Ch 2: PERFORMANCE MEASUREMENT, EVALUATION AND IMPROVEMENT TOOLS — Previous Year Exam Questions (PYQ)

1(a): Management Information System in a Digital Environment

5 Marks

While implementing Economic Value Added (EVA), the following basic steps would be involved: - Measurement - Management System - Motivation and - Mindset. - Measurement: Any company that wishes to implement EVA should institutionalize the process of measuring regularly. This measurement should be carried out after carrying out the prescribed accounting adjustment. - Management System: The company should be willing to align its management system to the EVA process. The EVA based management system is the basis on which the company should take decision related to the choice of strategy, capital allocation, merger and acquisitions, divesting the business and goal setting. - Motivation: The company should decide to implement EVA only if it is prepared to implement the incentive plan that goes with it. An EVA based incentive system, however, encourages managers to operate in such a way as to maximize the EVA, not just of the operations it oversees but of the company as a whole. - Mindset: The effective implementation of EVA necessitates a change in the culture and mindset of the company. All the constituents of the organization need to be taught to focus on one objective i.e., maximizing EVA. This singular focus leaves no room for ambiguity and also it is not difficult for employees to know just what actions of theirs will create EVA and what will destroy it.

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1(b): Total Productive Maintenance

5 Marks

A company XYZ has to replace one of its machines, which has become unserviceable. Two options are available: (i) A more expensive machine (MEM) with 12 years of life; (ii) A less expensive machine (LEM) with 6 years of life. If machine LEM is chosen, it will be replaced at the end of 6 years by another LEM machine. The pattern of maintenance, running costs and prices are as under: Particulars MEM (₹) LEM (₹) Purchase Price 10,00,000 7,00,000 Scrap value at the end of life 1,50,000 1,50,000 Overhauling is due at the end of 8th Year 4th Year Overhauling Costs 2,00,000 1,00,000 Annual repairs 1,00,000 1,40,000 CostofCapital-14%. You are required to recommend with supporting calculations, which of the machines should be purchased? Given: Particulars Discounting factor End of 4th Year 0.5921 End of 6th Year 0.4556 End of 8th Year 0.3506 End of 12th Year 0.2076 Years 1-6 3.8890 Years 1-12 5.660 Answer:

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2(a): Total Productive Maintenance

5 Marks

A Company has to replace one of its machines, which has become unserviceable. Two options are available: (i) A more expensive machine (EM) with 12 years of life; (ii) A less expensive machine (LM) with 6 years of life. If machine LM is chosen, it will be replaced at the end of 6 years by another LM machine. The pattern of maintenance, running costs and prices are as under: Particulars EM(₹) LM(₹) Purchase Price 10,00,000 7,00,000 Scrap value at the end of life 1,50,000 1,50,000 Overhauling is due at the end of 8th year 4th year Overhauling costs 2,00,000 1,00,000 Annual Repairs 1,00,000 1,40,000 Cost of Capital - 14%. You are required to recommend with supporting calculations, which of the machine should be purchased. Discounting factor End of 4th year 0.5921 End of 6th year 0.4556 End of 8th year 0.3506 End of 12th year 0.2076 Years 1-6 3.8890 Years 1-12 5.660

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2(b): Total Productive Maintenance

5 Marks

(ii) Since the shareholders of Gloomy Company Limited are getting maximum number of shares for one share held - 0.9277 when the Exchange Ratio is fixed as per the EPS, Shareholders of Gloomy Company Limited will prefer fixing of the Exchange Ratio as per EPS. Total PAT after Merger (370.49 + 240.61) ₹ 611.10 Total No. of Shares of Blooming Company Limited after merger assuming that Exchange Ratio is determined as per EPS (31.25 + 0.9277 × 21.875) 51.5434 EPS after Merger will be ₹ 11.86

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3(a): Management Information System in a Digital Environment

5 Marks

Objectives of MIS - To provide the managers at all levels with timely and accurate information for control of business activities - To highlight the critical factors in the operation of the business for appropriate decision making - To develop a systematic and regular process of communication within the organization on performance in different functional areas - To use the tools and techniques available under the system for programmed decision making - To provide best services to customers - To gain competitive advantage - To provide information support for business planning for future. MIS Reports—Few examples of MIS reports Summary reports, Trend reports, Predictive report, Exception report, on demand report, financial reports, inventory report sales reports, budget reports, production report, Cash flow reports, cost reports etc.

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3(b): Data Envelopment Analysis

5 Marks

The four types of benchmarking classified according to the nature of the business they serve are enumerated below : (i) Internal benchmarking: in which comparisons are made between various Department within the same organisation. For example, in an undergraduate college, the number of classes taken in a particular department, say English department may be compared with the Benchmark, say the Philosophy department, which is considered so as it is the best department in the college in terms of final result. (ii) Competitive benchmarking: in which comparisons are made with direct competitors. For example, in XYZ College, the number of classes taken in a particular department, say English department may be compared with the number of classes taken in the English department of MNK College both of which caters to same area and thus compete with each other regarding the number of students‟ admittance. (iii) Industry benchmarking: in which the benchmarking partner is not a direct competitor, but does share the same industry as one‟s organisation. In the example cited in (b) above, if the colleges do not compete with each other regarding students‟ admittance, then the same is an example of industry benchmarking. (iv) Generic benchmarking: Generic benchmarking broadly conceptualizes unrelated business processes or functions that can be practiced in the same or similar ways regardless of the Industry. The four types of benchmarking categorized based on the specific practices or processes being benchmarked are aligned below: (i) Product benchmarking: This is an age old practice of product oriented reverse engineering. Every organization buys its rival‟s products and tears down to find out how the features and performances etc., compare with its products. This could be the starting point for improvement. (ii) Process benchmarking: Process benchmarking is a crucial first step. It constitutes comparing and analysing the business processes of an organisation with those processes that are considered the best practices in the industry. (iii) Performance benchmarking: Performance benchmarking involves gathering and comparing quantitative data (i.e., measures or key performance indicators). It compares performances; and (iv) Strategic benchmarking: strategic benchmarking is comparing improvements in strategic performance of an organisation to that of performance leaders in similar field of activity, in addition to comparing them to the past performance of the organisation itself. 3 of 8

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