Business Management Sample Paper 2

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Business Management

Sample Paper 2Questions and Suggested Solutions


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NOTES TO USERS ABOUT SAMPLE PAPERS

Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidanceto students and their teachers regarding the style and type of question, and their suggested solutions, in

our examinations. They are not intended to provide an exhaustive list of all possible questions that may

be asked and both students and teachers alike are reminded to consult our published syllabus (seewww.AccountingTechniciansIreland.ie) for a comprehensive list of examinable topics.

There are often many possible approaches to the solution of questions in professional examinations. It

should not be assumed that the approach adopted in these solutions is the only correct approach,

particularly with discursive answers. Alternative answers will be marked on their own merits.

This publication is copyright 2011 and may not be reproduced without permission of Accounting

Technicians Ireland.

Accounting Technicians Ireland, 2011.


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INSTRUCTIONS TO CANDIDATES

Answer FOUR questions in total. QUESTION 1 IN SECTION A ISCOMPULSORY AND MUST BE ANSWERED. Answer ANY THREE questions in

Section B. If more than the requisite number of questions are answered,then only the requisite number, in the order filed, will be corrected.

Candidates should allocate their time carefully and should note that 1mark equates to 1.65 minutes.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on page 2 overleaf.


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SECTION A

(COMPULSORY QUESTION)

QUESTION 1 (COMPULSORY)

(a) Explain the term Market Segmentation and describe four key market

segmentation variables, using examples where appropriate.

10 Marks

(b) You have recently been appointed marketing manager for a chain of pizza

delivery stores. Describe two segmentation variables that are likely to be

relevant to the opening of pizza stores in new locations. Outline two factors

you would consider in assessing the attractiveness of a location for a new

store.

10 Marks

(c) Distinguish between transaction and relationship marketing.

5 Marks

Total 25 Marks


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SECTION B

(ANSWER ANY THREE QUESTIONS IN THIS SECTION)

QUESTION 2

(a) Describe Vrooms expectancy theory of motivation.10 Marks

(b) Comment on its relevance in todays business environment, making

reference to organisations with which you are familiar.

10 Marks

(c) Explain what is meant by the term Corporate Social Responsibility and set

out two reasons for making it an integral component of normal business

operations.

5 Marks

Total 25 Marks

QUESTION 3

(a) Describe each of the five forces identified by Porter for analysing theintensity of competition in an industry.

10 Marks

(b) Explain what is meant by SWOT analysis and comment on its relevance to

the formulation of strategy in an organisation of your choice.

10 Marks

(b) Describe three characteristics of effective teams.5 Marks

Total 25 Marks


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QUESTION 4

(a) Explain what is meant by the term Organisational leadership and outline

Fiedlers contingency theory of leadership.

10 Marks

(c) Describe four stages in the process of recruitment of a new employee.10 Marks

(c) Distinguish between personal power and position power.

5 Marks

Total 25 Marks

QUESTION 5

(a) Four characteristics of Services differentiate the marketing of Services from

the marketing of products namely their intangibility, inseparability,

variability and perishability. Describe each of these characteristics and

briefly explain their impact on the design of marketing programmes.

10 Marks

(b) Comment on the merits and limitations of the Internet as a distribution

channel.

10 Marks

(d) Describe two factors you would take into consideration in setting the price ofa product.

5 Marks

Total 25 Marks


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QUESTION 6

(a) Distinguish between each of the following types of information system,giving examples where appropriate:

i) Transaction Processing Systemsii) Management Information Systemsiii) Decision Support Systems

10 Marks

(b) You have been requested recently to join a steering group set up to

undertake a feasibility study of an IT project in your organisation. Identify

three broad criteria the steering group should consider in assessing the

feasibility of the IT project. Give reasons for choosing these criteria.

10 Marks

(c) Distinguish between Direct Changeover, Parallel Conversion and Pilot

Changeovers.

5 Marks

Total 25 Marks

QUESTION 7

(a) Explain the role of budgeting and describe the budgetary process.

10 Marks

(b) Describe two long-term sources of finance available to organisations.

10Marks

(c) Distinguish between zero based budgeting and incremental budgeting.

5 Marks

Total 25 Marks


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Suggested Solutions

Section A

Question 1

Part A

Market segmentation consists of breaking the total market into segments that

share common properties, such as the common wants of consumers, or their

purchasing power, geographical location, or buying attitudes or practices. The

ultimate degree of segmentation is customised marketing where sellers design a

separate product for individual buyers. Airline manufacturers such as Boeing

customise products. However for smaller businesses it is not profitable to customise

products at the individual level, so manufacturers identify classes of buyers who

differ in their broad requirements.

Typical segmentation variables include;

Demographic

Age range 18 to 30, Gender male or female

Geographic

Location urban, rural, national or international

Family life cycle

single, married no children, married young children, etc.

Socio- economic status

professional, managerial, skilled workers, unskilled etc.

Psychographic

Activities (leisure, sports, entertainment, shopping behaviour)

Interests (role perceptions, levels of social interaction)

Opinions (on topics such as politics, sports, social and moral issues)


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Benefits include a better matching of customer needs, targeting of customer

groups, tailoring of strategies and opportunities for growth.

Part B

A number of market segmentation variables would be relevant to the market in

question The demographic set of variables would be relevant at a number of levels.

There are probably a number of age profiles within this set of variables that arelikely to consume pizzas more than others (e.g. teenagers, and possible 18 to 30

age group etc.)

The family life cycle grouping is also likely to be relevant (e.g. single) as indeed is

the socio-economic status grouping (e.g. busy professional etc.)

The size and potential growth of the target segments outlined above would be

relevant. The nature and extent of the competition in the market and the distinctive

features of your service offerings relative to current offerings (e.g. location,

delivery, parking, quality and price).

Part C

Relationship marketing is a customer-centric strategy with the goal of maximising

profitability, revenue and customer satisfaction. It involves building and

maintaining profitable customer relationships by delivering enhanced customer

value and satisfaction. Customers perceive value when they evaluate the

difference between all the benefits and all the costs of a marketing offer. Customer

satisfaction depends on the products perceived performance relative to a buyers

expectations. The key is to match customer expectations with company

performance.

In this regard companies should strive to institute customer loyalty and retention

programmes in order to build relationships. These include:


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1. Offering financial benefits, such as frequency programmes which can includeair-miles, loyalty cards or money off vouchers.

2. Offering social benefits, such as club marketing programmes.

3. Offering structural ties such as offering free printers with computers or freeCDs with newspapers.

Transactional marketing delivers the rational and functional basic components of

value delivery. This type of marketing generates passive, transitory, and reactive

relationships with the customer and tends to be short term in nature.

The characteristics of each approach may be summarised below:

Characteristic Transactional

Marketing

Relationship

Marketing

1. Time orientation Short Term Long Term

2. Organisational goal Make the Sale Retain the Customer

3. Customer Service Priority Relatively low Key Component

4. Customer Contact Low to moderate Frequent


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5. Degree of Customer Commitment Low High

6. Buyer Seller Interactions Conflict &

Manipulation

Co-operation & Trust

7. Source of Quality Primarily from

Production

Company-wide

commitment

Question 2

Part A

Expectancy theory holds that people make conscious choices about their

motivation. The three factors that affect those choices are valance, expectancy,

and instrumentality.

Valance is simply the attractiveness or desirability of various rewards or outcomes.

Expectancy theory recognizes that the same reward or outcome, say, a promotion,

will be highly attractive to some people, will be highly disliked by others, and will

not make much difference one way or the other to still others.

Accordingly, when people are deciding how much effort to put forth, expectancy

theory says that they will consider the valance of all possible rewards and outcomes

that they can receive from their jobs. The greater the sum of those valences, each

of which can be positive, negative, or neutral, the more effort people will choose to

put forth on the job.

Expectancy is the perceived relationship between effort and performance. When

expectancy is strong, employees believe that their hard work and effort will result


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in a good performance, so they work harder. By contrast, when expectancy is

weak, employees figure that no matter what they do or how hard they work, they

won't be able to perform their jobs successfully, so they don't work as hard.

Instrumentality is the perceived relationship between performance and rewards.

When instrumentality is strong, employees believe that improved performance will

lead to better and more rewards, so they choose to work harder. When

instrumentality is weak, employees don't believe that better performance will result

in more or better rewards, so they choose not to work as hard.

Expectancy theory holds that for people to be highly motivated, all three variables

valance, expectancy, and instrumentality - must be high. Thus, expectancy

theory can be represented by the following simple equation

Motivation = Valance * Expectancy * Instrumentality

If any one of these variables declines overall motivation will decline too.

Part B

Motivation is a complex concept. There are a variety of factors which influence the

meanings people give to a situation and which prompt them to act in particular

ways.

Similarly, there is no one universally accepted theory of motivation. Broadly

speaking the theories, may be categorised into two groups, need and cognitive

theories of motivation.

Vrooms theory falls into the latter category. It takes a rational individualistic

perspective towards motivation. It assumes people make conscious decisions about


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the value of discharging their effort. It argues that clarity and belief in the effort,

performance and reward relationships enhances motivation.

The model certainly has intuitive appeal and there is a body of evidence to suggest

it has wide applicability in practice. For example, most bonus, piecework and

performance related pay systems are based on the logic underlying expectancy

theory.

The model like most theoretical frameworks does not necessarily hold for all peoplein all situations. Peoples valances vary from individual to individual, from culture to

culture and there is a temporal dimension to motivation in that a persons valances

themselves will vary at different stages of their lives.

The nature of the task environment also influences the appropriateness of the

framework. The tangibility of the outputs impacts its adoption. (e.g. making sales is

quite a tangible act and provides a clear basis for reward via sales commissions,

but taking care of the elderly is a completely different matter).

The system for measuring performance must also be fair and robust. The outcome

/ input ratios must be seen to fair and applied in an equitable manner, otherwise

the system risks loosing credibility.

Overall, no one framework can be used to deal with the complexities of reality, but

in appropriate conditions and circumstances, expectancy theory has a significant

role to play in contributing to motivation in work environments.

Part C

Corporate Social Responsibility (CSR) refers to the voluntary actions that

businesses may undertake over and above compliance with the minimum legal

requirements to address both its competitive interests and the interests of the

wider community. It can be characterised as the concept whereby companies


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integrate social and environmental concerns into their business operations and in

their interaction with their stakeholders on a voluntary basis.

A firms obligation to its publics is seen to extend beyond the legal responsibility to

comply with legislation. Instead firms voluntarily take further steps to improve the

quality of life for employees and their families as well as for the local community

and society at large.

Firms should engage in CSR to ensure they gain social acceptance throughethically responsible behaviour. Not engaging sufficiently with CSR is not only

potentially damaging to the firms reputation but also to the sustainability of long

term growth and development.

Question 3

Part A

Porter identified five forces that assist the organisation in analysing the intensity of

competition and the profitability and attractiveness of an industry.

Understanding these forces gives managers the necessary insights to facilitate

them to develop relevant strategies to be successful in their market. The five forces

are:


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Threat of new entrants

The more uncomplicated it is for new companies to enter the industry, the more

aggressive the competition will be. Factors that can limit the threat of new entrants

are known as barriers to entry. Some examples include:

- Existing loyalty to major brands

- Incentives for using a major brand- High fixed costs-

Scarcity of resources- High cost of switching brands / companies- Government restrictions or legislation

Threat of new

entrants

Bargaining power

of suppliers

Bargaining power

of buyers

Threat of

substitutes

Competitive

rivalry

within the

industry


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Power of Suppliers

The focuses on the amount of pressure suppliers can place on a business entity. If

one supplier has a large enough impact to affect a companys margins and

volumes, then it holds considerable power. Reasons that suppliers might have this

power include:

- Few suppliers of a particular product exist- No substitute products are available- Switching to another competitive product is costly- The product is very important to buyers- The supplying industry has a higher profitability than the buying industry

Power of Buyers

This relates to the amount of pressure customers can place on a business. If one

customer has a large enough purchasing power to affect a companys margins and

volumes, then the customer holds considerable power. Reasons that customers

might have this power include:

- Small number of buyers exist- These buyers purchase large volumes of the product- Switching to another competing product is simple- The product is not important to buyers; they can do without the product

for a period of time

- Customers are price sensitive

Availability of substitutes

If the cost of switching to competitive products is low, then brand switching could

be a serious threat. Factors that can affect the threat of substitutes include:


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- if substitutes are similar, it can be viewed in the same light as a newentrant

- if the substitutes are perceived to have the same benefits- if significant price differentials emerge and- if products are equally available and accessible

Competitive rivalry

This depicts the intensity of competition between existing firms within an industry.

Companies that are highly competitive generally earn low returns because the cost

of competition is high. A highly competitive market may result from:

- Players within an industry that are similar in size; there is no dominantfirm

- Little differentiation between competitors products and services- A mature industry with very little growth; companies can only grow by

encouraging customers to switch from competitors.

Part B

SWOT Analysis is a strategic planning tool used to evaluate the Strengths,

Weaknesses, Opportunities, and Threats involved in a business venture. It involves

specifying the objective of the business venture or project and identifying the

internal and external factors that are favourable and unfavourable to achieving that

objective. The analysis can include

STRENGTHS

Competitive advantage?

Resources, Assets, People?

Experience, knowledge, data?

WEAKNESSES

Lack of competitive strength?

Reputation, presence & reach?

Financials?


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Accreditations, qualifications?

Philosophy, Values?

Marketing awareness, reach,

distribution?

Financial reserves?

Cultural, attitudinal behaviours?

Innovative aspects?

Price, Value, Quality?

Reputation?Location?

Cash flow?

Reliability of data?

Staff Morale & staff turnover?

Innovative aspects?

Locations?

Facilities?

Marketing awareness?

OPPORTUNITIES

Market developments?

Competitors vulnerabilities?

Industry or lifestyle trends?

Technology development or

innovations?

Global influences?

New markets?

New USPs?

Tactics major contracts?

Information & research?

Partnerships, agencies & distribution?

Niche target markets?

Business & Product development?

THREATS

Political effects?

Legislation effects?

Environmental effects?

IT developments?

Competitor intentions?

Market demand?

New technologies?

Sustaining internal capabilities?

High staff turnover / loss of key staff?

Sustainable financial backing?

Economy home & abroad?

Changing consumer tastes/lifestyles?


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Part C

Team cohesiveness can be related to the strength of the bond between members of

the team. If the team is cohesive, then members are motivated to achieve the

teams goals and are enthusiastic about working with other people in the team.

Managing team cohesiveness and effectiveness is emerging as an important

organisational phenomenon that brings together many aspects of management,from effective organisational structure to employee motivation, from management

control to participative management. The focus on teams stems from the need for

organisations to be flexible and responsive to customer requirements in an

increasingly competitive business environment, while at the same time ensuring

that management and staff work together to meet these changing needs.

Over the last number of decades there has been a fundamental movement away

from a hierarchical and adversarial management culture to one based on co-

operative relationships in order to achieve a strong customer orientation, improved

operation processes and an acceptance of the need for continuous improvement.

The effectiveness of a work team is highly dependent on the organisation in

question, in terms of its existing structures, changes in its external business

environment, its underlying culture, its past, present and future strategy, and its

reward/control systems within which teamwork is to be established.

Teams fulfill a number of functions in organisations. They tend to be established to

fulfill specific ends. However they actually may become cohesive units that outlive

their original purpose and in that sense they can take on a life of their own.

Effective work teams tend to display a number of the following characteristics

1 A clear unity of purpose

2. A feeling of mutual trust and dependency3. Clear or concrete milestones against which it measure itself


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4. Supportive, informal and relaxed atmosphere5. Free flow of information and communication6. An ability to resolve conflict constructively

Question 4

Part A

Organisational leadership is an interpersonal process whereby the firm attempts to

influence employees in accomplishing an objective. It can be demonstrated by any

employee at any level of an organisation. Opportunities generally occur in

supervisory and managerial positions rather than non managerial positions as it is

expected of those in supervisory and managerial positions.

Fiedler suggests matching relationship orientated leadership styles and task

orientated leadership styles to situation favourableness improves overall group

performance. He argues that leader-member relations, task structure and position

power give rise to different levels of situation favourableness. He suggests task

orientated styles are most appropriate when situations are highly unfavourable or

highly favourable. He further suggests that relationship orientated styles are likely

to be suitable when situations are moderately favourable.

Fiedler defined situation favourableness as the degree to which a particular

situation either permits or denies the leader the chance to influence the behaviour

of group members. In a highly favourable situations, leaders find that their actions

influence followers, but in highly unfavourable situations leaders have little or no

success influencing the people they are trying to lead.

Three situational factors determine the favourability of a situation; leader member

relations, task structure and position power. The most important situational factor

is leader-member relations, which refers to how well followers respect, trust and

like their leaders. When leader member relations are good, followers trust their


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leader, and there is a friendly work atmosphere. Task structure is the degree to

which the requirements of subordinates tasks are clearly specified. With highly

structured tasks, employees have clear job responsibilities, goals and procedures.

Position power is the degree to which leaders are able to hire, fire, reward and

punish workers. The more influence leaders have over hiring, firing rewards and

punishments, the greater their power.

In general, this theory suggests that leadership styles can be matched to

situations. Empirical evidence would seem to provide some support for the theory,although it is still a generalization and each situation is unique and has to be dealt

with on a case by case basis.

Part B

Employee recruitment is the process of obtaining a sufficient number of the right

people at the right time to best meet the needs of the organisation. It involves

finding, hiring and holding onto people who can satisfy the technical, educational

and social needs of the organisation. Recruitment relies on a number of sources,

including internal promotions, advertisements, employment agencies, management

consultants, and so on. The process is comprised of a number of distinct stages

1. Manpower planning / Needs analysis

2. Job description responsibilities defined

3. Attributes & aptitudes required

4. Conditions established terms and conditions

5. Job advertisement drawn up

6. Advertised internally

7. Advertised externally

8. Short listing

9. Interview and other selection procedures

10. Offer made

11. If accepted unsuccessful candidates notified

12. Induction and training


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A short description of a selection of stages is set out below.

Need Analysis

This stage of the process is concerned with estimating the quantity and quality of

human resources required to meet the objectives of the organisation. It is based on

a thorough understanding of organisations strategy and its implications for the

workforce, planned technological changes, a detailed inventory of employee

characteristics (age, sex, martial status, tenure, skill level, qualifications, promotion

potential and performance levels) and attrition rate.

Job Description

This involves specifying the job and what the job demands in terms of employee

behaviour. It is a statement of the main tasks of the job. It is clearly an important

aspect of the background stage of recruitment, because the ideal individual is

derived from the contents of the job description. If an inaccurate job description is

prepared, then the individual characteristics subsequently specified may also be

inaccurate or inappropriate.

Attribute and Aptitudes required

The may also be called the person specification. It details the skills, qualification,

knowledge and experience the individual should possess in order to best match the

job. The person specification may often distinguish between those characteristics

considered essential and those considered desirable. Among the things it might

take account of are:


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- attainments, education/ qualifications / experience- general intelligence- special aptitudes- interests- motivation- adjustment

Advertising

Equipped with a job description and a person specification, the task now becomes

one of attracting a pool of potential candidates. In considering possible sources of

labour, we must consider internal and external sources. Internal sources may come

from transfers or promotions. Potential external sources include colleges, Institutes

of Technology, Universities, employment agencies and management consultancies

and executive search agencies.

Each of these sources should be evaluated, particularly with respect to their

suitability to yield the right candidate, and costs involved.

Selection

The selection process effectively begins when application forms / CVs are received.

Selection tools available to organisations range from the more traditional methods

of interviews and references, through to the more sophisticated techniques, such as

biographical data, aptitude tests and psychological tests.

The interview is widely held to be the most commonly used selection technique.

Often described as a conversation with the purpose, it may take a number of

different forms. The three most common types are one-to-one interviews, panel

interviews and group interviews / assessment.


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Part C

Power is generally described as the capacity or ability of a person to influence

another. Position power is based on a mangers rank in an organizational structure.

Personal power is based on a persons individual characteristics.

Position power may be subdivided into legitimate power, reward power and

coercive power. Legitimate power originates from the managers position within the

organization hierarchy. The power is inherent in the hierarchical position the

manager occupies. It is evident at the various levels of the organization and

assumes that all employees are compliant with requests from their managers. If

employees feel managers do not deserve his/her position this may lower a

managers ability to exercise legitimate power.

Reward power originates from a managers ability to withhold rewards from others.

The more valuable the reward available to a manager, the greater the level of

power derived from controlling it. Ignoring people or awarding insignificant rewards

can decrease the motivation of the workers affected by these actions.

Coercive power is concerned emotional or physical threats to ensure compliance. It

is the power to administer penalties that are not desired by an employee. (e.g. a

negative review of their work). It is not used very often and may sometimes be

implied than direct and can often result in a loss of motivation, hidden behaviour

and retaliation.

Personal power is a characteristic of the individual that stays with the individual

regardless of the position he/ she holds.

Expert power derives from the expert knowledge or information that an individual /

manager has amassed. It may arise at all levels of the organization.


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Referent power originates from the charisma or identification that a manger has

developed. It is visible through the actions of those who admire the manager, for

example, they may talk, and dress and act like the manager. Attempts to generate

this type of power can fail if it is viewed as manipulative.

Question 5

Part A

Services are intangible. Unlike physical products they cannot be seen, tasted, felt,

heard or touched before they are bought. To reduce uncertainty, buyers will look

for signs or evidence of their service quality. These are tangible cues. They will

draw inferences about quality from the place, people, equipment, communication

material, symbols and price they see. The marketers task is to manage the

evidence and to add tangibles to the intangibles. Service providers are challenged

to add physical evidence and imagery to their intangibles.

Services also have the characteristic of inseparability. Buyer provider interaction is

a special feature of services marketing. Services cannot be separated from their

providers. Customers participate in and affect the transaction. Customers affect

each other. Word of mouth is very important in the services industry. Employees

also play an important part in the service outcome.

Services also have a degree of perishability. Services cannot be stored. The

perishability of services is not a problem when demand is steady. When demand

fluctuates, service firms may have problems. It may be difficult to synchronise

supply and demand. Services cannot be returned or resold. This aspect of services

can be managed by good demand practice. For example, an airline will take off

whether or not the plane is full.

Services are also heterogeneous / variable in nature. Because they depend on who

provides them and when and where they are provided, services are highly variable.


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Service users are aware of this variability and often talk to others before selecting a

service provider. Many services cannot be provided by machines and therefore the

human factor is of great importance in delivering service quality humans cannot

function at peak efficiency at all times therefore service quality will vary from

customer to customer.

Also what one customer will perceive as good service, another will perceive as only

moderate. Service delivery and customer satisfaction also depend on employee

actions. Service quality depends on many uncontrollable factors. There is no sureknowledge that the service delivered matches what was planned and promoted.

Part B

Some of the benefits of the Internet as a distribution channel include; low cost of

distribution, customization, new market opportunities and to some extent better

relationship building.

The internet does transform industries and their business models and increases

competition.

There are also security, privacy, accessibility and legal issues associated with using

the Internet as a distribution medium.

Further some customers are wedded habitually to conventional approaches to

shopping and purchasing, whilst others may suffer from technophobia.


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Part C

Product pricing is influenced by a number of factors:

The costs of production

Costs set the floor price for a product. Costs include the cost of labour, rawmaterials and overheads. There is no way an organisation can sell products below

cost and stay in business in the long run.

The customer

The customer determines the highest price that can be charged; this is referred to

as the ceiling price. Market research must be undertaken to find out what

customers will be willing to pay for products

The competition

The competition that exists in the marketplace determines the actual level at which

the price will be set. If the customer sees an organisations product or service as

identical to the competitions product or service, he / she will be unwilling to pay a

higher price. Higher prices can only be charged if additional benefits are offered to

customers to justify the higher prices.

The organisations objectives

The objectives set by the organisation may also influence pricing policy. For

example, to obtain a quick return on investment, a higher price may be charged in

the early stages of the product life cycle. (Market skimming) If increased market


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share is the objective a lower price may be charged to penetrate the market

(Market penetration)

Government regulations and controls

Governments may interfere in the pricing decisions if they feel the company is

acting against the public interest, or abusing its market position (monopolies)

Question 6

Part A

Transaction processing systems (TPS) are information systems which exist to

support the day to day, or week to week, processing and recording of routine

business transactions such as Orders, Despatch Notes and Invoices. (e.g. cash

registers, atms , sales order processing systems etc.). Transaction processing

systems are primarily used by operational managers. However as TPS store the

pool of information in databases which may be accessed and manipulated in a

manner which provides meaningful insights that guide management decision-

making, they may be used indirectly by all levels of management.

They are generally designed to work with high volumes on a real time basis. (e.g.

online cinema seat sales, or on line airline ticket sales). They form the backbone of

the entities information processing systems and need to be fully secure andfunctional at all times.

Management information system (MIS) are systems which produce and

present information in order to satisfy the information needs of managers at

various levels in the organisation. They are systems that analyse/summarise


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existing data (usually from a database) and produce reports for management-level

staff. The reports generated by an MIS are usually:

- Periodic (e.g. a monthly sales report for the Galway branch)- Demand (e.g. an updated class attendance sheet showing all registered

students)

- Exception ( e.g. a report showing all rejected / refused credit card transactionsfor the last month; or a report showing all accounts more than two months

overdue)

Management are tasked with making the decisions that will decide how the

business will operate in the foreseeable future. They need to be able to drill down

into existing data sources to the level of detail required for the purpose. (e.g. to be

able to view sales by product, region, salesperson or some combination of these).

Decision support systems are complex systems used to help managers make

non-routine decisions. They generally consist of a model based on past

experience. Users can then use expected data (e.g. projected sales for next year),

to generate estimates for other factors (e.g. projected profits, etc.)

DSSs use various types of analysis, like what if (i.e. change in one element of

the model and see what happens to the result), and sensitivity (i.e. make small

changes to one element and see what happens to another element).

A spreadsheet model can be used as a simple but effective Decision Support

System.

Part B

Three broad criteria for undertaking feasibility studies include


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Economic feasibility

This involves assessing the economic/financial case for the proposal. It

encompasses an assessment of the tangible and intangible benefits and costs, and

an evaluation of the justifications.

Operational and Organizational feasibility

This involves assessing whether the organization has the necessary skills and

capabilities available to operate the system on a day to day basis. It involves

assessing the degree of fit of the programme and the level of disruption that will be

involved in implementing any change.

Technical feasibility

The main issue here is whether the organization is technically capable of developing

and operating the system (i.e. do they have the correct IT infrastructure, etc).

Part C

Direct Changeover

This is when the old system is turned off and the new system goes live straight

away. There is no change over period. This is fast and appears cheap, but has a

number of problems;

- there is no time to identify remaining problems with the new system. Ifsomething goes wrong, there is no fall back.


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- It will take time for users to get to know the new system, and this will meanthat productivity drops.

- When problems occur, it is often expensive to fix them.

Parallel Conversion

This is when both old and new systems run in parallel for a certain period of time

(the changeover period). This allows problems in the new system to be identified,and also allows time for users to familiarize themselves with the new system. But:

- running two systems in parallel is very resource intensive and can be complex

- there is a danger that users will just keep using the old system and neverengage with the old system.

Pilot Changeover

This is where the system is introduced in one location (or one department) only.

This can be viewed almost as a trial run, and once problems have been ironed out

the system will be rolled out to the rest of the company. The pilot location still has

to follow either a direct or parallel changeover method.

Question 7

Part A

Budgetary control refers to the analysis, recording and reporting on the activities

and financial well being of the organisation. It involves forecasting likely outcomes

of plans in an attempt to control the future for the organisation. It is a bread and

butter activity for the financial team, in that it ensures effective monitoring of

current activities, and gives invaluable information about performance in relation to

plans.


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Financial control of activities is vital to all organisations. Many smaller firms, for a

variety of reasons, such as lack of expertise or over-trading, opt for informal rather

than formal systems of control. This can be catastrophic for the small firm as the

true performance or profitability cannot be gauged.

Budgetary control requires that realistic profit and loss and cash flow forecasts are

prepared at the beginning of the period and that they be updated normally on a

quarterly basis as the year progresses. Due care and consideration is required ininterpreting variances from budget to ensure managers are held accountable for all

those matters that fall within their sphere of control

The cash flow forecast may be used to determine if company borrowing is required

or if surplus funds are likely to be available for re-investment. Comparing actual

performance against forecasted profit and loss account projections allows

management to monitor margins on a regular basis and to take appropriate

corrective action before deviations become too serious.

The process of budget formulation typically goes through the following stages:

- communication of details of budget policy and guidelines to the peopleresponsible for the preparation of budgets

- initial preparation of various budgets- negotiation of budgets with superiors- co-ordination and review of budgets- final acceptance of budgets- ongoing review of budgets


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Part B

Ordinary share capital

Ordinary shareholders are members of the company holding voting rights. They

own a share of the companys assets and a share of any profits earned after all

prior claims have been met.

Ordinary shares or Equity, as they are termed, are a permanent source of finance.

Ordinary shareholders provide seed capital to allow the business to develop and

grow. There are no fixed repayment or interest charges to be paid in the case of

equity. Equity also provides the owners with authority to influence policy and

direction.

Equity may be raised through offers for sale, public issues, placing, tender or rights

issues

Equity is generally regarded as an expensive source of finance when compared to

loan finance, as the dividends to equity holders are not tax deductible like loan

interest. Another disadvantage of equity is the potential change in the balance of

control between existing and new shareholders.

Debentures:

A debenture is a written acknowledgement of indebtedness by a company. Interest

is paid at a fixed rate, normally at half- yearly intervals. Debentures are not part of


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the share capital of a company and debenture holders are not members of the

company. A debenture holder is a creditor of the company. His interest is a debt

of the company, payable irrespective of whether there are profits or not.

Debentures may be redeemable or irredeemable. Redeemable debentures may be

an appropriate source of finance where a companys needs are temporary.

Redeemable debentures must be redeemed by a fixed date or within a given time

period. Irredeemable debentures are repayable only in the event of some specified

contingency, such as the winding-up of a company or default in the payment ofinterest.

Debentures may be secured or unsecured. Most debentures are secured by a

charge on the assets of the company. This charge may be fixed or floating. In the

case of a fixed charge, the security relates specifically to a particular asset or group

of assets. The company is not permitted to dispose of the asset or assets without

providing equivalent security, or without the prior approval of the debenture

holders.

The terms of the debenture and the rights and responsibilities of the parties

involved are set out in the Debenture Trust Deed. Matters outlined in this deed

must be complied with by the company. The Debenture Trust Deed will contain,

amongst others, the following:-

(1) Restrictions on additional lending.

(2) Matters pertaining to the disposal of assets on which the loan is secured.

(3) Insurance relating to the property on which the loan is secured.

(4) Provisions relating to the retention of title deeds of properties on which theloan is secured.

Preference Shares:

Preference shareholders have the right to a fixed dividend rate which is paid before

anything can be distributed to ordinary shareholders. They may be cumulative or


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non-cumulative. With non-cumulative preference shares, when profits are poor and

no preference dividend is paid in the year, the dividend is foregone forever. In the

case of cumulative preference shares previously unpaid dividends can be recouped

in future years. In order to make the preference shares more attractive, they may

be entitled to some further participation in the profits over and above their fixed

rate of dividend, after a certain rate of dividend has been paid to the ordinary

shareholders. This type of preference share is called a participating preference

share. Preference shares may also carry the right to priority with regard to

repayment of capital in the event of a company being wound up. A company mayissue redeemable preference shares which it can redeem at some future date. In

setting the dividend rate applicable to preference shares attention should be given

to current and anticipated future interest rates. Unlike interest payments,

preference dividends are not allowable expenses for taxation purposes. For this

reason they hold few attractions for the majority of companies and tend not to be

used as a source of finance.

Part C

Incremental Budgeting

An incremental approach to budgeting concentrates on the marginal change from

one period to another. The current year's estimates of expenditure and income are

used as the starting point for next year's budget. Obviously, new activities will be

incorporated in the new budget but the main weakness of this approach is its

failure to critically appraise the larger components of expenditure and to justify

continued funding support. A counter argument could be put forward that a

substantial part of the activities are mandatory or statutorily required and there is

no merit in undertaking a costly justification of the expenditure.


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Zero Based Budgeting

Zero based budgeting (ZBB) is the preparation of budgets from a zero base and

involves starting from scratch and building up a budget from knowledge of the

planned activities for the coming period. Nothing within the budget is sacrosanct

and this approach is radically different from incremental budgeting.

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Business Management Sample Paper 2

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