PM- Past Papers Questions and Answers
Why businesses calculate market size and market share variances- (4 marks)
Market size and market share variances
The market size and market share variances are a breakdown of the sales
volume variance. The sales volume variance shows the effect on profit of the
actual sales level being different from the budgeted sales level. However,
without considering how the market itself has changed, it is difficult to draw
conclusions about performance from the sales volume variance. Therefore, the
sales volume variance is broken down into its two components. By doing this, it
is possible to assess the extent to which changes in profit are as a result of:
(i) A change in the size of the market as a whole, which is beyond the control of
the sales manager; and
(ii) A change in the share of the market which the company holds, which is
deemed to be within the control of the sales manager.
Consequently, the variances become far more meaningful for performance
management as businesses can identify external and internal factors which can
influence the results and what was controllable and uncontrollable.
Benefits of an organization using the balanced scorecard approach to measure
performance instead of using solely financial measures- (4 marks)
The benefits to an organization of using the balanced scorecard to assess
performance instead of relying solely on financial measures are as follows:
Not all organizations have profit or financial return as the main objective. In an
altruistic not-for-profit charity, the objectives are based on delivering a service
which can be measured in benefit to people who are unable to pay for the
service. Therefore, it is necessary to have measures which are not purely
financial to reflect the different emphasis of the mission and supporting
objectives.
Financial performance indicators are ‘lagging’ indicators. This means that the
events and decisions which caused these indicators occurred long ago. The
balanced scorecard includes ‘leading’ indicators. For example, the learning and
,growth perspective may encourage spending on training or techniques which
will depress profits or increase costs in the short term, but will have much
greater benefits in the future.
The balanced scorecard helps to align key performance measures with strategy
at all levels. This means that all employees will be able to link their individual
goals to those of the organization as a whole. The benefit of this is that it
ensures that what gets measured is important to the organization.
Financial measures used in isolation are relatively easy to manipulate in the
short term. For example, a high return on investment figure may be considered
an indicator of good performance whereas it may have been caused by a
manager delaying the purchase of a necessary asset. The balanced scorecard
provided a range of indicators which makes this type of manipulation more
difficult to conceal.
Problems which not-for-profit organizations face as a result of having multiple
objectives-
The primary objective of commercial organizations is to maximize the wealth
they generate for their owners (shareholders). In contrast, the objectives of
NFPO’s are often non-financial and reflect the interests which the various
stakeholders have in an organization. These stakeholders often have varying
interests in the organization, meaning that the organization will also have a
number of different objectives.
These conflicts may make it difficult to set clear objectives on which all
stakeholders agree. Consequently, the organization’s management will face a
dilemma when trying to decide which objectives are most important and
therefore prioritized in the course of strategic planning and decision-making.
This can be a particular problem when different objectives make different
demands on resources or require different courses of action.
Another problem is that these organizations often do not generate revenue but
simply have a fixed budget for spending which they have to keep to and are
often subject to strong external influences which will influence the setting of
objectives e.g., political factors.
, Difficulties in assessing performance of not-for-profit organizations due to the
qualitative nature of their objectives-
1. Difficulties of measurement
2. Subjectivity
Four perspectives of the balanced scorecard-
1. Financial perspective – this perspective is concerned with how a company
looks to its shareholders. How can it create value for them?
2. Customer perspective – this considers how the organization appears to
customers. The organization should ask itself: ‘to achieve our vision, how
should we appear to our customers?’ The customer perspective should
identify the customer and market segments in which the business will
compete. There is a strong link between the customer perspective and the
revenue objectives in the financial perspective. If customer objectives are
achieved, revenue objectives should be too.
3. Internal perspective – this requires the organization to ask itself: ‘what
must we excel at to achieve our financial and customer objectives?’ It
must identify the internal business processes which are critical to the
implementation of the organization’s strategy. These will include the
innovation process, the operations process, and the post-sales process.
4. Learning and growth perspective – this requires the organization to ask
itself whether it can continue to improve and create value. The
organization must continue to invest in its infrastructure – i.e., people,
systems, and organizational procedures – in order to improve the
capabilities which will help the other three perspectives to be achieved.
Issues of encouraging divisional managers to take decisions in the interests of
the company as a whole, where transfer pricing is used-
Divisional managers’ performance is assessed using a metric as decided by the
company. This may simply be the profit for the period, or, depending on the
type of responsibility center being used, a metric such as residual income or
return on capital employed. Whatever the metric being used, the division’s
profit figure is going to affect it and divisional managers are therefore going to
be keen to maximize their individual profits. By focusing on individual decisions,
divisional managers are often not aware of the impact of their decisions on the
company as a whole. This would particularly be the case where a decision which
Why businesses calculate market size and market share variances- (4 marks)
Market size and market share variances
The market size and market share variances are a breakdown of the sales
volume variance. The sales volume variance shows the effect on profit of the
actual sales level being different from the budgeted sales level. However,
without considering how the market itself has changed, it is difficult to draw
conclusions about performance from the sales volume variance. Therefore, the
sales volume variance is broken down into its two components. By doing this, it
is possible to assess the extent to which changes in profit are as a result of:
(i) A change in the size of the market as a whole, which is beyond the control of
the sales manager; and
(ii) A change in the share of the market which the company holds, which is
deemed to be within the control of the sales manager.
Consequently, the variances become far more meaningful for performance
management as businesses can identify external and internal factors which can
influence the results and what was controllable and uncontrollable.
Benefits of an organization using the balanced scorecard approach to measure
performance instead of using solely financial measures- (4 marks)
The benefits to an organization of using the balanced scorecard to assess
performance instead of relying solely on financial measures are as follows:
Not all organizations have profit or financial return as the main objective. In an
altruistic not-for-profit charity, the objectives are based on delivering a service
which can be measured in benefit to people who are unable to pay for the
service. Therefore, it is necessary to have measures which are not purely
financial to reflect the different emphasis of the mission and supporting
objectives.
Financial performance indicators are ‘lagging’ indicators. This means that the
events and decisions which caused these indicators occurred long ago. The
balanced scorecard includes ‘leading’ indicators. For example, the learning and
,growth perspective may encourage spending on training or techniques which
will depress profits or increase costs in the short term, but will have much
greater benefits in the future.
The balanced scorecard helps to align key performance measures with strategy
at all levels. This means that all employees will be able to link their individual
goals to those of the organization as a whole. The benefit of this is that it
ensures that what gets measured is important to the organization.
Financial measures used in isolation are relatively easy to manipulate in the
short term. For example, a high return on investment figure may be considered
an indicator of good performance whereas it may have been caused by a
manager delaying the purchase of a necessary asset. The balanced scorecard
provided a range of indicators which makes this type of manipulation more
difficult to conceal.
Problems which not-for-profit organizations face as a result of having multiple
objectives-
The primary objective of commercial organizations is to maximize the wealth
they generate for their owners (shareholders). In contrast, the objectives of
NFPO’s are often non-financial and reflect the interests which the various
stakeholders have in an organization. These stakeholders often have varying
interests in the organization, meaning that the organization will also have a
number of different objectives.
These conflicts may make it difficult to set clear objectives on which all
stakeholders agree. Consequently, the organization’s management will face a
dilemma when trying to decide which objectives are most important and
therefore prioritized in the course of strategic planning and decision-making.
This can be a particular problem when different objectives make different
demands on resources or require different courses of action.
Another problem is that these organizations often do not generate revenue but
simply have a fixed budget for spending which they have to keep to and are
often subject to strong external influences which will influence the setting of
objectives e.g., political factors.
, Difficulties in assessing performance of not-for-profit organizations due to the
qualitative nature of their objectives-
1. Difficulties of measurement
2. Subjectivity
Four perspectives of the balanced scorecard-
1. Financial perspective – this perspective is concerned with how a company
looks to its shareholders. How can it create value for them?
2. Customer perspective – this considers how the organization appears to
customers. The organization should ask itself: ‘to achieve our vision, how
should we appear to our customers?’ The customer perspective should
identify the customer and market segments in which the business will
compete. There is a strong link between the customer perspective and the
revenue objectives in the financial perspective. If customer objectives are
achieved, revenue objectives should be too.
3. Internal perspective – this requires the organization to ask itself: ‘what
must we excel at to achieve our financial and customer objectives?’ It
must identify the internal business processes which are critical to the
implementation of the organization’s strategy. These will include the
innovation process, the operations process, and the post-sales process.
4. Learning and growth perspective – this requires the organization to ask
itself whether it can continue to improve and create value. The
organization must continue to invest in its infrastructure – i.e., people,
systems, and organizational procedures – in order to improve the
capabilities which will help the other three perspectives to be achieved.
Issues of encouraging divisional managers to take decisions in the interests of
the company as a whole, where transfer pricing is used-
Divisional managers’ performance is assessed using a metric as decided by the
company. This may simply be the profit for the period, or, depending on the
type of responsibility center being used, a metric such as residual income or
return on capital employed. Whatever the metric being used, the division’s
profit figure is going to affect it and divisional managers are therefore going to
be keen to maximize their individual profits. By focusing on individual decisions,
divisional managers are often not aware of the impact of their decisions on the
company as a whole. This would particularly be the case where a decision which
