CIMA E3 Exam Surgery
Past Paper Question – Q53
ZZZ manufacturing company (11/11)
45 mins
ZZZ is a manufacturing company employing 1,200 people which makes components for the automotive
industry. ZZZ has had ‘preferred supplier’ status with a major car manufacturer, MMM, for the last three
months. This means ZZZ is guaranteed a minimum amount of business with MMM each week. The preferred
supplier status is reviewed annually. MMM insists on a year-on-year reduction of 4% in the prices charged by
ZZZ. ZZZ’s current level of guaranteed business with MMM is £2 million per week which constitutes 95% of
ZZZ’s revenue.
MMM operates a just-in-time production and purchasing system and it has a policy of not inspecting the
components supplied to it by ZZZ. However, if there are two reports of any of ZZZ’s components failing, either
during production or later in a vehicle driven by one of MMM’s customers, ZZZ would lose its preferred
supplier status. ZZZ has a number of competitors which would like to replace it as MMM’s preferred supplier.
ZZZ’s Managing Director, H, has the following objectives, which have been imposed upon him by ZZZ’s Board of
Directors:
•
Maintain ZZZ's preferred supplier status with MMM;
•
Keep ZZZ's expenditure within the limits set each year in the budget which is approved by its Board of
Directors;
•
Develop the management skills of ZZZ's 32 operational managers
H is held responsible for the successful achievement of the objectives and he may lose his job if any are not met.
H believes that the best way to achieve his objectives is by the use of a performance management system (PMS)
which he has designed. H’s PMS is based exclusively on budgetary control. This PMS uses quarterly reports
prepared by ZZZ’s budget accountant. These reports compare budgeted and actual expenditure for each of
ZZZ’s 2,000 cost centres.
The quarterly reports are reviewed by H and later discussed with ZZZ’s operational managers. The operational
managers are shown the aggregate amount of under or overspending in the cost centres but are not allowed to
know the detail underlying this. This is because H believes that the details of ZZZ’s finances should only be
known to members of the Board of Directors.
All ZZZ’s investment in new capital equipment, amounting to £20 million in the previous financial year, was
spent in two of the manufacturing cost centres. ZZZ’s investment proposals are originated and prepared by H
and submitted for approval to ZZZ’s Board of Directors. The operational managers are not involved with the
preparation of investment proposals. To date, no investment proposal submitted by H has been refused by the
board.
Required
(a)
Evaluate the effectiveness of ZZZ’s performance management system in assisting H achieve his
objectives.
(11 marks)
(b)
Recommend, with reasons, FOUR improvements ZZZ could make to its current performance
management system.
(8 marks)
Note: In your answer to part (b), you must NOT include the balanced scorecard as one of your
recommendations.
(c)
Recommend, with reasons, TWO performance measures that would show ZZZ’s operational managers
the progress they are making towards maintaining ZZZ’s preferred supplier status with MMM. (6 marks)
(Total = 25 marks)