Activity-Based Costing (ABC) is specifically designed to address the distortions of traditional absorption costing. It traces overhead costs to products based on the activities they consume, providing a more accurate cost for complex, low-volume products that use support resources disproportionately. This accuracy is crucial for strategic pricing and identifying which products are truly profitable.

The balanced scorecard is based on cause-and-effect relationships. The internal process and learning & growth perspectives contain leading indicators (drivers) of future performance in the customer and financial perspectives (outcomes). Weakness in innovation and employee development, while not impacting today’s results, signals a future inability to sustain customer value and financial performance.

The primary goal of investment appraisal is to maximize shareholder wealth, which is directly increased by accepting all projects with a positive NPV. NPV is considered superior to IRR as it gives an absolute value of wealth increase and doesn’t have the potential for multiple rates or reinvestment assumption issues. A positive NPV means the project’s return exceeds the cost of capital, even if the IRR calculation shows a minor discrepancy.

For a high-impact, low-probability risk where mitigation is too costly, risk transfer is often the most suitable strategy. Purchasing insurance shifts the financial consequence of the risk to the insurer for a known, manageable premium. This is more practical than acceptance (which leaves the company fully exposed), reduction (which may still be costly for a rare event), or avoidance (which means forgoing business opportunities).

The success of JIT is critically dependent on a seamless and reliable supply chain. It eliminates buffer stock, so any disruption in supply (due to poor quality, late delivery, or logistical failure) immediately halts production or sales. Therefore, developing strong, collaborative relationships with reliable suppliers and having robust logistics are prerequisites, not optional extras, for a JIT system.

NPV is the superior investment appraisal technique. It considers the time value of money and provides an absolute measure of the expected increase in shareholder wealth in monetary terms. ARR, based on accounting profits and ignoring the time value of money, can be misleading. A project with a lower percentage return but applied to a larger capital base or generating cash flows further into the future can create more total wealth (higher NPV), which is the primary financial objective.

The optimal transfer price should encourage internal trade when it benefits the whole company. The minimum price for Division A is its variable cost (£45) – below this, it loses money on internal sales. The maximum price for Division B is the external market price (£80) – above this, it would buy externally. For internal trade to occur, the price must be ≥£45 for A’s motivation and ≤£80 for B’s motivation. Therefore, any price in the range £45-£80 achieves goal congruence.

Participative budgeting involves managers in the creation of their own budgets. This increases buy-in, commitment, and ownership because the targets are seen as more realistic and fair. It leverages managers’ operational knowledge, leading to more accurate budgets. While still challenging, agreed-upon targets are more motivating than imposed, unrealistic ones, which often lead to game-playing and demotivation.

Bargaining power of buyers is high when buyers can easily play competitors against each other. This is most possible when products are undifferentiated or standardized. If Product A is identical to Product B, the buyer can demand a lower price from either supplier, threatening to switch. High switching costs (Option B) and fragmented sellers (the opposite of Option C) reduce buyer power. A concentrated seller industry (Option D) increases supplier power, not buyer power.

Activity-Based Costing (ABC) is specifically designed to address the distortions of traditional absorption costing. It traces overhead costs to products based on the activities they consume, providing a more accurate cost for complex, low-volume products that use support resources disproportionately. This accuracy is crucial for strategic pricing and identifying which products are truly profitable.0