction. However, with average admission prices
jumping about 8-6% (W2) and numbers of visitors falling, there are clearly problems. Large increases in admission prices reduce the value proposition for the customer, it is unlikely that the rate of increase is sustainable or even justifiable. Indeed with volumes falling (down by 6·7% (W6)), it appears that some customers are being put off and price could be one of the reasons.

Maintenance and repairs
There appears to be a continuing drift away from routine maintenance with management preferring to repair equipment as required. This does not appear to be
saving any money as the combined cost of maintenance and repair is higher in 20X5 than in 20X4 (possible risks are dealt with in part (b)).

Directors' pay
Absolute salary levels are up 6·7% (W3), well above the modest inflation rate. It appears that the shareholders are happy with the financial performance of the
business and are prepared to reward the directors accordingly. Bonus levels are also well up. It may be that the directors have some form of profit related pay scheme and
are being rewarded for the improved profit performance. The directors are likely to be very pleased with the increases to pay.

Wages
Wages are down by 12% (W5). This may partly reflect the loss of customers (down by 6·7% (W6)) if it is assumed that at least part of the wages cost is variable. It could
also be that the directors are reducing staff levels beyond the fall in the level of customers to enhance short-term profit and personal bonus. Customer service and
indeed safety could be compromised here.
Net profit
Net profit is up a huge 31·3% (W7) and most shareholders would be pleased with that. Net profit is a very traditional measure of performance and most would say this
was a sign of good performance.
Return on assets
The profitability can be measured relative to the asset base which is being used to generate it. This is sometimes referred to as ROI or return on investment. The return
on assets is up considerably to 11·4% from 8% (W8). This is partly due to the significant rise in profit and partly due to the fall in asset value. We are told that TIP
has cut back on new development, so the fall in asset value is probably due todepreciation being charged with little being spent during the year on assets. In this
regard it is inevitable that return on assets is up but it is more questionable whether this is a good performance. A theme park (and thrill rides in particular) must be
updated to keep customers coming back. The directors of TIP are risking the future of the park.

Workings:

• (W1) Sales growth is $5,320,000/$5,250,000 = 1-01333 or 1-3%.
• (W2) Average admission prices were:
• 20X4: $5,250,000/150,000 = $35 per person
• 20X5: $5,320,000/140,000 = $38 per person
• An increase of $38/$35 = 1-0857 or 8-57%
• (W3) Directors' pay up by $160,000/$150,000 = 1-0667 or 6·7%.
• (W4) Directors' bonuses levels up from $15,000/$150,000 or 10%
• $18,000/$160,000 or 12:5% of turnover. This is an increase of 3/15 or 20%.
• (W5) Wages are down by (1 – $2,200,000/$2,500,000) or 12%.
• (W6) Loss of customers is (1 – 140,000/150,000) or 6·7%.
• (W7) Profits up by $1,372,000/$1,045,000 = 1·3129 or 31-3%.
• (W8) Return on assets:
• 20X4: $1,045,000/$13,000,000 = 1-0803 or 8-03%
• 20X5: $1,372,000/$12,000,000 = 1-114 or 11-4%

(b) Quality provision
Reliability of the rides
The hours lost has increased significantly. Equally the percentage of capacity lost due to breakdowns is now approaching 17·8% (W9). This would appear to be a very
high number of hours lost. This would surely increase the risk that customers are disappointed being unable to ride. Given the fixed admission price system, this is
bound to irritate some customers as they have effectively already paid to ride.
Average queuing time
Queuing will be seen by customers as dead time. They may see some waiting as inevitable and hence acceptable. However, TIP should be careful to maintain waiting
times at a minimum. An increase of 10 minutes (or 50%) is likely to be noticeable by customers and is unlikely to enhance the quality of the TIP experience for them. The
increase in waiting times is probably due to the high number of hours lost due to breakdown with customers being forced to queue for a fewer number of ride options.
Safety
The clear reduction in maintenance could easily damage the safety record of the park and is an obvious quality issue.
Risks
If TIP continues with current policies, then they will expose themselves to the following risks:
- The lack of routine maintenance could easily lead to an accident or injury to a customer. This could lead to compensation being paid or reputational damage.
- Increased competition. The continuous raising of admission prices increases the likelihood of a new competitor entering the market (although there are significant
barriers to entry in this market, e.g. capital cost, land and so on).
- Loss of customers. The value for money which customers see when coming to TIP is clearly reducing (higher prices, less reliability of rides and longer queues).
Regardless of the existence of competition, customers could simply choose not to come, substituting another leisure activity instead.
- Profit fall. In the end if customers' numbers fall, then so will profit. The shareholders, although well rewarded at the moment, could suffer a loss of dividend.
Directors' job security could then be threatened.
Workings:
(W9) Capacity of rides in hours is 360 days x 50 rides x 10 hours per day = 180,000.
20X4 lost capacity is 9,000/180,000 = 0·05 or 5%.
20X5 lost capacity is 32,000/180,000 = 0·177 or 17:8%.

(a)
(i) Sales price variance and sales volume variance

(ii) Material price planning and purchasing operational variances
Material planning variance = (original target price - general market price at time of purchase) x quantity purchased ($60-$85) x 1,400 = $35,000 A
Material price operational variance = (general market price at time of purchase actual price paid) x quantity purchased ($85 - $80) x 1,400 = $7,000 F

(iii) Labour rate and labour efficiency variances
Labour rate variance = (standard labour rate per hour - actual labour rate per hour) x actual hours worked

Actual hours worked by temporary workers:
Total hours needed if staff were fully efficient = (750 x 2) + (650 x 1-5) = 2,475.
Permanent staff provide 2,200 hours, therefore excess = 2,475 – 2,200 = 275.
However, temporary workers take twice as long, therefore hours worked = 275 x 2 = 550.

Labour rate variance relates solely to temporary workers; therefore ignore permanent staff in the calculation.
Labour rate variance = ($14 - $18) x 550 = $2,200 A

Labour efficiency variance = (standard labour hours for actual production - actual labour hours worked) x standard rate (275-550) x $14 = $3,850 A

(b) Explanation of planning and operational variances
Before the material price planning and operational variances were calculated, the only information available as regards material purchasing was that there was an
adverse material price variance of $28,000. The purchasing department will be assessed on the basis of this variance, yet, on its own, it is not a reliable indicator of
the purchasing department's efficiency. The reason it is not a reliable indicator is because market conditions can change, leading to an increase in price, and this
change in market conditions is not within the control of the purchasing department.

By analysing the materials price variance further and breaking it down into its two components - planning and operational - the variance actually becomes a more
useful assessment tool. The planning variance represents the uncontrollable element and the operational variance represents the controllable element.
The planning variance is really useful for providing feedback on just how skilled management is in estimating future prices. This can be very easy in some
businesses and very difficult in others. Giving this detail could help to improve planning and standard setting in the future, as management will be increasingly
aware of factors which could create volatility in their forecasts.

The operational variance is more meaningful in that it measures the purchasing department's efficiency given the market conditions which prevailed at the time. As
can be seen in Carad, the material price operational variance is favourable which demonstrates that the purchasing department managed to acquire the component
which was in short supply at a better price than expected. Without this breakdown in the variance, the purchasing department could have been held accountable for the
overall adverse variance which was not indicative of their actual performance. This is then a fairer method of assessing performance and will, in turn, stop staff from
becoming demotivated.

The correct option is option 1 
Additional Information:

• (1) and (2) would be appropriate measures of the performance, as they are within the control of the managers of the divisions and reflect quality of output, and ability to sell the products. (3) is not appropriate, as profit centre managers cannot make investment decisions, so it would be unfair to deduct deprecation from their profit. Similarly residual income would not be appropriate – as managers of a profit centre cannot make investment decisions, it is not fair to evaluate their performance by a measure that deducts the cost of capital from their profit.

The correct option is option 1 

Additional Information:

(a) TIP's financial performance can be assessed in a number of ways:
Sales growth
Sales are up about 1·3% (W1) which is a little above the rate of inflation and therefore a move in the right direction. However, with average admission prices
jumping about 8-6% (W2) and numbers of visitors falling, there are clearly problems. Large increases in admission prices reduce the value proposition for the customer, it is unlikely that the rate of increase is sustainable or even justifiable. Indeed with volumes falling (down by 6·7% (W6)), it appears that some customers are being put off and price could be one of the reasons.

Maintenance and repairs
There appears to be a continuing drift away from routine maintenance with management preferring to repair equipment as required. This does not appear to be
saving any money as the combined cost of maintenance and repair is higher in 20X5 than in 20X4 (possible risks are dealt with in part (b)).

Directors' pay
Absolute salary levels are up 6·7% (W3), well above the modest inflation rate. It appears that the shareholders are happy with the financial performance of the
business and are prepared to reward the directors accordingly. Bonus levels are also well up. It may be that the directors have some form of profit related pay scheme and
are being rewarded for the improved profit performance. The directors are likely to be very pleased with the increases to pay.

Wages
Wages are down by 12% (W5). This may partly reflect the loss of customers (down by 6·7% (W6)) if it is assumed that at least part of the wages cost is variable. It could
also be that the directors are reducing staff levels beyond the fall in the level of customers to enhance short-term profit and personal bonus. Customer service and
indeed safety could be compromised here.
Net profit
Net profit is up a huge 31·3% (W7) and most shareholders would be pleased with that. Net profit is a very traditional measure of performance and most would say this
was a sign of good performance.
Return on assets
The profitability can be measured relative to the asset base which is being used to generate it. This is sometimes referred to as ROI or return on investment. The return
on assets is up considerably to 11·4% from 8% (W8). This is partly due to the significant rise in profit and partly due to the fall in asset value. We are told that TIP
has cut back on new development, so the fall in asset value is probably due todepreciation being charged with little being spent during the year on assets. In this
regard it is inevitable that return on assets is up but it is more questionable whether this is a good performance. A theme park (and thrill rides in particular) must be
updated to keep customers coming back. The directors of TIP are risking the future of the park.

Workings:

• (W1) Sales growth is $5,320,000/$5,250,000 = 1-01333 or 1-3%.
• (W2) Average admission prices were:
• 20X4: $5,250,000/150,000 = $35 per person
• 20X5: $5,320,000/140,000 = $38 per person
• An increase of $38/$35 = 1-0857 or 8-57%
• (W3) Directors' pay up by $160,000/$150,000 = 1-0667 or 6·7%.
• (W4) Directors' bonuses levels up from $15,000/$150,000 or 10%
• $18,000/$160,000 or 12:5% of turnover. This is an increase of 3/15 or 20%.
• (W5) Wages are down by (1 – $2,200,000/$2,500,000) or 12%.
• (W6) Loss of customers is (1 – 140,000/150,000) or 6·7%.
• (W7) Profits up by $1,372,000/$1,045,000 = 1·3129 or 31-3%.
• (W8) Return on assets:
• 20X4: $1,045,000/$13,000,000 = 1-0803 or 8-03%
• 20X5: $1,372,000/$12,000,000 = 1-114 or 11-4%

(b) Quality provision
Reliability of the rides
The hours lost has increased significantly. Equally the percentage of capacity lost due to breakdowns is now approaching 17·8% (W9). This would appear to be a very
high number of hours lost. This would surely increase the risk that customers are disappointed being unable to ride. Given the fixed admission price system, this is
bound to irritate some customers as they have effectively already paid to ride.
Average queuing time
Queuing will be seen by customers as dead time. They may see some waiting as inevitable and hence acceptable. However, TIP should be careful to maintain waiting
times at a minimum. An increase of 10 minutes (or 50%) is likely to be noticeable by customers and is unlikely to enhance the quality of the TIP experience for them. The
increase in waiting times is probably due to the high number of hours lost due to breakdown with customers being forced to queue for a fewer number of ride options.
Safety
The clear reduction in maintenance could easily damage the safety record of the park and is an obvious quality issue.
Risks
If TIP continues with current policies, then they will expose themselves to the following risks:
- The lack of routine maintenance could easily lead to an accident or injury to a customer. This could lead to compensation being paid or reputational damage.
- Increased competition. The continuous raising of admission prices increases the likelihood of a new competitor entering the market (although there are significant
barriers to entry in this market, e.g. capital cost, land and so on).
- Loss of customers. The value for money which customers see when coming to TIP is clearly reducing (higher prices, less reliability of rides and longer queues).
Regardless of the existence of competition, customers could simply choose not to come, substituting another leisure activity instead.
- Profit fall. In the end if customers' numbers fall, then so will profit. The shareholders, although well rewarded at the moment, could suffer a loss of dividend.
Directors' job security could then be threatened.
Workings:
(W9) Capacity of rides in hours is 360 days x 50 rides x 10 hours per day = 180,000.
20X4 lost capacity is 9,000/180,000 = 0·05 or 5%.
20X5 lost capacity is 32,000/180,000 = 0·177 or 17:8%.

(a)
(i) Sales price variance and sales volume variance

(ii) Material price planning and purchasing operational variances
Material planning variance = (original target price - general market price at time of purchase) x quantity purchased ($60-$85) x 1,400 = $35,000 A
Material price operational variance = (general market price at time of purchase actual price paid) x quantity purchased ($85 - $80) x 1,400 = $7,000 F

(iii) Labour rate and labour efficiency variances
Labour rate variance = (standard labour rate per hour - actual labour rate per hour) x actual hours worked

Actual hours worked by temporary workers:
Total hours needed if staff were fully efficient = (750 x 2) + (650 x 1-5) = 2,475.
Permanent staff provide 2,200 hours, therefore excess = 2,475 – 2,200 = 275.
However, temporary workers take twice as long, therefore hours worked = 275 x 2 = 550.

Labour rate variance relates solely to temporary workers; therefore ignore permanent staff in the calculation.
Labour rate variance = ($14 - $18) x 550 = $2,200 A

Labour efficiency variance = (standard labour hours for actual production - actual labour hours worked) x standard rate (275-550) x $14 = $3,850 A

(b) Explanation of planning and operational variances
Before the material price planning and operational variances were calculated, the only information available as regards material purchasing was that there was an
adverse material price variance of $28,000. The purchasing department will be assessed on the basis of this variance, yet, on its own, it is not a reliable indicator of
the purchasing department's efficiency. The reason it is not a reliable indicator is because market conditions can change, leading to an increase in price, and this
change in market conditions is not within the control of the purchasing department.

By analysing the materials price variance further and breaking it down into its two components - planning and operational - the variance actually becomes a more
useful assessment tool. The planning variance represents the uncontrollable element and the operational variance represents the controllable element.
The planning variance is really useful for providing feedback on just how skilled management is in estimating future prices. This can be very easy in some
businesses and very difficult in others. Giving this detail could help to improve planning and standard setting in the future, as management will be increasingly
aware of factors which could create volatility in their forecasts.

The operational variance is more meaningful in that it measures the purchasing department's efficiency given the market conditions which prevailed at the time. As
can be seen in Carad, the material price operational variance is favourable which demonstrates that the purchasing department managed to acquire the component
which was in short supply at a better price than expected. Without this breakdown in the variance, the purchasing department could have been held accountable for the
overall adverse variance which was not indicative of their actual performance. This is then a fairer method of assessing performance and will, in turn, stop staff from
becoming demotivated.

The correct option is option 1 
Additional Information:

• (1) and (2) would be appropriate measures of the performance, as they are within the control of the managers of the divisions and reflect quality of output, and ability to sell the products. (3) is not appropriate, as profit centre managers cannot make investment decisions, so it would be unfair to deduct deprecation from their profit. Similarly residual income would not be appropriate – as managers of a profit centre cannot make investment decisions, it is not fair to evaluate their performance by a measure that deducts the cost of capital from their profit.

The correct option is option 1 

Additional Information:

The correct option is option 1 

Additional Information:

The controllability principle means that managers should only be judged based on things within their control. Controllable profit should be used to calculate ROI since it ignores head office recharges, which are outside of the control of the management. Since the divisions are responsible for investment in non-current assets, current assets and current liabilities, all such items should be included in net assets.

WORKING NOTE

The correct option is option 4 

Additional Information:

• A faulty thermostat would lead to an adverse yield variance because a greater proportion of inputs is wasted.
• Staff training on waste reduction should, if anything, lead to a favourable yield variance as there should be less waste. Increased cost of materials would affect the materials price variance, but not the yield. The fall in selling price would affect the sales price variance but not the yield.

The correct option is option 2

Additional Information:

• Calculating the cumulative average time per unit for 500 times, using the formula:
• Y = axb:
• a = 50 minutes, x = 500, b = −0.4150375
• Y = 3.791. This is the cumulative average time per job.
• Therefore total time for 500 = 500 × 3.791 = 1,895.5 minutes.

The correct option is option 4 

Additional Information:

• Where (1) meets the x-axis constraints (2) and (3) do not impact contribution as these constraints intersect the x-axis further along. Constraint 1 is the limiting factor.