P04EG (October 2005)

EXAMINATION GUIDE

P04 – BUSINESS PRACTICE

This guide is intended for candidates preparing for the examination unit to which it
relates. Candidates will find the guide most helpful if used in conjunction with the
self-assessment exercises in the coursebook.

The answers presented in the guide provide an outline of the key points which
candidates could beneficially have covered in the examination. They are not
necessarily a definitive statement of some unique, correct answer and, where
applicable, other appropriate views could also gain good marks.

The guide should provide greater insight of the approach the examiners were
looking for. Practice in answering the questions is highly desirable and should be
considered a critical part of a properly planned programme of examination
preparation.
P04
 THE CHARTERED INSURANCE INSTITUTE

DIPLOMA

OCTOBER 2005 EXAMINATION PAPER

UNIT P04
BUSINESS PRACTICE

Three hours are allowed for this paper.

READ THE INSTRUCTIONS OVERLEAF CAREFULLY BEFORE ANSWERING ANY

QUESTIONS.

THE CHARTERED INSURANCE INSTITUTE

P04 – BUSINESS PRACTICE CANDIDATE INSTRUCTIONS READ THE

INSTRUCTION BELOW BEFORE ANSWERING ANY QUESTIONS

Three hours are allowed for this paper.

You should answer all questions.

The paper contains 20 questions and carries a total of 200 marks:

You are strongly advised to attempt ALL the required questions in order to gain maximum

possible marks.

In attempting the questions, you may find it helpful in some places to make rough notes in the

answer booklet. If you do this, you must cross through these notes before you hand in the
booklet.
Answer each question on a new page. If a question has more than one part, leave several

lines blank after each question part.

It is important to show all steps in a calculation, even if you have used a calculator.

% • Fill in the information requested on the answer booklet and on form B.

% • You are allowed to write on the inside pages of this question paper but you must
NOT write your name, candidate number, PIN or any other identification ANYWHERE on this
question paper.
% • The answer booklet and this question paper MUST BE HANDED IN
PERSONALLY BY YOU to the invigilator before you leave the examination. FAILURE TO
COMPLY WITH THIS REGULATION MAY RESULT IN YOUR PAPER NOT BEING
MARKED AND YOU MAY BE PREVENTED FROM ENTERING THIS EXAMINATION
IN FUTURE.

THE CHARTERED INSURANCE INSTITUTE © The Examinations Department, CII, 20

Aldermanbury, London EC2V 7HY
Each question is worth 10 marks.

Note form is acceptable where this conveys all the necessary information.
1. (a) What is a memorandum of association? (2 marks)
(b) How many people should sign it? (2 marks)
(c) What information should it contain? (6 marks)
2. (a) Identify three of the changing economic influences in the global economy, giving an
example of each. (6 marks)
(b) List three other levels of the economy that are of interest to business managers. (4 marks)
2. 3. What is a market? Outline four types of market structure.
4. (a) Outline the six recognised functions of a business. (7 marks)
(b) Of these, state which function is the least likely to be outsourced and why? (3 marks)
5. Psychometric tests may be used as part of an organisation’s recruitment process.
(a) Explain briefly their format and purpose. (4 marks)
(b) Outline three main disadvantages in using such tests. (6 marks)
6. Outline the principal characteristics of the following management styles:
(a) open door;
(b) autocratic;
(c) paternalistic;
(d) militaristic;
(e) democratic.
3. 7. Explain briefly the key features of a company limited by guarantee.
4. 8. Outline the role of a company’s external auditors.
5. 9. On what grounds might the Financial Services Authority use their powers of
control and intervention when dealing with insurance companies?
10. (a) List the six characteristics of effective internal communications for an organisation. (6
marks)
(b) Outline four benefits that efficient internal communications will bring to an organisation.
(4 marks)
6. 11. Identify the six stages that market research typically follows.
7. 12. Explain briefly five advantages that budgeting brings to a business.
13. (a) What four main factors should managers consider to ensure that the information
needed for decision making is appropriate? (4 marks)
(b) Identify four types of information that may be required by decision makers. (6 marks)
8. 14. Outline five of the principal provisions of the Working Hours Directive
1998/1999.
9. 15. (a) In accounting terms, define profit. (3 marks)

(b) Prepare a profit & loss account from the following figures:

Sales for the period

Cost of equipment
Depreciation of equipment
Labour costs
Other expenses

£ 500
1,000
 200
150
25 (7 marks)

1. 16. Give four reasons why ethical issues should play an important part in business
management of larger organisations.
2. 17. Identify four key characteristics present in the formation and operation of project
teams.
3. 18. Briefly describe five key aspects of succession planning.
4. 19. Identify five external economic factors that could influence an organisation’s
ability to satisfy customer needs.
5. 20. Outline the six phases of the management planning process.

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SUGGESTED SOLUTIONS

The answers set out below show the approach being looked for by the examiners. In many cases
there is scope for well-reasoned alternative views which would also receive good marks.

EXAMINER’S COMMENTS

The overall standard of knowledge displayed in this examination was again disappointing.
Typically, answers were too general and lacked sufficient detail to obtain good marks. Most
answers were far too general.

Confusion arose at the start with question 1, because many gave the content of the articles of
association instead, or a mixture of both.

Question 3 proved difficult, but what was surprising was that a high proportion of candidates
were unable to provide a reasonable definition of a market!

For question 4 (and question 20), candidates were asked to give an ‘outline’ answer. This type of
question requires a short description but many just listed the points thus losing valuable marks.

Question 5 was a prime example of insufficient detail being given.

Answers of variable quality were provided for questions 11, 14, 16 and 17.

Question 13 proved the most difficult to answer, with very few obtaining maximum marks.
Candidates should read the question carefully, plan their answers and avoid including irrelevant
information on a topic for which no marks will be awarded.
10. (a) The memorandum of association is the document required to be lodged with
Companies House to register the formation of a limited company.
11. (b) One or more individuals may form a private limited company by subscribing to
the memorandum but two or more individuals are required to form a public limited company
(plc).
(c) • It sets out the company’s name, its objects and whether its registered office is situated in
both England and Wales, only Wales or Scotland.
1. • It also states that the liability of the members is limited to the amount they
paid for their shares.
2. • It specifies the maximum amount of capital the company may raise and its
division of shares of a fixed amount.

Question 2

(a) • Structural changes – such as the union or fragmentation of states – the break-up of the
Soviet Union.
% • Variations in the global demand for products and services – cyclical nature of the
worlds’ demand for ships which corresponds with the demand for moving raw materials and
consumer goods around the world.
% • Variations in the supply and price of raw materials – dramatic rise of oil prices in
the 1970s which affected those who relied on oil as a source of energy or manufacturing
material.
% • Variations in the supply and price of labour – currently call centres in India, etc.
(b) • The domestic economy.
% • The economy of the market.
% • The economy of business operations.

Question 3

% • A market consists of individuals and organisations who are interested in buying

and selling, and who are willing to buy or sell a particular product or service and who have the
resources to engage in such a transaction.
% • The market may be in a particular location where buying and selling take place of
a range of goods such as fruit, vegetables, fish, etc.

Or
12. • A market may be more widespread or global – oil, coal and metals are traded on
an international scale.
13. • There are also niche markets, where there are relatively few buyers and sellers –
for example in the aviation market.
14. • Increasingly markets are more ‘virtual’ or not dependent on a particular physical
forum – the internet provides an ‘on-line’ medium whereby goods and services can be bought or
sold.
(a) • Innovation – this is concerned with the development of new business ideas in terms of
products, processes and methods of marketing, organisation and management.
% • Production – comprises those activities concerned with the creation of goods and
services through bringing together and mixing a number of resource inputs, including metals,
labour, finance and plans.
% • Marketing – involves researching the market and using the information in the
development of the product or service, pricing and promotion.
% • Human resource management – is concerned with the planning, acquisition,
development, organisation and reward of a firm’s human resources.
% • Finance and accounting – deals with the raising and management of funds and
production of information to facilitate these two processes.
% • Compliance with regulations – ensures that the organisation meets the regulations
and requirements imposed on it by Government and industrial bodies.
(b) • Innovation is the least likely function to be outsourced because it is the core function
that keeps a business distinct.

Question 5

(a) • The tests are often multiple choice, and are carefully researched and designed to
highlight inconsistencies.
• Their purpose is that they are designed to measure personality traits on a defined scale,
thereby allowing comparisons between different candidates on a level playing field.
(b) • Results may sometimes prove unreliable, because some candidates may be able to
answer questions in a consistently dishonest way.
1. • Tailormade tests are very expensive to develop and the cheaper ‘off the
shelf’ tests available are limited to a narrow range of positions.
2. • The interpretation of the results of psychometric tests is a specific skill
which needs to be learned by the assessor.
15. (a) Managers are approachable by staff at all times.
16. (b) Control and power usually rests with a single individual, usually the chief
executive.
17. (c) The company looks after its employees in a fatherly way. This style is sometimes
perceived as too interfering.
18. (d) The management is structured in a formal way, with clear job demarcation (also
hierarchical).
19. (e) Decisions are taken with prior reference to as many staff as possible (also
consultative).

Question 7

% • A company limited by guarantee must be officially registered with the appropriate

authorities.
% • This type of company does not issue shares in order to raise money for its
operations. Instead the members of the company guarantee its debts, up to an agreed, and usually
nominal, amount.
% • These are organisations which may make a profit, but which do not pass the profit
on to investors in the forms of a dividend. Instead, they reinvest the profit in the organisation,
usually for the benefit of its members or customers.
% • The accounts of a company limited by guarantee must be audited annually by the
qualified accountant.
% • This legal structure is favoured by non-profit distributing organisations such as
charities and mutual associations.

Question 8

% • To report whether the financial statements of a company have been properly

prepared under the appropriate accounting rules.
% • Whether in their opinion the accounts have been properly prepared and give a true
and fair view of the company’s affairs.
• Also the auditor must check:
– the accounts comply with company legislation;
– the information given in the director’s report is consistent with the accounts;
– the company has kept proper accounting records;
– the company’s accounts are in agreement with those records.
% • If it considers it desirable to protect policyholders against the risk that the insurer
might be unable to meet its liabilities or to fulfil the reasonable expectations of policyholders.
% • Where it appears that the insurer has broken a rule (e.g. an accounting regulation).
% • Where it appears that misleading or inaccurate information has been supplied.
% • If it is not satisfied with the reinsurance arrangements of the insurer; or believes
that a director, controller or manager is not a fit and proper person.

Question 10

(a) The six characteristics of effective internal communication are:

% • accuracy;
% • clarity;
% • relevance;
% • reliability;
% • credibility;
% • timeliness.
(b) Any four from the following:
% • bring about change in the culture and structure of the business more quickly;
% • encourage staff to be co-operative and innovative;
% • ensure all relevant staff are helping to meet corporate objectives;
% • motivated workforce;
% • greater commitment to the organisation;
% • employee support for management decisions.

Question 11

Stage 1 Identifying the missing information needed for analysis.

Stage 2 Determining data needed, over which period of time and where it can be
 obtained Stage 3 Design of research methods, eg questionnaires, interviews. Stage
4 Design of sample size and characteristics. Stage 5 Data collection, how it will be collected and
stored. Stage 6 Techniques used in analysis and presentation of results.
Any five from the following:
% • assists in managing the expected inflows and outflows of money for a business;
% • unifies all employees’ activities within an organisation;
% • encourages planning – without predicting where the organisation is heading,
managers cannot tell what resources they will need;
% • promotes motivation because each person in the organisation has a target to
achieve or exceed;
% • aids control by providing a benchmark for measuring the actual performance
against its predicted performance;
% • makes everybody in the organisation financially aware that costs do matter, and
that individual and group performance is likely to be reflected in the financial outcome. This
awareness should prompt a desire for efficiency;
% • introduces a common basis of comparison with a discipline for predictions and the
measure of results, which will apply throughout the organisation.

Question 13

(a) • Which information is needed.

% • How the information is structured.
% • The collection and collation of information.
% • The presentation of information.
(b) Any four from the following:
% • what resources are available (staff, budget funds);
% • what level of productivity is being achieved;
% • whether objectives are being met;
% • financial data to decide on recruitment;
% • sales data to decide on marketing strategy;
% • information about the property market to decide on whether to move office;
% • information about foreign competition law to decide on overseas expansion.

Question 14

Any five from:

20. • a limit on the average weekly working time to 48 hours, although individuals can
choose to work longer;
21. • a limit on night worker’s average normal daily working time to eight hours;
22. • a requirement to offer health assessments to night workers;
23. • minimum daily and weekly rest periods and rest breaks at work if working day is
longer than six hours;
24. • paid annual leave;
25. • a worker is entitled to a rest period of 11 consecutive hours between each working
day;
26. • a worker is entitled to an uninterrupted rest period of not less than 24 hours in
each seven day period.

(a) Profit is the excess of income over the expenditure incurred in generating that income.
(b) Profit & Loss Account INCOME Sales 500 EXPENDITURE Less: cost of sales Labour
150 Depreciation 200 Other expenses 25

375

GROSS PROFIT 125

Question 16

Any four from the following:

27. • large organisations can have revenue income which is often more than small
nations, therefore how these companies use their wealth can have implications for the well being
of the countries in which they operate;
28. • responsibility and power are closely interlinked. Senior managers in large
organisations can make decisions that impact not only on large numbers of employees but
possibly whole communities;
29. • consumers and consumer groups now increasingly judge organisations by the way
they handle ethical and environmental issues;
30. • as strategic business decisions are partly determined by the cultural influence of
societies, cultural factors can affect the moral thinking of managers;
31. • the ethics of the organisation impact on its own staff in the way that they are
managed and also influence standards and levels of conduct for dealing with the organisation’s
customers.

Question 17

32. • Project teams are units especially created to cope with changing business
environments and reflect a close identification with the client’s needs.
33. • They are temporary structures formed to deal with a particular task or problem
and to consolidate technical expertise.
34. • Project team membership may change considerably during the life of the team.
Different specialists may be brought in at different times and one employee may be a member of
several different teams.
35. • The system works best where the culture of the firm encourages teams to be
constituted by the best people for the job, regardless of grade or position.

Any five from the following:

% • review of the organisation’s business strategy;
% • identify the key jobs necessary to achieve strategic goals;
% • identify the extent to which these jobs will change;
% • identify the performance factors critical to success in these jobs (e.g. skills,
qualifications, experience);
% • establish current key players;
% • prepare an inventory of the skills, abilities, etc. of current key players;
% • identify a timescale before current key players will leave the organisation;
% • establish a means of identifying current skills of potential successors and their
potential to develop new skills.

Question 19

Any five from the following:

36. • the economy – high unemployment leads to less disposable income and depressed
retail sales;
37. • government regulation – new legislation bans all tobacco advertising;
38. • competition – competitor goes out of business;
39. • consumer lobbying – consumers call for a ban on genetically modified foods;
40. • technology – technological advances make a new product possible;
41. • social or cultural influences – certain religions prohibit work on some days of the
week or at certain hours of the day.

Question 20

42. • Analysis – managers need to analyse what they want to achieve, why and when
and the chances of success.
43. • Evaluation of options – managers consider how they will be able to achieve their
overall objectives from various choices.
44. • Definition of goals – managers need to formulate specific goals which when taken
together, will bring them closer to their overall objectives.
45. • Allocation of resources – managers need to decide how they will use their
resources to realise their goals.
46. • Timetable – managers need a timetable for completing each stage of the plan and
achieving each goal.
47. • Evaluation of success – managers need to devise clear measures and standards to
confirm that goals have been achieved.