Business Management

Sample Paper 2
Questions and Suggested Solutions

NOTES TO USERS ABOUT SAMPLE PAPERS Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to 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 (see www.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.

INSTRUCTIONS TO CANDIDATES Answer FOUR questions in total. QUESTION 1 IN SECTION A IS COMPULSORY 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 1 mark equates to 1.65 minutes. Answers should be illustrated with examples, where appropriate. Question 1 begins on page 2 overleaf.

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

SECTION B (ANSWER ANY THREE QUESTIONS IN THIS SECTION) QUESTION 2 (a) (b) Describe Vrooms expectancy theory of motivation. 10 Marks 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 the intensity 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

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 of a product. 5 Marks Total 25 Marks

QUESTION 6 (a) Distinguish between each of the following types of information system, giving examples where appropriate: i) ii) iii) Transaction Processing Systems Management Information Systems 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. 10 Marks (c) Distinguish between zero based budgeting and incremental budgeting. 5 Marks Total 25 Marks

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)

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 are likely 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. performance. In this regard companies should strive to institute customer loyalty and retention programmes in order to build relationships. These include: The key is to match customer expectations with company

1. Offering financial benefits, such as frequency programmes which can include air-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 free CDs 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 Production

from

Company-wide commitment

Question 2 Part A Expectancy theory motivation. 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 holds that people make conscious choices about their

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

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. 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. 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. Thus, expectancy When instrumentality is weak, employees don't believe that better performance will result

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 people in 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 through ethically 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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Threatofnew entrants

Bargainingpower ofsuppliers

Competitive rivalry withinthe industry

Bargainingpower ofbuyers

Threatof substitutes

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

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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 new entrant 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 dominant firm 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 distribution? Financial reserves? Cultural, attitudinal behaviours? Innovative aspects? Price, Value, Quality? Reputation? Location? OPPORTUNITIES Market developments? Competitors vulnerabilities? Industry or lifestyle trends? Technology innovations? Global influences? New markets? New USPs? Tactics major contracts? Information & research? Partnerships, agencies & distribution? Niche target markets? Business & Product development? development or awareness, reach,

Cash flow? Reliability of data? Staff Morale & staff turnover? Innovative aspects? Locations? Facilities? Marketing awareness?

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 cooperative 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 2. 3. A clear unity of purpose A feeling of mutual trust and dependency Clear or concrete milestones against which it measure itself

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4. 5. 6.

Supportive, informal and relaxed atmosphere Free flow of information and communication 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 sure knowledge 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, raw materials 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 decisionmaking, 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 and functional 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 transactions for 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. If something 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 mean that 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 never engage 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 in interpreting 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 people responsible 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 of interest. 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) (2) (3) (4) Restrictions on additional lending. Matters pertaining to the disposal of assets on which the loan is secured. Insurance relating to the property on which the loan is secured. Provisions relating to the retention of title deeds of properties on which the loan 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. share. This type of preference share is called a participating preference 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 may issue 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, For this preference dividends are not allowable expenses for taxation purposes. used as a source of finance.

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

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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