P5 Quick Revision, Ppapers Key Points - Summary of Imp Areas by Sir Taha Popatia

P5 summary book Taha Popatia
P5 QUICK REVISION
PAST PAPER KEY POINTS
2010 – 2017
+
SUMMARY OF SOME
IMPORTANT AREAS
1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Balanced Scorecard ACCA P5 BY TAHA POPATIA
• Consists of four perspectives.
• Requires an organization to have a number of goals supported by performance measures in each
perspective.
• Uses both internal and external information to assess performance and measures financial and non-
financial aspects of a business to ensure long term future success, rather than just focusing on historic
results.
• When applying the balanced scorecard performance measures need to be chosen carefully. A balance
needs to be struck and only measures which will help organization to achieve it’s objectives should be
chosen. Further some measures of business may be harder to measure than others. Furthermore,
measures chosen may conflict. Care must be taken to avoid overloading with too many performance
measures.
CUSTOMER INTERNAL INNOVATION AND FINANCIAL

LEARNING
Measures what it is that Looks at what processes Considers how future Measures whether
customers value from the does the organization value can be created. performance is
business. need to be successful. acceptable to investors.
Creation of long term
future value can be
addressed.

BOSTON CONSULTING GROUP MATRIX ACCA P5 BY TAHA POPATIA

Fitz Gerald and Moon’s building block model ACCA P5 BY TAHA POPATIA
• Aims to improve the performance measurement system of service businesses.
• It suggests that performance system should be based on three concepts of dimensions, standards and
rewards.
DIMENSIONS STANDARDS REWARDS

Fall into two categories: Targets set for the metrics chosen Motivators for the employees to
1. Downstream results: from the dimensions measured. work towards the set standards.
competitive and financial 1. Those being measured 1. Must be CLEARLY
performance. take OWNERSHIP of them UNDERSTOOD by those
2. Upstream determinants: possibly by participating in whose performance will be
quality of service, the standard setting measured.
flexibility, resource process. 2. Must be related to the
utilization and innovation. 2. Must be ACHIEVABLE in areas of responsibility that
These yield specific order to motivate. the staff member
performance metrics for a 3. Must be FAIRLY set. CONTROLS.
company.

Six Sigma and DMAIC Methodology ACCA P5 BY TAHA POPATIA
• Six-sigma is a quality management system. The overall aim is to ensure a very high and consistent
standard of quality output.
• THE DMAIC process is a technique used to implement six-sigma to improve existing processes and is split
into five phases as described below:
DEFINE MEASURE ANALYSE IMPROVE CONTROL

It is a planning Measurement This stage is where At this stage the This is the on-going
phase and includes principle: 1. Only root causes of the proposals for monitoring of the
documentation of measure what the problems are improving the improvements.
existing process. customer thinks is identified. process are
important. 2. Do implemented and Some processes can
The establishment not measure things Assessment availability of be monitored
of precise customer that the customer categories: 1. Value resources and likely automatically with
requirements from is satisfied with. 3. adding 2. Necessary costs of making the control systems
the process in Only measure support 3. Non- improvements that produce
question is an things that can be value adding. need to be carefully general exception
essential part of improved. considered. reports
this phase. Analysis should automatically.
Areas for produce a list of
Customer measurement: 1. problem, causes The on-going
requirements can Inputs 2. Process and potential areas monitoring may
be divided in three elements 3. for improvement. indicate that some
levels: Basic Outputs and of the earlier stages
(minimum), customer in the DMAIC
Satisfiers (improve satisfaction. process need to be
the quality of revisited.
customer
experience) and
Delighters
(unexpected by the
customers).

ACCA p5 2010 past papers summary by Taha Popatia
June 2010
Question # 1
Importance of non-financial performance indicators and use of balanced scorecard to improve performance
• There is a widely held view that ‘what gets measured gets done’ and if performance measures are
restricted to financial measures alone then the focus of managers will be myopic (lacking foresight) and
consequently they may be motivated by the wrong stimuli.
• Many commentators have argued that financial measures encourage short-termism to the detriment of
the longer-term prospects of organizations.
• The increasing attention given to NFPIs was a key factor in the development of ‘balanced scorecard’
which proposed that business performance is reviewed from four perspectives: 1. Financial perspective –
How does an organization appear to the shareholders? 2. Customer perspective – How does an
organization appear to the customer? 3. Internal business perspective – What must an organization excel
at? 4. Innovation and learning perspective – Can an organization continue to improve and create value?
• The results from innovation and learning, internal business and customer perspective will be mirrored in
the financial perspective.
• Possible measures that might be featured within a balanced scorecard: 1. Customer perspective: % of
sales from new clients, % of clients from whom repeat business is gained, Ratings from client satisfaction
survey. 2. Internal business perspective: % of client projects completed on time and within budget, % of
employee time billed to clients. 3. Innovation and learning: % of time used for staff development, % of
revenues earned from new products or services. 4. Financial perspective: Growth in operating cash flows,
Gross margin earned from clients, % increase in operating costs.
potential benefits and potential problems of subcontracting work
• Benefits: 1. Increased flexibility 2. Particular expertise 3. Reduces the overall cost since the staff is
temporary.
• Problems: 1. Use of subcontract staff might cause resentment to full-time staff. 2. Subcontracts might not
identify the corporate culture. 3. The fact that there are two completely different pay schemes operating
might prove problematic and cause dissatisfaction among full-time consultants and/or subcontractors.
Question # 2
Expected values
• Expected values take into account the relative likelihood of each of the possible outcomes occurring. The
use of expected values implies that the company have a risk-neutral attitude. A risk neutral decision-
maker will ignore the variability in the range of potential outcomes and will be concerned only with the
expected value of outcomes.

Question # 3
Value for money audits
• They may be seen as being of particular relevance in not-for-profit organizations where they are an
important performance assessment tool. The VFM audit focuses on the achievement of objectives of the
organization in a way that ensures that most economic, efficient and effective manner.
Economy, efficiency and effectiveness
• The three Es are likely to be seen as possibly being in conflict with each other in terms of the
achievement of objectives.
• Economy: minimizing the average cost per unit.
• Efficiency: maximization of the input: output ratio.
• Effectiveness: achievement of the objectives of the proposal.
Intangibility, Heterogeneity, Simultaneity and Perishability
• Intangibility: not easily measurable.

• Heterogeneity: refers to a possible variability in the standard of performance in the provision of the
service.
• Simultaneity: refers to the provision and consumption of the service coinciding and hence making it
difficult to apply all relevant checks and tests before use.
• Perishability: refers to the inability to store the service in advance.
Question # 4
Differences in the job cost estimates under traditional costing and Activity Based Costing systems
• The costs may differ in the way they consume activities in each of the activity areas.
• The activity areas differ in their indirect cost allocation bases.
Potential problems in the successful implementation of the activity-based costing system
• Initially it would be very time consuming to collect a large amount of data concerning the activities
relating to each job.
• It would be vital to identify the real ‘cost-drivers’ within the activity-based costing system.
Operational Activity-Based-Management (ABM)
• Operational ABM is about doing things right. Those activities which add value to products can be
identified and improved. Activities that do not add value should be reduced in order to cut costs without
reducing product value.
Strategic Activity-Based-Management (SBM)
• Strategic ABM is about doing the right things using the ABC information to decide which products to
develop and which activities to use.

Implicit value of an activity
• An activity may have implicit value not necessarily reflected in the financial value added to any service or
product. For example, servicing customers. Cutting back on such expenditure may lead to a poorer
perceived value by customers of the service provided with a consequent fall in demand.
Question # 5
Cost targeting
• The use of cost targeting would necessitate comparison of current estimated cost levels against the
targets which must be achieved if the desired levels of profitability and hence return on investment are
to be achieved. Thus, where a difference exists between the current estimated cost levels and the cost
target, it is essential that this gap be closed.
Performance assessment
Financial performance and marketing
• The profit increase is partly linked to the projected fall in quality costs, both costs of conformance
(appraisal and prevention) and costs of non-conformance (internal and external failure).
External efficiency
• In order to achieve external efficiency a company has to satisfy its customers. Customer satisfaction may
be defined as meeting customer expectations. The quality of service provision and delivery are
operational criteria that can be used to monitor levels of customer satisfaction.
Internal efficiency
• Internal efficiency may be assessed by reference to flexibility and productivity. Flexibility relates to the
business operating system as a whole whilst productivity relates to the management of resources such as
staff time. This should be helped through reduced cycle time and decreased levels of waste.
December 2010
Question # 1
Building and monitoring CSFs
• Critical success factors are those areas of business performance where the company must succeed in
order to achieve its overall strategic objectives.
• Monitoring CSFs are those that are used to keep abreast of ongoing operations, for example, comparison
of actual results to budgets and industry averages.
• Building CSFs are those which look to the future of the organization and its development.
Information for establishing CSFs
• The company can use information about the internal and external environment to set its CSFs. Relevant
external information would include the structure of the industry and the strategy of company’s

competitors. Relevant internal information would include measures of seasonality on sales and
effectiveness of marketing campaigns.
Performance indicators linked to the CSFs
• CSFs for audience satisfaction: Sales per film, Brand recognition, repeat viewings and Awards won.
• CSFs for profitability in operations: Industry average margin, time in production and costs.
Impact of chosen Performance indicators for the design and use of the company’s website and its management
information system and its executive information system
• The company website can collect audience survey results and comments posted on the site.
• A management information system (MIS) will collate the information from individual transactions
recorded in the accounting system to allow middle level management to control the business. This
system will allow customer purchases to be summarized into reports to identify both products that sell
well and the customers who provide the main sources of revenue.
• An executive information system is one that will supply information to the senior management of the
organization allowing them to drill down into the more detailed transaction reports where necessary.
Question # 2
Costing systems
• Absorption costing is a traditional system of allocating overhead costs to products based on production
activity.
• ABC is an alternative for the allocation of overheads intended to capture the different activities that lead
to costs being incurred. The principle benefit of ABC is that identification and monitoring of these
activities leads to more accurate cost control.
Beyond budgeting
• The process known as going beyond budgeting involves replacing the annual system of a centrally
created budget with a more flexible system of targets. Performance measurement changes from
monitoring variances from the budget towards measuring achievement of strategic goals, adding value
and performance against suitable benchmarks. The targets are intended to guide rather than constrain
the line managers thus improving their motivation.
Question # 3
Value based management
• The value-based approach takes the primary objective of the business to be maximizing shareholder
wealth and seeks to align performance with this objective. The principle measure used at the strategic
level will be economic value added. By using this as the sole measure of performance, management is
focused and they will be able to avoid conflicts which occur when there are multiple objectives and
measures.
Evaluation of VBM based measures against traditional profit-based measures of performance

• Value measures are considered to be superior to profit measures because they take into consideration
the capital employed and cost of capital.
• Also, although value measures are calculated from profit figures they are adjusted in order to bring them
closer to a cash flow measure of performance which is less affected by the various accounting
adjustments such as depreciation.
• A disadvantage of value-based measures like EVA compared to profit is the unfamiliarity and complexity
of the calculation. These difficulties can be overcome by a process of education and training for the staff
and shareholders.
Question # 4
Factors which will affect a company’s environmental strategy
• Government regulations such as requirements to recycle material, limits on pollution and waste levels
along with new taxes such as carbon levies to add additional costs. Performance indicators would be
additional costs resulting from failure to recycle waste, fines paid for breaches and the level of
environmental tax burdens.
• The general economic climate is relevant to the strategy including factors such as interest, inflation and
exchange rates.
• Trends and fashions among the general public appear to be relevant as the public will be end-users of its
services and environmentally efficient technologies such as hybrid cars and solar recharging cells would
be relevant to the cost and product. Performance indicator would involve measuring the impact of the
use of new technology on existing emission data.
Question # 5
Quantitative models and Qualitative methods
• Quantitative models such as the Altman Z-score use publicly available financial information about a firm
in order to predict whether it is likely to fail within the two-year period. The method uses a model
equation into which the financial data is input and a score obtained. The advantages of such methods are
that they are simple to calculate and provide an objective measure of failure. These models are open to
manipulation through creative accounting which can be a feature of companies in trouble.
• Qualitative methods are based on the realization that financial measure are limited in describing the
circumstances of a company. Models such as Argenti’s rely on subjective scores to certain questions
given by the investigator. A score above a certain level indicates potential disaster. The advantage of the
method is the ability to use non-financial as well as financial measures and the judgement of the
investigator but this is also a weakness as there is a danger that the investigator will give scores to ensure
the conclusion agrees with first impressions.
Qualitative problems apparent in the company’s structure and performance
• The qualitative problems can be broken down according to the Argenti model into three broad areas:
defects, mistakes made and symptoms of failure.
• Company exhibits the following defects: a domineering CEO, a failure to split CEO/Chairman roles and a
passive senior management. These are structural problems within the company that will obstruct any
effort to change direction if that direction is leading the company downwards.

• The company may also be making mistakes: Overtrading and this is mainly funded by debt and the
company seems to depend on one big project.
• Symptoms of failure: Deteriorating ratios, Creative accounting and declining morale and quality. These
are not yet apparent from the information to hand and this may imply that there is still time to correct
matters as these are often the final signals of failure e.g. creative accounting being employed to massage
the financial statements.

June 2011
Question # 1
ROI, RI and EVA
• Controllable return on investment = operating profit/ capital employed.

• Residual income = Operating profit less notional interest charge.
• Non-controllable return on investment = Profit Before Interest / capital employed.
• Any allocated head office costs should be excluded from profit figure as these are not controllable at
divisional level.
• There should normally be a target ROI to compare performance.
• ROI may at times discourage new investments in assets since this measure improves as assets are
depreciated with age.
• RI offers the possibility of applying different costs of capital to divisions with different risk profiles.
• RI does not allow a clear comparison of performance between divisions since it is an absolute measure.
• Both ROI and RI are profit based measures rather than cash. Measures such as NPV use cash flows which
are less subject to the interpretation of accounting rules.
• EVA is an absolute measure like RI and it involves a more complex calculation. EVA adjustments are
intended to avoid distortion of results by accounting policies.
• EVA and RI do not help to judge relative divisional performance as the divisions are not of similar size and
so an absolute measure is not comparable.
Transfer Pricing
• The objective of a transfer pricing system is to allow divisional management to be assessed on the basis
of divisional profit and so provide them with motivation while retaining their autonomy.
• The transfer price should be set so that the decisions of the divisions individually are beneficial to the
company as a whole.
Market Based Pricing
• There would be cost savings if the work is kept internal to the company such as the overheads of
negotiating and managing the contract with outsiders. A market price adjusted down for these
savings would be appropriate.
Cost Based Pricing
• The work could also be charged on the basis of the cost to the service division.
• The work could be charged at variable cost or at such price which breaks even divisional profit.
New information system
• Executive information system will bring a number of benefits in decision making at strategic level.
• EIS should allow drill down access to the more detailed operational records but the initial presentation of
data should be based on the key performance indicators of the company.
• It may present the problem of information overload to managers. Therefore, the system will need to be
designed to give access to only those areas that it is appropriate for any given manager to see.

• The data used in decision-making will be more robust as a single database will reduce the problem of
redundancy where multiple copies of the same data are held on different systems. This will remove the
danger of inconsistencies and reduce the storage required by the company.
• In order to gain the maximum benefit from the new system, executive managers will need to be trained
and this training should occur just before the new system is available so that the are in a position to use it
immediately.
Question # 2
Balanced Scorecard
• The balanced scorecard is a tool to translate the overall vision of a company into objectives and
performance metrics. It aims to ensure that the performance measures on the scorecard are those that
will serve the long-term interests of the business.
• This approach will usually broaden the range of performance measures as it introduces four key
perspectives: financial, customer, internal business process and learning and growth.
• The use of these perspectives encourages companies to use non-financial measures as well as financial
ones.
• It is important that in broadening the perspectives of performance measurement, the scorecard does not
overwhelm with numbers. Therefore, the measures should be limited in number and clearly prioritized.
• Financial perspective: EVA, Shareholder value added, dividend per share, cashflow based measures for
survival and growth measures such as eps.
• Customer perspective: Cost in comparison to competitors.
• Internal process perspective: measures of manufacturing excellence and efficiency in the testing.
• Learning and growth perspective: the improvement in the time to market from product to product.
• The collection of data on some of the non-financial measures may be very difficult.
Mendelow’s matrix

Question # 3
Fitzgerald and Moon’s building block approach
• The building block model is an analysis that aims to improve the performance measurement systems of
service businesses.
• It suggests that the performance system should be based on three concepts of dimensions, standards
and rewards.
• Dimensions fall into two categories: downstream results – competitive and financial performance and
upstream determinants of those results – quality of service, flexibility, resource utilization and
innovation.
• Standards are the targets set for the metrics chosen from the dimensions measured.
• Rewards are the motivators for the employees to work towards the standards set.
Main building block improvements
• It will ensure that all the key determinants of success in performance are being measured.
• The reward system will operate in a way to optimally motivate the individual staff members.
Question # 4
Boston Consultancy Group (BCG)
• Dog – poor candidate for investment. A disposal could be considered unless there are other reasons to
keep it.
• Problem child / question mark – either financed to grow or else sold to another consolidator.
• Cash cow – managed for its cash generative capabilities.
• The BCG matrix can be beneficial as it allows the company to view the prospects of its different divisions.
A different style of management should be applied to each division based on this analysis.
• The performance management systems and metrics used by the divisions should therefore be adjusted
to reflect this analysis.

Existing remuneration system
• The existing system is primarily based on the division’s performance compared to budget. It is likely that
the management style will be highly cost conscious and conservative as a result. This could present
particular problems for the divisions that are or could be grown.
Question # 5
Cost categories that would aid transparency in environmental reporting
• Conventional costs: such as raw material costs should be broadened to include the cost of waste through
inefficiency. There and other conventional costs such as fines are often hidden within overheads and
therefore will not be a high priority for management control unless they are separately reported.
• Contingent costs: such as the cost of cleaning industrial sites when these are decommissioned.
• Relational costs: such as the production of environmental information for public reporting.
• Reputational costs: associated with failing to address environmental issues when consumer boycotts and
adverse publicity lose sales revenue.
Environmental accounting techniques
• Lifecycle view: considering the costs and revenues of a product over the whole life of the product rather
than one accounting period. It may take profit or discounted cashflow as the principal measure of
performance.
• Activity-based Costing: method of detailed cost allocation that, when applied to environmental costs,
distinguishes between environment-related costs and environment-driven costs. Related costs would
include those specifically attributed to an environment cost center while driven costs are those that are
generally hidden in overheads but relate to environment drivers such as additional staff costs or the
shorter working life f equipment.
• Input / Output Analysis: considers the physical quantities input into a business process and compares
these with the output quantities with the difference being identified as either stored or wasted in the
process. It will highlight priorities for efficiency improvements.
• The non-financial benefits will include a better public image and reduced chance of protest by
environmental groups and an improved relationship with the government.
• Installation of any system will require significant increases in the information that the management
accounting systems collect and so incur increased costs.
Lifecycle costing
• The value of lifecycle costing often lies in the visibility it gives to costs that are determined in the early
stages of the design of the product.

December 2011
Question # 1
Three categories of risk appetite:
• Risk averse: individuals tend to assume the worst outcome and seek to minimize its effect.
• Risk seekers: interested in the best outcomes and seek to maximize their returns under these
circumstances.
• Risk neutral: individuals are interested in the most probable outcome.
• Risk seekers: will aim to maximise the possible returns from the different demand scenarios. The
maximax (maximum of the maximum payoffs) method would be appropriate in this situation.
• Risk averse decision-makers: will aim to maximise the minimum possible returns from the different
demand scenarios. The maximin (maximum of the minimum payoffs) method would be appropriate in
this situation.
• Pessimistic decision-makers will choose to focus on the lost profit (regret) compared to the best choice
under that demand scenario. They aim to minimize the maximum level of regret that they can suffer
under any demand scenario. This is called minimax regret (minimum of the maximum regret) method.
• A risk neutral manager does not take an optimistic or pessimistic stance. They will choose the option that
yields the maximum expected value.
Question # 2
Key features of performance measures:
• They should measure the effectiveness of the business and its processes in meeting the organizations
objectives.
• They should contain internal and external measures of performance.
• They should comprise a mix of financial and non-financial methods.
• They should cover both the short-term and long-term performance of the organization.
Lynch and Cross – performance pyramid

• The pyramid firstly focuses on the development of a coherent set of objectives from the overall
corporate vision. The pyramid views a range of objectives from the strategic to the operational, linking
these through the themes of external effectiveness and internal efficiency.
• The strategic level concerns relate to market and financial factors and these are fed by the tactical level
drivers of customer satisfaction, flexibility and productivity. The operational objectives are then derived
from the tactical drivers.
• The performance measurement system is then built up to reflect the objectives and so ensure that each
of the performance measures at the operational level feed the tactical level requirements and measures
at this level drive the strategic objectives of the organization. For example, cycle time reductions will
improve productivity which will enhance the profitability.
• The driving forces according to Lynch and Cross, that are appropriate to meeting an organization’s
objectives are customer satisfaction (quality and service standards), flexibility (innovation and the ability
to adapt to change in the external business environment0 and productivity (efficiency and waste).
Question # 3
Controls and security procedures that are necessary for management information
• The controls necessary over management information would involve the use of standard templates and
definitions for all information that has to be collated specially where information processing is
decentralized to the departments.
• In order to safeguard data, there should be a policy on regular backups.
• The current system of passing information by memory stick could easily lead to misplacement or loss of
data. If memory sticks are to be used then data should be encrypted. It will also mean that there will be
different versions of the data files on the department PCs and the administration system which will
require to be controlled.
Usefulness of the pack that is provided to the board of governors
• Pack addresses the financial and educational performance of the school.

• It utilizes the skill of the department heads in giving them the choice of how to present data on pupil
performance.
• Flaws: 1. There is too much information being provided and that the information is too detailed for a
non-expert audience such as the governors. 2. There appears to be a lack of narrative in the pack to
explain the data given. 3. No benchmark data is provided for external comparison.
Improving the information system by installing a network across the school to link the departmental
computers and the administration department
• The suggested improvements will bring the benefit of removing possible duplication of files and reducing
storage requirements by unifying the data in one database.
• The network should facilitate the transfer of information between departments and the school office
making errors in transfer less likely.
• It may be possible to share data with other schools which could assist in a benchmarking exercise in order
to identify best practice in the region.
• The costs of such an upgrade may not be outweighed by the benefits.

• The opening of the network to the internet may possibly open the network to hackers.
Question # 4
The suitability of branch information as a means of assessing managers performance
• The manager should only be held responsible for those areas of performance that they can control.
• Planning and Operational variances must be calculated. Planning variances are not in control (Revised
budget due to market changes and Original budget) and Operational variances are those which are in
control (Revised budget and Actual results)
The performance management style at Albacore and evaluation of performance appraisal system
• The management style at Albacore is highly budget constrained it is driven by financial performance to
meet the needs of the venture capitalist owners. This management style leads to stress for employees
and difficult working relationships.
• The budget should be agreed between the manager and their appraiser using the detailed knowledge of
both parties to improve the budget estimates.
• Performance appraisal could also recognize longer-term and non-financial factors in the manager’s
performance, such as innovative marketing ideas and staff development.
Question # 5
Impact of collection and use of quality costs
• Costs of conformance: Ensuring that products produced are at the acceptable quality standard. This
includes prevention costs: such as training for staff and appraisal costs: such as inspection of components
from suppliers before they are used and inspection of work-in-progress.
• Costs of non-conformance: Cost of dealing with production that do not meet the prescribed quality
standards. These costs include internal failure costs when a quality fault is noticed before the product
leaves the factory and is rectified. External failure costs also arise when a customer finds a fault with the
product which must be handled through customer complaints.
• There are quality costs that an accounting system will tend to omit such as the opportunity cost of lost
future sales.
• The identification and collection of these costs will probably lead to greater management focus on the
quality issues.
Kaizen costing approach
• The kaizen costing process focuses on producing constant, small, incremental cost reductions throughout
the production process during the product’s life. Kaizen can be translated as continuous improvement.
• Kaizen costing can respond more easily to a dynamic business environment.
• Standard costing is used to control costs while kaizen costing focuses on cost reduction.
Just in time purchasing and production
• Just in time is a demand-pull system of ordering from suppliers which aims to reduce inventory levels to
zero.

• The benefits will be measured in lower working capital requirements and factory floor space savings.
• The problems include increased reliance on suppliers as faults in raw material may lead to costly
stoppages to production.
• Output must be matched to demand and each stage of the production process must match its output
speed to the demand level.

June 2012
Question # 1
Critically assessing existing performance report
• Past three years and forecast one year information is available. Breakdown of last two quarters is also
available for which gives a snapshot of more immediate performance.
• There are no cash measures of performance in the report.
• There is too much unnecessary information. The use of more percentage figures rather than absolute
numbers may help. Also the numbers are given to the last $ where it would probably be sufficient to
work in thousands of dollars.
• The critical success factors associated with each functional area will need to be identified and the suitable
performance measures chosen.
• The timescales reported in the current format are possibly not helpful for quarterly meetings. It may be
useful to consider reporting the last quarter’s monthly performance giving comparative figures from the
previous year and drop the use of the detailed 2010 and 2011 figures in favor of just supplying net profit
figures.
• The current report does not give much benchmark data to allow comparisons in order to better
understand the results. It would be helpful to have budget figures for internal comparison and
competitor figures for an external comparison of performance.
Using measures suggested
• EVA is positive which implies the business is adding value for the shareholders.
• Measures used: NPV, MIRR, EVA, Net profit, ROE and ROCE.
What gets measured gets done
• The idea behind the quote, what gets measured, gets done. Is that the staff and management will only
react to the performance measures chosen by the owners. In other words, poor performance reporting
can lead to inefficient management.
Question # 2
Performance prism
• Performance prism has five facets which attempt to unify various methods of performance management
into a coherent whole.
• The facets are stakeholder satisfaction which then depends upon the other four facets of stakeholder
contribution, strategies, processes and capabilities.
• By taking a wider view and focusing on stakeholders, the prism model may help to avoid performance
measurement that is driven by internally-derived strategies.
• Stakeholder satisfaction involves the identification of the important stakeholder groups and an
understanding of their wants and needs.
• The stakeholder contribution identify what the organization wants from its stakeholders.
• The strategies are the paths that the organization will follow in order to deliver stakeholder satisfaction.

• The processes are required if the strategies are to be executed.
• The capabilities are what are required in order to operate and improve the processes. The capabilities
can be identified by an audit of the strength and weaknesses of the business.
Question # 3
Six Sigma
• There are a number of broad ways in which the implementation of Six sigma improves quality in an
organization. These include:
• 1. An increased focus on customers
• 2. Management decision making being driven by data and facts not intuitions such as the use of customer
satisfaction scores or numbers of complaints as key performance measures.
• 3. The identification of business processes’ improvement as key to success which is exemplified by the
mapping of the processes and then their redesign.
• 4. The proactive involvement of management such as the CEO championing the billing improvement
project.
The DMAIC process
• DEFINE customer requirements/problem: Here the problem is the complaints on bills that result in
customer dissatisfaction and delayed revenue receipt or potential loss of business.
• MEASURE the existing performance: The number of customer complaints or scores below a threshold
level on customer survey will have to be measured and targets set. Measurement should focus on areas
where the customer will value improvement.
• ANALYSE the existing process: This step involves data collection in order to identify the root causes of
problems and then techniques such as Pareto analysis will improve the focus of action on the issues that
give rise to the majority of complaints based on the idea that 20% of the categories of causes will give
rise to 80% of the complaints.
• IMPROVE the process: This is the implementation stage for any changes that are suggested and it is
important at this stage to check on the cost and resource consequences of any of any suggested
improvement.
• CONTROL the process: The improvement project will be monitored after implementation to ensure that
the benefits of reduced complaints are maintained. This can be done through exception reporting if
complaint numbers begin to exceed the tolerance set.
Question # 4
Benchmarking
The benchmarking process is often described using seven steps. The following are the steps with the current
state of the exercise:
• 1. Set objectives and decide the areas to benchmark.

• 2. Identify key performance drivers and indicators.
• 3. Select organizations for benchmarking comparison.
• 4. Measure performance of all organizations involved in benchmarking.

• 5. Compare performances.
• 6. Specify improvement projects.
• 7. Implement and monitor improvements.
Question # 5
Performance measurement problems at the company (virtual organization)
• In a virtual organization, performance measurement can cause difficulties due to the fact that key players
in the business processes and in the supply chain are not ‘on site’. The organization has the problem of
collecting and monitoring data about its employees working from home and the outsourcing partners.
• There is a reliance placed on information technology for handling these remote contacts. A large
database would be required that can be automatically updated from the activities of the remote staff and
suppliers. This will require the staff and supplier systems to be compatible.
• Even with reviews of system logs to identify the hours that staff spend logged in to the systems, there are
still the difficulty of measuring staff outputs in order to ensure their productivity.
• There is disagreement over the measurement of the key SLAs. In order to resolve such disputes, lengthy
reconciliations between the organization and strategic partners systems will have to be undertaken
otherwise there are no grounds for enforcement of the SLAs. The solution would be for the partners to
agree a standard reporting format for all data that relates to the SLAs which would remove the need for
such reconciliations.
Performance management problems at the organization
• The performance management of the employees is complicated due to the inability of the management
to look over their shoulder since they are not present in the same building.
• Work could be divided into projects where the outputs are more easily identified and pay and bonuses
related to these.
• The performance management issues of handling the strategic partners include: 1. Confidentiality where
the strategic partners will have access to commercially sensitive information. 2. Reliability where the
partner is supplying a business critical role.
December 2012
Question # 1
Suitable performance measures
• Net income (after deduction of allocated head office cost) is not wholly the responsibility of the regional
management as head office costs are outside their control. Therefore, operating profit is a much better
performance measure.
• For a service business operating profit, return on capital employed and residual income are less
meaningful measures. More meaningful measures would be revenue growth and cost terms like ratio of
staff cost to revenue.
• If residual income is to be used it may be appropriate to use different notional interest rate for different
divisional offices.

• It would assist decision making if suitable benchmarks internal and external were also found and included
in performance reporting.
Remuneration packages
• Generally using industry norms as a basic benchmark will help ensure that staff are kept broadly happy,
although it will not motivate them to outperform their peers.
Question # 2
Incremental budgeting
• Incremental budgeting is suitable in organizations where the business is stable and so historic figures
represent a solid base from which to consider small changes.
Rolling budget
• A rolling budget is one where the budget is kept up to date by adding another accounting period when
the most recent one expires.
• Rolling budgets are suitable when the business environment is changing rapidly or when the business
unit needs to be tightly controlled.
• The rolling budget requires additional resources as they now have to be done each quarter rather than
annually but the benefits of giving management a clearer picture and more realistic targets more than
outweigh this.
Zero-based budgeting
• Appropriate for project based function.

• ZBB is often used where spending is discretionary in areas such as marketing and research and
development.
• Marketing for example is best controlled by having individual budgets for each campaign that the
divisional managers must justify to senior management at the start.
• ZBB requires each cost element to be justified, otherwise no resources are allocated.
Bottom up and top down budget control
• Bottom up budget control involves divisional managers having an opportunity to participate in the setting
of their budgets/targets. It has the advantage of improving motivation of the divisional managers by
creating a greater sense of ownership in the budget/targets. Bottom up processing frees senior
management resource as the divisional managers do more of the work. It can also improve the quality of
decision making and budgeting as divisional managers are closer to their product markets.
• A top down budget is one that is imposed on the budget holder by the senior management. It is
controlled by senior management and avoids budgets that are not in line with overall corporate
objectives or that are too easily achieved.
Question # 3
EVA format

Operating profit
ADD back
Non-cash items
Accounting depreciation
Doubtful debts
Research and Development
LESS
Economic depreciation
Tax – Cash paid
Lost tax relief on interest
NOPAT
Capital Employed
At 2012 start
ADD back
Provision for doubtful debt at 2012 start b/s amount
Other non-cash items incurred in 2011
Adjusted year end figure
EVA = NOPAT – WACC x Capital Employed
Question # 4
Consideration for liquidity and gearing ratio
• In the short term, liquidity covers the degree to which there are readily available funds in order to meet
immediately payable liabilities.
• In the long-term gearing measures the risk. This could be financial or it could be operational risk.
Qualitative model for predicting corporate failure.
• Qualitative models of business failure such as Argenti use a variety of qualitative and some non-
accounting factors to predict corporate failure. The types of factors included are management
experience, dependence on one or few customers or suppliers and a history of qualified audit opinions.
Question # 5
BURNS AND SCAPENS WORK
• Burns and Scapens have studied changes in management accounting and noted how it has changed focus
from financial control to business support.
• The management accountant has become more of a generalist within the business providing an internal
consulting service for managers. They have named this new role as hybrid accountant.
• Burns and Scapens state that there are three main forces for change: technology, management structure
and competition.
• Technology: Management information systems allow users across the organization to input data and run
reports giving the type of analysis once only provided by the management accountant.

• Management structure: For example responsibility for budgeting has often moved from the head office
to operational management.
• Competitive environment: There has been a move in organizations to a more strategic focus with the
need for competitive advantage being emphasized.
The impact of brand loyalty and awareness on the business both from the customer and the internal business
process perspectives
• Brand identity quickly conveys an image of quality and price that helps customers to identify the products
and so helps create customer loyalty to the brand. Loyalty results in repurchase and continued use of the
products.
• Brand awareness is an indicator of the strength of a product’s place in the customers minds.
• Customer perspective: The brand is part of a competitive advantage of the business in the given case.
This justifies the high profit margins that company charges. The customer will want to see the family
story behind the company maintained and this will require a large annual marketing budget. This
spending will be both regular, to maintain the general brand and its position, and irregular, to match
specific product launches or marketing opportunities.
• Internal process perspective: quality control is of great importance. This is true in both production and
retailing SBUs.
Measuring brand awareness
• Can be done crudely through revenue and market share.
Measuring brand loyalty
• Measuring brand loyalty can be done through customer retention and repeat purchase rates. It can also
be measured by considering the profit margins that HS enjoys and comparing these to other companies
that make similar products but without such a strong brand.

June 2013
Question # 1
Characteristics differentiating service from manufacturing business
• Simultaneous – creation and consumption at same time.

• Heterogeneous (variable) – hard to standardize.
• Intangible -no physical product.
• Perishable – cannot be stored.
Current strategic performance information
• The current information used by the board is purely financial in nature and as a result, it omits to
measure many of the elements mentioned in the mission.
• There is no attempt to measure the goal of being the number 1 hotel chain. An obvious way to measure
this would be market share but there is no external data given in the report.
• Year on year growth figures are given but no inflation figure is given which might explain growth as a
non-management achievement.
• There is limited information on fixed and variable costs in the report which is relevant here, as hotels
naturally have a high operational gearing since many costs are fixed and so profit is sensitive to small
changes in revenue.
Balanced scorecard proposal
• Generally, the BSC will aid in communicating, implementing and controlling the strategy of the company.
It aims to help achieve coherence between stated goals and the measures used.
• The financial perspective is covered by the measures of strategic financial performance (share price and
ROCE). This fits with the objective of maximizing shareholders value.
• The customer perspective is addressed by the customer survey scores. This addresses the objective of
delighting customers. To measure the objective of brand loyalty growth in customer account revenues
must be used.
• The internal process perspective is addressed through the hotel budget variance analysis. This analysis
will need to be broken down into detailed areas for each hotel.
• The learning and growth perspective is not assigned any metric. A possible metric would be percentage
of revenue generated from new hotel types or hotel services.
Difficulties of implementing and using the BSC
• The first difficulty is in selecting the metrics for use in the scorecard. It is important that the BSC does not
become a long list of metrics that obscure the truth with information overload.
• The second difficulty is that some of the perspectives and their metrics will naturally conflict with each
other. These conflicts may be required to be resolved at board level by looking at what will achieve the
overall mission of the company.
• The final difficulty is the need for senior management to be committed to use of the BSC.

Hotel manager targets
Challenging targets
• The targets must be challenging enough to push employees, in order to motivate them to maximum
effort, without being perceived to be so improbable to achieve that they demotivate the employees.
Standards
• Standards are the measures of employee performance.
Rewards
• Rewards must be: 1. Clear, that is, understood by the managers. 2. Motivating, that is, of value to the
employee and 3. Controllable, that is, related to their area of responsibility.
Question # 2
ABC costing
• The advantage of the ABC analysis is that it shows the activities that are driving the higher costs.
How the information on each activity can be used and improved upon at Navier in assisting cost reduction and
quality management in the customer care department
• The analysis shows that pre-sale costs account for around 40%. The pre-sale work is essential and
department converts 46% of enquiries into orders. It would be beneficial to try to benchmark this ratio to
competitor performance although obtaining comparable data will be difficult.
• Complaint handling activity is a non-value adding activity and efforts must be made to minimize them.
Question # 3
Porter’s five forces analysis (1. Threat of new entrants 2. Threat of substitutes 3. Power of suppliers 4. Power
of customers 5. Power of existing competition)
Threat of new entrants
• Barriers to entry are high due to long timescale and high level of expertise required to develop the
product. Performance measure – percentage of revenue derived from patented products to measure the
legally protected revenues of the business and so indicate the barrier to entry.
Threat of substitutes
• Improved diesel/petrol engines would potentially have many lower barriers to cross as the technology is
known to the car industry and the infrastructure exists to deliver the fuel to the end-users of the cars.
Power of suppliers
• Suppliers have considerable power. There are rare raw materials used in the production and the price
and availability of these will dictate possible output levels.

• The power of suppliers could be measured by estimating the cost of shifting to an alternative supplier,
cost of suppliers’ product compared to total cost of the fuel cell and the number of suppliers.
Power of customers
• The customers will have a large degree of influence given their size.
• The power of customers can be measured by estimating their switching costs which are likely to be high.
Other measures could be the number of alternative customers and the level of discounts customers
demand.
Power of existing competition
• The power of existing competition appears low as the company has two-year lead in development.
• It will be important to protect this legally by patenting innovations as soon as possible and, also, ensuring
the strictest commercial confidentiality is maintained within the company and their commercial partners.
Question # 4
Current transfer pricing policy
• A good transfer pricing system will ensure goal congruence and fair performance measurement between
the divisions and maintain a suitable level of managerial autonomy within each division.
• Electrical components: The use of a market price basis for electronic components makes sense, as these
are generic products for which there is a ready external market. Therefore, the performance of the
component division in their production can be readily compared to this market and the assembly division
will accept such a price. However, the assembly division could reasonably argue that the market price is
too high, since an internal transfer of components does not require a number of costs (transport,
marketing and bad debts). These should be deducted from the market price to get an adjusted market
price.
• Housing Components: The housing components are currently priced using actual production costs. This
makes sense, as these components are uniquely produced for the assembly division and there is no
external market. It could be argued that unique work in housing components should be rewarded with
greater divisional profit.
Impact of changes in proposed divisional structure
• Housing division: The housing division is now a cost center and so it will be easier for it to focus on cost
control. However, there may be an adverse effect on the motivation of divisional managers through
losing profit center status and this must be countered by altering their reward packages to focus them on
costs.
• Electrical division: The electrical division’s treatment as a profit center makes sense, as it can be
compared to similar companies for benchmarking purposes.
• Assembly division: The assembly division is unaffected by the changes, although the greater clarity of
results in the electrical division will allow the managers of the division to ensure that the electrical
division remains competitive.
• Landual Lamps: No change on current profits but the changes will hopefully improve company’s profits in
the near future.

December 2013
Question # 1
PEST ANALYSIS
• PEST – Political, Economic, Socio-cultural and technological

• The political environment is characterized by government actions which here included the giving of
grants to a competitor to set up manufacturing operations.
• The economic environment is characterized by growth as the populace of the country becomes
wealthier.
• The socio-cultural factors include demographic trends and changed is customers’ taste.
• Technology can impact on Lopten in two ways. First, the development of new features for the products
themselves will require continued product development. Second, new technology in manufacturing could
improve further the contribution per unit as costs are cut from the manufacturing process by, for
example, increased automation in production.
Linking the KPIs and CSFs
• The first CSF is to obtain a dominant market presence. This will be measured by market share and it can
be seen that Posh has obtained about a third of the market and so can be said to be a major presence. In
order to judge whether this is dominant, Company will need to have its competitors market share.
• The second CSF is the maximization of profit within the risk appetite of the business. The absolute level of
profit is given as a KPI and so a trend analysis of this will indicate optimization.
• The third CSF looks at maintenance of brand through product quality. The most direct measure of brand
can be gained through the consumer awards as they show the impression being made on the customers
by the products.
Planning and control
• Planning is carried out at Lopten where there is a top-down structure to the mission, objectives and CSFs
leading to the KPIs. The KPI which will be reflected in this activity are those which are forward looking.
• The control activity measures actual results against plan and then takes necessary action to correct
activities back to plan. In order to be used in this way, the KPIs calculated above will need their
benchmark comparators to be given.
Question # 2
The current performance measurement system using the performance pyramid of lynch and cross

• The performance pyramid of lynch and cross is based on the belief that each level of an organization has
different concerns but they must support each other in order to achieve the overall objectives of the
organization.
• At Graviton, the company objective is to maximize shareholder wealth by being flexible in response to
market demand and controlling the production chain closely.
• Return on capital employed is reported but this is not directly measuring shareholder wealth and it is
surprising that there is no mention of measures such as total shareholder return which will cover
dividends and share price growth.
• Level 2 of the pyramid is the driving of the vision by satisfying the market and performing well financially,
the financial measures are lacking a focus on costs which would highlight the higher costs of designers.
• Market satisfaction is driven by customer satisfaction and flexibility. Graviton measures flexibility through
time to market and delivery and these are obviously given a high priority in order to meet this objective
in the corporate vision.
Assess whether the three problems listed by the board apply to Graviton and suggest appropriate performance
management solutions to them
• Myopia is prioritizing short-term issues over long-term ones and is evident here in factory site 2. Using
ROCE as a performance measures has led to no investment in new machinery. The use of long term
measures rather than those over just one accounting period might help to capture the effect of such
behavior.
• Gaming is dysfunctional behavior (from the organization’s perspective) where an individual manager is
trying to meet their individual targets while ignoring the good of the whole organization. This behavior
can be dealt with by emphasizing a culture of honesty in the organization and by ensuring that the
manager is rewarded for average gains over a long period rather than block payments for hitting simple
profit-triggers in a single period.
• Ossification is the unwillingness to change from an existing performance system. The CEO will need to
persuade them that there are issues in the omissions from the current set of performance measures
which will lead to long term difficulties in achieving their overall goal of enhancing shareholder wealth.

Question # 3
Impact of radio-frequency identification devices system on the performance management at Quark
• The costs of hardware and software to set up the system and then ongoing operation of the system in
terms of maintenance, consumables and employee time are often considerable.
• However, these costs can be offset against the efficiency savings of lost employee time in searching for
tagged items and quality improvements in patient care which will result from that quicker access.
• The significant difference from the old system will be the real-time nature of the information and also its
accuracy as it is collected and updated automatically.
• Improved control will result from the knowledge of location of high-value drugs.
Evaluate whether the overall management of the hospital can be considered to be leaner as a result of the
RFID information system
• Lean systems overall goal is to get the right things to the right place at the right time, the first time.
Additional aims were to minimize waste and be open to change. These objectives match closely with the
RFID system at Quark.
• The five S’s concept is often associated with the lean principles and has the aim of creating a workplace
which is in order.
• The five S’s are: 1. Structurise – Introduce order where possible. 2. Systemise – arrange and identify items
for ease of use 3. Sanitise – Be tidy. 4. Standardise – Be consistent in the approach taken. 5. Self –
discipline – Maintain through motivation. The system should report be exception to management on a
daily basis about any items misplaced so corrective actions can be taken.
Evaluate how the medical staff’s attitudes will influence the design and implementation of the RFID system
and how it might be used to promote responsibility and accountability at the hospital
• As medical staff are high status individuals, it will be necessary to persuade them to accept the new
system rather than impose the change.
• The new system will be screen based but the use of information technology should not be shocking in
Quark as it has the reputation of being advanced in this area. The reports will need to be carefully
designed with input from the medical staff in order that they find the system easy to learn and use, as
this is often a major barrier to the uptake of a new system.
• It may be possible to make specific staff responsible for the storage of drugs and equipment. Regular
checks on the position of assets will act as a control test of this staff activity. It may be necessary to break
the hospital into departments or wards in order to identify the relevant responsible individuals.
Question # 4
Evaluating the method of calculating and measuring the force scores for use in the league table in achieving
the department of the interior’s aim and goals
• Force score should reflect the aims and objectives of the department
• The overall aim has two basic parts 1. Value for money 2. Community safety.
• The score does use variables associated with community safety but does not measure value for money.

• Value for money would be reflected by measures which take account of economy, efficiency and
effectiveness.
• Example measures for value for money: number of police per 10,000 population and cost per population
member.
• The choice of weightings used in the FS formula must be considered. The formula recognizes only four
variables and weights them equally.
• There is also a danger of over-complicating the formula with more variables and complex methods of
allocating weights and thus losing one of its main advantages, which is its simplicity.
The merits of league tables in performance management and address the CEO’s concern over their use in
performance management
• The use of league tables effectively benchmarks performance and can have a positive effect on behavior.
• League tables gives a single figure which gives clear, immediate answer to questions of performance.
• However, the use of league tables only measures relative performance. The best force in the table could
still be producing unacceptable performance in absolute terms.
• On introduction, if the parties whose performance is being evaluated in the league table do not feel that
they can affect the score, then they will not be held accountable by it.
• It can lead to over-focusing by employees on the variables in the FS to the exclusion of other relevant
issues, i.e. only doing things that get measured.

June 2014
Question # 1
Report to the CEO
TO
FROM
DATE
SUBJECT
Current performance report
 The report does not directly measure shareholders value which could be done through considering net
present value or economic value added or share price or dividend.
 The current report uses period profits as its main measure of performance, this can suffer from being
short term unlike the shareholder value measures mentioned.
 The report does compare budget and actual performance which gives an indication of whether plans are
being followed and is helpful in controlling the organization.
 No historic information given which would allow trends to be calculated.
 The main board would probably find it easier if less detailed figures were given and a clear statement of
the key measures of subsidiary performance provided.
 The subsidiary managers would probably benefit from the inclusion of a breakdown of profit by
geographical region as well.
 In terms of presentation the data is clear and in a form which would be easily recognizable to those used
to reading accounts.
 The report could be made easier by rounding all figures to thousands and thus removing unnecessary
details.
Cost structures
 Fixed costs represent a risk to Cantor since if there is a fall in the general economy, these must still be
covered by revenues. A break-even analysis would be helpful, The difficulty with such analysis is that
some costs are partly fixed and partly variable.
 Variable costs are more desirable as they do not threaten the survival of the business but they are often
higher than a fixed cost deal.
Economic Value Added
 Economic Value Added = NOPAT – WACC X CAPITAL EMPLOYED

 For NOPAT = OPERATING PROFIT + AMOUNT CAPITALISED WHICH WAS EXPENSED OUT – TAX PAYMENTS
– LOST TAX RELIEF ON INTEREST.
Value Based Management
 VBM begins from the view that the value of a company is measured by its discounted future cash flows.
 The implementation will broadly involve four steps: 1. A strategy is developed to maximize value 2. Key
value drivers must be identified and then performance targets are defined for those value drivers. 3. A
plan is developed to achieve the targets. 4. Performance metrics and reward systems measurement and
incentive systems are created compatible with these targets.
1|P ag e AR TT BUSIN ESS SCH OOL SIR TAHA POPATIA

 The impact for Cantor would be the introduction of new performance measures based on the drivers and
a reward system to motivate staff. In order to align the interests of employees and management with
shareholders value, a feature of the new reward system is often a share based payment scheme.
Measurement of treatment of employees
 The measurement of treatment of employees is difficult due to its subjective nature. The organization
will constantly be in negotiation with the employees as the have conflicting aims, for example, over pay
rates and workloads.
 Average employee number, Employee turnover rates, Average pay per employee.
Question # 2
Business Process Re-engineering
 BPR is described as the fundamental rethinking and radical redesign of business processes to achieve
dramatic improvements in critical measures of performance such as cost, quality, service and speed.
 Employees will need to retrain to gain additional skills. The organizational hierarchy will flatten with the
employees being given more responsibility to make decisions. This is often aided by the introduction of a
unified corporate database accessed through an ERP system.
Appraisal process
 Appraisal is the process of collecting and reviewing data on an employee’s work which will provide an
assessment of their capabilities and potential in order to improve performance, for example, by training.
 It also presents an opportunity to deal with other HR issues, such as discipline, career management,
motivation and determining rewards.
Question # 3
Risk appetite and method of decision making
 Risk seeking – high risk investments, failure of some investments provided others generate high returns.
Maximax approach to decision-making under uncertainty will be appropriate. Maximax approach – select
design which maximizes the highest profit for each design among the tree demand scenarios.
 Risk averse – focusing on the survival of the business. Maximin approach to decision-making under
uncertainty will be appropriate. In the maximin approach, the design selected will be the one which
maximizes the lowest profit for each design among the three demand scenarios.
Problems encountered in managing performance in a joint venture
 The primary difficulty is establishing the objectives of the joint venture. The different JV partners may
have different goals.
 Performance metrics are likely to include a variety of financial indicators, such as profit, growth and cash
flows. However, there may be different emphasis put on these metrics by each JV partner.
 Another potential issue in joint ventures is that the partners must also share information and intellectual
property. It is likely that the venture partners will be reluctant to share too much information about their
own businesses with their JV partner.

 It will be important for the success of JV that a climate of trust exists which will depend on issues such as
management style and culture.
Question # 4
Planning and Operational elements of variances
 Planning variances are those that arise due to inaccurate forecasts and standards in the original budget
setting.
 Operational variances are then the remainder due to the decisions of operational managers.
 Planning variance is the difference between the original standard and a revised one set with the benefit
of hindsight.
 Operational variance is the difference between this revised standard and actual performance.
Purpose and benefits of budgeting
 Budgeting is a key control tool for management and of importance in controlling costs in businesses
seeking to be a cost leader.
 Budgets help to communicate and coordinate all the management activities within the company towards
a single plan.
 Budget helps to attribute responsibility for performance.
 Participatory nature of the budget process will help to motivate managers to achieve budget figures
which they themselves have helped to set.
 Budget-setting should not be complex in order to avoid the activity to be time consuming.
Beyond budgeting method
 Going beyond budgeting involves replacing the annual system of a centrally created budget with a more
flexible system of targets.
 Performance measurement changes from monitoring variances from the budget towards measuring
achievement of strategic goals, adding value and performance against suitable benchmarks.
 The targets are intended to guide rather than constrain the line managers, thus improving their
motivation.
 The approach is appropriate in industries where there are rapid changes in the business environment.
 Disadvantages of going beyond budget: 1. More time consuming 2. Lower level managers would now
need to prepare their own forecasts 3. The management style may not be appropriate for the particular
organization since going beyond budgeting requires to allow power to be devolved to lower level
management.
December 2014
Question # 1
Performance prism
 The performance prism has five facets which attempt to unify various methods of performance
management into a coherent whole.

 The facets are stakeholder satisfaction which then depends upon the other four facets of stakeholder
contribution, strategies, processes and capabilities.
 The benchmarking exercise will help in setting strategies with which the business aims to achieve
stakeholder satisfaction.
Stakeholder analysis
 Shareholders have considerable power but do not wish active involvement in decision making therefore
they must be kept satisfied by ensuring their financial targets are met.
 Employees have little power generally and so need to be kept informed. However, there is a sub group of
key employees with skills who the company must retain.
 Customers are key players and they should be managed closely by having staff dedicated to liaising with
them this type of close cooperation is likely to be necessary in high technology industries.
 Suppliers have little power and Boltzman should be in a position of strength in negotiation over the price
and quality of their goods.
Evaluation of suggested performance indicators
 Performance measures should be focused on the influential stakeholders identified above.

 Shareholders – Return on capital employed, economic value added, revenue growth and net profit
margin.
 Customer – indicators covering the price/quality mix of products.
 Employee – Average pay as a percentage of an industry benchmark.
Benchmarking
 The benchmarking exercise is an external one where comparison is drawn with a major competitor. This
is valuable in identifying area of the competitor’s advantage and also areas for improvement with a
similar business.
 Limitation of benchmarking is that it will only indicate strategic improvements not operational ones, as
such detailed information is unlikely to be in the public domain.
 Economic Value Added = NOPAT – WACC x cost of capital.
 NOPAT = Operating profit – tax paid – tax benefit on interest.
JIT initiative
 Demand forecasts must be accurate in order to time manufacture as required. This requires close links to
our customers.
 Delivery of raw material from supplier should be on time and of good quality. A detailed review of supply
chain is required in order to identify those suppliers who can meet our needs.
 Lesser suppliers in just in time will increase bargaining power of suppliers.
 The basic layout of the factory must be redesigned and the workforce need to be flexible on working
patterns and multi skilled to avoid bottlenecks.

Question # 2
Non-financial indicators are useful for public sector organizations
 Public sector organizations are not expected to make profit.

 Public sector organizations have multiple objectives unlike in a profit-making organization and this
requires an approach which takes account of all the perspectives.
Value for money
 The standard criteria for analysis of the value for money of a service are: 1. Economy – The optimization
of the resources which the organization has, ensuring the appropriate quality of input resources are
obtained at the lowest cost. 2. Efficiency – The optimization of the process by which inputs are turned
into outputs. 3. Effectiveness – how the outputs of the organization meet its goals.
 Economy could be measured by looking at the cost of buying equipment and average pay per employee.
 Efficiency could be measured by the number of tonnes of waste moved per staff member or the staff cost
per tonne collected.
 Effectiveness could be measured against departmental goals: 1. Public health concerns 2. Clean and
attractive streets 3. Increased recycling.
Difficulties of measuring qualitative factors of performance
 The major problem in interpreting qualitative data is that it is subjective since it is based on people’s
opinion.
 The recording and processing of qualitative data can be difficult. Opinions are expressed in language and
it can be difficult to tell if a complaint which describes service as awful is more or less serious than one
which describes service as unacceptable.
 The most common way to try to overcome this problem is to turn data into quantitative data. Scoring
systems are used to collect data. However, the problem remains that such scoring systems are still
subjective.
Question # 3
Lifecycle costing issues
 Lifecycle costing records the costs of product from cradle to grave, taking into account the environmental
consequences across the whole life of the product. In order to appraise the project correctly, cost
recording systems must capture all costs.
 This must include costs incurred prior to production and after production ceases.
Input / Output analysis and its impact on information systems
 Input / Output analysis records material inflows and outflows rather than financial inflows and outflows.
 It operates on the basis that what comes in must go out, or be stored. It ensures that the business will
consider how it uses its resources and focuses it on environmental cost.
 The difficulty with adopting this technique is putting monetary values on the outputs. (Carbon tax to
value co2 emissions)

 The impact on information systems is the need to collect non-financial data about volumes of emissions
which will require measuring equipment to be fitted to the power stations and then data collected.
Question # 4
Z-score
 A quantitative model such as those presented here identifies financial ratios which significantly differ in
value between surviving and failing companies.
 Statistical analysis is then used to choose the weightings for these ratios in a formula for a score which
can be used to identify companies which exhibit the features of previously failing companies.
 The Altman Z-score was originally developed in 1960s, the world economy has significantly changes since
then.
 The mining sector is not like general manufacturing, for example, it is highly capital intensive with long
periods of no revenue generation.
Potential effects of a mines lifecycle on Z-score
 The lifecycle issues relate to the long lifecycle for development and use of a mine and the uneven cash
flows over the lifecycle.
 Initial years – large capital investment and no revenue. Then a 20-year revenue generating phase. Last
year of decommissioning cost with no revenue.
Recommendations to reduce the probability of failure of a company
 Alter the proportion of revenues generated from long term contracts rather than the more volatile spot
market.
 Learn from the mistakes of competitors by avoiding overpriced acquisitions or other large project failures
by performing suitable due diligence and risk analysis in advance of the investment.
 Use hedging techniques to reduce volatile revenues due to foreign exchange rate changes.

June 2015
Question # 1
Implications of using value chain for performance management
 Value chain is a model of business integration showing the way that business activities are organized.
 Key idea is that it is activities that create value and incur costs.
 Activities are split into two – 1. Primary: Ones which the customer interacts directly 2. Secondary:
necessary to support the primary.
 Value is built by linking activities and hence there must be a flow of information between different
activities, in performance management terms this will affect 1. Information systems which will have to
ensure good communication across functional boundaries and 2. Job descriptions and reporting
hierarchies as these will have to reflect activities.
 Although the chain shows procurement and technology development as secondary activities, they will be
vital for MS, since it does not currently manufacture their own goods, control of the price and quality
balance of supplier relationships will be important.
Question # 2
Enterprise Resource Planning System
 Enterprise Resource Planning Systems are software systems designed to support and automate the
business processes of large enterprises.
 ERPS help in identifying and planning the use of resources across the organization in all activities.
 It will aid the flow of information between all functions both within the company and also with key
stakeholders.
 ERPS handle many aspects of operations including manufacturing, inventory, distribution, invoicing and
accounting. They also cover support functions such as human resource management and marketing.
 ERPS can also contain SCM – supply chain management and CRM – customer relationship management.
Critical areas in the alliance agreement
 High manufacturing quality – faults will either lead to delayed delivery if spotted in internal inspection or
else lead to customer dissatisfaction and rework costs to repair faulty items.
 The time of delivery will dictate the volume of screen inventory which the company has to hold and so
impact on any attempt to run a just in time system of manufacturing.
 The size of the penalties would need to be commensurate with damage to the reputation of the product
from BAS’ failure.
Financial and non-financial data
 Financial data – heavily checked and policed as part of the annual audit regime, is quantitative and so
objective.
 Non-financial data – qualitative and will often be required to be transformed into quantitative data by
applying 1-5 scale. It has the problem of being judgmental and subjective.

Internal and External sources
 Company will have greater control over the accuracy of internal data within its own ERPS than the
external data such as might be supplied by suppliers for their deliveries.
 External sources of data such as for the SLA will obviously be highly contentious it there is the possibility
of penalty payments resulting from breaches of the agreement.
Question # 3
Customer perspective’s impact on the metrics in the financial perspective
 The success factors in the customer perspective will drive improved customer satisfaction. This should
improve the customer satisfaction of our service and so drive revenue growth. The increase in revenue
could come from two routes: 1. Winning customers from the competition and increased selling prices as
we may be perceived to offer premium service.
 These will improve customers profit margin and other metrics in financial perspectives.
 Metrics in customer perspective: Percentage of customer requests which Victoria can undertake, time
taken per kilometer which a package travels, Percentage of packages delivered within the time window
and percentage of undamaged packages delivered.
Problems with measurement using customer complaints
 Under reporting where the customer does not bother to report a problem.
 Reporting of unjustified complaints to obtain compensation payments/credits.
Reward management issues
 The senior management rewards system appears open to manipulation as the board is effectively setting
their own rewards. There is the danger that targets are set to be easily achieved.
 The operational managers should have their measures of performance set through a cascade down from
the strategic measures in the BSC. These measures will often come from the customer and process
perspectives.
Question # 4
EVA
 The main benefit to EVA is its link to the overall corporate objective of adding shareholders value. It is an
appropriate measure to use if the company is applying value-based management.
 Advantages of EVA: 1. Gives an absolute measure 2. Simple test, If EVA is positive then the company is
generating a return above that required by the providers of finance. 3. The adjustments within the EVA
calculation mean that the measure is closer to cash flows than accounting profits and so is less subject to
choices in accounting policies. 4. EVA encourages investment for the future by removing such costs from
the performance period and treating them like capital expenditure.
 The specific criticism for EVA that it is complicated is reasonable as the full version requires more than
100 adjustments to the information in the normal financial statements.

 EVA uses WACC for the company as a whole and may not reflect the risks of the division. RI uses a
notional cost of capital based on the risk of the division, which will be subject to an element of
judgement and estimate.
Recommendations for each divisions control and management style
 Baby divisions – star – should be treated as investment division with autonomy to continue to develop its
business successfully. Non-accounting style may be appropriate.
 Chocolate division – cash cow – profit center since its sector is mature and there are unlikely to be plans
to make new investment. The management style should be budget-constrained with special emphasis
placed on the ability of the division to generate cash not just profit.
December 2015
Question # 1
Economic Value Added
 Non-cash expenses are correctly added back to profit as such costs are treated as unacceptable
accounting adjustments on cash-based view.
 Marketing activities for long term benefit are correctly added back as they generate future value for the
business and so the prior year expenditure is also added in to capital employed.
 Operating leases should be added back to profit and capital employed and a suitable additional
depreciation charged as these are now treated as assets of the business.
 The capital employed should be based on the year start figure.
Key performance indicators for the critical success factors
Greater staff productivity (CSF)
 The current measure of units produced per labor hour does not reflect the skill and effort which goes into
producing different units. Revenue per employee would better reflect the different skill levels involved in
production. (Actual staff hours as a percentage of standard hours)
Reduction of wastage in production (CSF)
 The weakness of the existing measure is that it only looks at one cost area of production – power
consumption. Stock obsolescence will measure the wastage due to technological change which is present
in the complex products produced by IC. (Input/output analysis of material)
Greater innovation of products (CSF)
 The number of patents filed will reflect greater innovation at IC. Patents will legally protect groups of
products. This will represent a stronger measure of innovation than new products launched since the
patent gives legal exclusivity. (Percentage of income generated from products which did not exist last
year)

Lean manufacturing projects
Just in time manufacturing
 JIT seeks to produce on a pull-basis to meet the customers’ demands rather than to produce products for
inventory, which then acts as a buffer between production levels and demand.
 The main impact of JIT is reduction in inventory
 The main enablers for such a system are a need for close links to customers and suppliers in order to
predict demand and to quickly supply that demand.
 It also pushes some of the responsibility for improved quality of components (and reduced wastage) on
to suppliers.
Kaizen costing
 Kaizen costing aims to reduce current cost of production through continuous improvement.
 Each period, goals for lower costs are set and then performance monitored against these using variances.
 At the end of the period a new lower cost goal is set for the next period.
 This project has the explicit aim of reducing waste and improving productivity and so is directly linked to
the critical success factors such as greater productivity and reduction of wastage in production.
Costs of quality and a zero defects approach of manufacturing
 Costs of quality can be broken down into four parts – 1. Prevention costs – which occur before or during
production and aim to prevent the production of defective products. 2. Appraisal costs – which occur
after production and aim to check that products meet quality standards. 3. Internal failure costs – which
occur when products are identified as defective before delivery to the customer and so are scrapped or
reworked. 4. External failure costs – which occur when defective products are delivered to the customer.
 The zero defectives approach is also known as total quality management. The TQM philosophy is that it is
better to spend money on prevention, which involves challenging all aspects of the production process in
order to improve and so avoid failure costs.
New information system
 The move to a single database for the organization will integrate the subsystems from different
functions.
 It will improve the visibility of each function’s operations to the others.
 The unified database will be critical in achieving the goal of JIT manufacturing as close links between
production scheduling and demand forecasts will be required in order to match production runs with
demand forecasts/orders.
 In using kaizen costing, cross-functional communication will be important. The design team will need to
communicate with the production team so that the design is more easily streamlined for production.
 The introduction of TQM will require clearer reporting of quality costs to assist in the on-going motivation
of staff, which is often a problem in TQM. Informing the quality teams of the impact that increased
prevention costs are having on lowering failure costs will be important in maintaining the push to zero
defects.

 The nature of the data used in the current system is quantitative but with the new projects, there will be
a need to communicate qualitative information, for example, relating to the nature of the defects or the
new productions processes put in place.
Question # 2
Weaknesses in the current budget process
 Company currently uses traditional approach to budgeting, which has a number of weaknesses.
 Budgeting system does not seem to be aligned with the company’s corporate objective which focuses on
innovation and continuous product improvement.
 Budgeting process at the company is currently time consuming and probably therefore costly.
 Budgets are only prepared annually which is clearly too infrequent for a company like this operating in
technology industry.
 It also appears that the company fails to flex the budgets and consequently the fixed budgets had
discouraged divisional managers from deviating from the original plan.
 The current system is not encouraging goal congruence between divisions and the company as a whole
and a budgeting system, if done effectively, should encourage co-ordination and co-operation.
 Managers may find the budgeting process demotivating because it is time-consuming and then the
directors override the forecasts which they had made.
Beyond budgeting
 Beyond budgeting moves away from traditional budgeting processes and is suitable for businesses
operating in a rapidly changing external environment and has the following features: 1. Performance is
assessed by reference to external benchmarks, utilizing rolling forecasts and more non – financial
information. 2. More freedom is given to managers to make decisions which are consistent with the
organizations goals. 3. Resources are made available on demand, for example, to enable a division to
take advantage of an opportunity in the market, rather than being constrained by budget. 4. Effective
information systems are required to provide fast and easily accessible information across the whole
organization to allow robust planning and control at all levels.
Question # 3
DMAIC METHODOLOGY TO IMPLEMENT SIX SIGMA PROJECT
 The DMAIC process is a technique used to implement six sigma to improve existing processes and is split
into five phases as described below
 DEFINE THE PROCESS - Six SIGMA focuses clearly on the requirements of the customer and it is
important to be clear exactly what customers’ requirements are and in this case specifically why products
are returned. The objective of the project needs to be clear, in this case to reduce the number of
customer returns.
 MEASURE THE EXISTING PROCESS – The current return figures do give some data to as to why products
are returned, but its usefulness is limited as it is unclear which of the categories relates to defective
manufacture, and which relates to activities of other divisions. The ambiguity of the data and category
definitions will need addressing to enable the process to be measured effectively. The existing data are
insufficient to reliably measure existing performance and take no account of inputs such as raw material.

 ANALYSE THE PROCESS – This stage is where the root causes of the problems are identified. Additional
information may be needed, for example, to analyze customer returns by type of product, by country of
sale etc.
 IMPROVE THE PROCESS – At this stage the proposals for improving the process are implemented and
availability of resources and likely costs of making the improvements need to be carefully considered.
 CONTROL – This is the ongoing monitoring that the reduction in customer returns due to defective
manufacturing is being maintained. The ongoing monitoring may indicate that some of the earlier stages
in the DMAIC process need to be revisited.
Impact on information requirements arising from:
i) The need to identify and improve on the level of customer returns
 Performance data relating to the reasons for customer returns need to be clearly segregated between
responsibility centers.
 Company needs to ensure it produces performance data to an appropriate level of detail so as not to
overload the users with too much data.
 Performance data should be provided at an appropriate frequency. For the company’s main board,
monthly reporting may be sufficient to alert them to any problems. Responsibility centers will need much
more frequent, even daily or weekly details of the level of customer returns so that the can react quickly
to any problems identified.
ii) The proposed re-designation of the overseas subsidiaries from profit centers to revenue centers
 At the moment, the overseas subsidiaries are being designated as profit centers and managers will be
held accountable for both revenues and costs. As they do not manufacture, it seems reasonable to
designate them as revenue center.
 The performance data produced by subsidiaries IT systems will therefore switch to focus more on
revenues rather than costs. As revenue centers, they may have some freedom to change selling prices.
Company will need to ensure that subsidiaries have information to monitor the impact of different
pricing strategies.
 It is important that company ensures that subsidiary management still has sight of the information about
overheads being incurred in their own subsidiary to ensure that such costs are still controlled efficiently.
Question # 4
Use of balanced scorecard to improve the performance management system
 The balanced scorecard consists of four perspectives: Customer, Internal, innovation and learning and
financial.
 It requires an organization to have a number of goals supported by performance measures in each
perspective.
 The customer perspective measures what it is that customers value from the business.
 Internal looks at what processes does the organization need to be successful.
 Innovation and learning considers how future value can be created.
 Financial measures whether performance is acceptable to investors.

 Useful because it uses both internal and external information to assess performance and measures
financial and non-financial aspects of a business to ensure long-term future success.
 Return on capital employed as a key financial performance measure does not correlate directly with the
objective to maximize shareholder wealth and could encourage short-term decisions to be taken at the
expense of long-term success. Here, the trains are becoming unreliable and their condition is
deteriorating and in the long term this will reduce customer satisfaction and financial performance.
 Within the customer perspective soup could use a range of performance measures, this will be beneficial
as where passengers are able, they are likely to choose to use Soup if they provide a good service.
 Measures of the internal processes are likely to be closely linked to customer satisfaction. The scorecard
could be used to help address reliability, overcrowding and environmental factors. Reliability will be
highly valued by customers especially those who travel frequently and who rely on rail travel to get to
work. The number of trains arriving late would be a suitable measure of reliability, as would the number
of train services cancelled.
 The creation of long term future value can be addressed by the innovation and learning perspective. Time
spent training staff may improve customer satisfaction and reduce maintenance time.
 The scorecard will encourage Soup to be forward looking, unlike the present system which is limited to
historic performance.
Problems soup may encounter in selecting and interpreting performance measures when applying the
balanced scorecard to its performance management system
 When applying balanced scorecard, the measures need to be chosen carefully. Currently soup focuses on
short term financial measures such as return on capital employed, whereas the balanced scorecard
considers more long-term measures.
 Measures chosen may conflict. Overcrowding may be unwelcomed by passengers but making them less
crowded conflicts with Soup’s presumed objective of fully occupied trains.
 Time spent maintaining trains to reduce their impact on the environment or ensure reliability will mean
they are not operational for periods of time, though safety will be a key factor here.
 Care must be taken to avoid overloading with too many performance measures. The current objective is
to maximize shareholder wealth is very broad. Having a clearer strategy would enable soup to determine
suitable performance measures so it is not overloaded with KPIs which do not contribute towards
achieving this strategy.

June 2016
Question # 1
Performance reporting at Flack
• Customer loyalty could be gauged through repeat purchases or market share information but neither is
supplied.
• The criticism of the company’s management as being short term is reflected in the performance
reporting. The report only contains for comparison budget information and the previous years’ figures.
There are no longer term forecasts or information on future capital investment.
• Presentation of report can be improved by rounding all figures to millions.
Divisional performance measure
• The current measure of divisional operating profit reflects the trading in the period under consideration.
• The proposal to change the divisional performance measure addresses the issue of not reflecting the
capital used since residual income (RI) deducts an imputed interest charge. Divisions can then be set
targets in terms of RI.
• The difficulties in calculating RI lie in correctly setting the imputed interest rate and calculating the capital
being employed by the division.
• An advantage of RI is that the imputed interest rate can be changed to reflect the different risks of the
divisions.
• Using RI can discourage investment. As net book value of assets falls over time, RI automatically increases
and ‘do not invest’ could become an attractive option to the managers.
Loyalty card system
• New information system will collect data from customers’ purchases and store it for data mining
purposes in a data warehouse.
• By focusing offers on those things which customers enjoy a company can enhance the brand and also
take the opportunity to sell greater volumes alongside the offered products.
• The data warehouse will allow data mining for relationships, for example, geographical preferences for
products, links between price offers and volumes sold.
Question # 2
Business Process Reengineering (BPR)
• BPR involves radical and fundamental changes in the way processes in organizations are designed. BPR
aims to improve key performance measures such as reducing costs, improving quality, service delivery
and customer satisfaction.
• Reorganizing into teams: A change to team working will mean that workers will be able to perform the
roles of other members in the team and ensure that there were no bottlenecks in the production. It will
result in improved efficiency and flexibility in production.
• Production teams are responsible for quality: Reorganizing the production into teams of machinists,
sometimes known as production cells would make machinists responsible for decisions about quality of a

particular product type. This should lead to improvements in quality and therefore meeting the needs of
the customers.
• Tracking with radio frequency identification tags: This should save salary costs and improve lines of
communication in the business. The use of RFID tags would capture the information required to manage
the production process at source, and there would be no distinction between gathering of information
and processing it.
• Practical and cultural aspects of the proposal: New performance measures and reward systems will need
to be developed. The proposed changes may meet resistance from existing staff who may perceive it as a
threat and a one-off cost cutting measure rather than a fundamental long-term change in the business.
Reward system: current and proposed
• Current – Basic wage and amount depending upon number of units produced. This will mean quick
production but low quality.
• Proposed – A team based performance bonus would be appropriate. In that way, the rest of the team
would ensure that any underperforming machinists would improve their performance. Rewards based on
factors such as quality, innovation, on time delivery and the ability to work as part of a team would be
appropriate and consistent with the machinists enlarged job role.
Question # 3
Implementation of ABC costing
• ABC is an alternative to absorption costing.

• In order to implement ABC, overheads need to be grouped into cost pools. Then cost drivers for each cost
pool must be identified. Cost drivers are the activities which bring about the costs.
• Once the cost pools and their associated cost drivers have been established, the cost per unit of cost
driver can be calculated for each individual activity. The overhead costs are then absorbed into each unit
based on how much of the activity the unit uses.
Appropriateness of ABC
• ABC is especially useful where there is a wide range of complex products and where production
overheads form a larger proportion of total production costs.
• ABC enables a more accurate cost of production to be calculated, which is very useful is setting product
prices.
• ABC enables managers to determine what activities drive the costs, and so focus on reducing those
activities to control costs.
Problems with ABC
• ABC is less useful in businesses where there is a small range of relatively simple products and where
production overheads only comprise a very small amount of total production costs.
• Calculation of ABC may be time consuming, complex and poorly understood by managers. As such, the
time and expense of doing so may not be justified.

Activity Based Management
• ABM is the use of ABC methods in order to improve organizational performance by meeting the needs of
customers using the lowest possible amount of resources or costs. ABM can be applied at the operational
level or to help develop strategy.
• Product pricing: By accurately determining the cost of each product using ABC, company would be able to
ensure that prices are set so as to achieve an acceptable margin and also remain competitive with the
prices currently charged in the rest of the market.
• Analysis of activities: By analyzing the activities which drive the costs, company could determine which
activities may not be required or could be done in a more efficient way. ABM may help identify activities
which are of no value to consumer but consume time and resources, such as transport of goods to and
from subcontractor. All non-value adding activities should be eliminated or reduced. By identifying the
activities which drive these costs managers can attempt to do this.
• Performance measurement: For ABM to be successful, it will require the commitment of senior
management and effective communication and training of employees at all levels in the organization as
the benefits and method of ABM. New performance measurement systems will need to be developed.
Employee rewards will need to be aligned to key performance measures, such as the reduction of non-
value adding processes like inspection. Additional information gathering systems, or adaptions to existing
information systems will be required which will incur additional cost and may disrupt existing activities.
Question # 4
Value for money
• The value for money can be assessed using the 3Es framework of economy, efficiency and effectiveness.
• Economy: This involves obtaining the inputs to the service at the lowest possible costs while still
maintaining the quality of inputs. In practice, this may be difficult to do, and a reduction in cost may lead
to a reduction in quality.
• Efficiency: Efficiency measures the amount of outputs relative to the amount of inputs.
• Effectiveness: Effectiveness measures whether the objectives of the organization are being met.
• Objective to improve the overall standard of education in Teeland: Number of students completing their
studies, or obtaining good results in unviresity exams may be appropriate measures.
Effect of league tables on the quality of universities
• League tables encourage competition between universities: the publishing of league tables of the
performance of the universities should stimulate competition for high ranking between them.
• League tables give choice to students and staff: Prospective students and staff will be able to make
choices about which university to study or work at according to their position in the league tables.
• Use of league table to ensure accountability of the universities: If the league tables are made publicly
available this should ensure the performance of the universities is transparent and that they will be held
accountable by the public for the quality of service and value for money which they provide.
• Sharing of resources may be discouraged: This may discourage knowledge or even resource sharing
between the universities if they see themselves in competition for the best students and limited research
funding.

• University leaders may focus on a narrow range of objectives: Management time and resources may be
diverted away from areas such as social, pastoral and sporting facilities to improving educational
standards and high-quality research in order to boost the position on the league table.
• Resources required to produce league table
• Regions may not be directly comparable: there may be inherent differences between universities which
make comparison using league tables misleading or of limited value.
December 2016
Question # 1
Problems with using balanced scorecard
• The balanced scorecard provides no aggregate or single summary measure of performance unlike the
value-based approach.
• The measures in the scorecard can conflict, for example, cost controls (financial perspective) can obstruct
the investment needed in order to speed up manufacturing processes (internal business perspective).
• It can be difficult to select measures. In particular, there is the danger of losing sight of key information in
a plethora of indicators.
• Management should acquire the expertise for understanding non-financial measures through training.
• New information systems may be required to collect and record data leading to extra cost.
Choice of current and proposed performance measures
Current
• The current measures are all historic, financial ones and so the BSC approach will bring a longer-term
view by using non-financial measures which consider those factors which might drive future growth.
• ROCE: is a widely used measure which it should be possible to benchmark against competitors.
• Average cost to develop a new drug: is a financial measure of the development divisions performance but
this does not measure its aim of innovation in development. Indeed, this measure may conflict with that
aim as cost control development may hinder innovative thinking.
Consultants’ proposed measures
• Customer perspective measures should focus on the strategies which will achieve success in the eyes of
the customers. Examples of this would be measuring the efficacy of the drugs which are developed by
Monza or the reputation of Monza’s medicines among the medical community.
• ROCE: does not seem to be directly linked to shareholder value as, for example, economic value added or
net present value would be. ROCE considers the performance over the whole capital base while the
shareholders will be more directly concerned with returns on their equity investment.
• Cost control in business processes is important but other measures of success such as time to market for
the development of new products and quality initiatives should also be considered.

Variations in calculating return on capital employed and a suitable approach for Monza
• The one area that could be argued is whether to include the one-off costs of restructuring in
performance. It would probably be best to disclose both figures to the company’s stakeholders and to
identify how any competitor would perform such a calculation for benchmarking.
• Market values of equity and debt would give a more accurate measure of performance both for ROCE
and ROE.
Quality costs and total quality management at manufacturing division
• Quality costs are usually broken into four categories: 1. Prevention costs which relate to avoiding
producing defective items in the first place. 2. Appraisal costs which relate to ensuring that the products
produced meet an acceptable standard. 3. Costs of internal failure which relate to products which fail
appraisal and how these are handled. 4. Costs of external failure which relate to products which fail the
standard but are still shipped to customers.
• Examples: 1. Prevention cost: training of staff. 2. Appraisal cost: product testing. 3. Cost of internal
failure: Rejected batches which are scrapped. 4. Cost of external failure: Fines and discounts for late
delivery.
• The analysis of quality costs should help t emphasize the importance of prevention by showing its
financial value and this is vital to motivate a total quality management approach.
• Total quality management focuses on the customer perspective and the need for each part of the
organization to avoid defects in the chain of production.
Lean information system
• Lean systems aim to get the right thing to the right place at the right time, first time. They aim to reduce
waste while being flexible. The need for flexibility is important for any organization working in a
constantly changing environment.
Question # 2
Incremental budgeting
• The starting point is usually the previous year’s actual performance or budget. This is then updated for
any known changes in costs, or for inflation. The budget would normally remain unchanged for the
remainder of the year.
• Suitable for organizations which are stable and not undergoing significant changes.
• Incremental budgeting is only suitable for business where costs are already well controlled. This is
because a bid disadvantage of incremental budgeting is that it perpetuates inefficient activities by often
simply building inflation into previous year results or budgets.
• Incremental budgeting may, however, build budget slack. Managers may spend up to their budgeted
amounts in one year, so that their budget is not cut the next year, which may affect their appraisal and
reward in the future.
• It is not advisable for a stable mature division to use rolling budgets as the current incremental process
appears satisfactory. This is especially so since divisional managers have little experience of setting their
own budgets, and the time and cost of using rolling budgets would exceed the value of them.

Rolling budgets
• Are continually updated to reflect current conditions and are usually extended by budgeting for an
additional period after the current period.
• Suitable for businesses which change rapidly or where it is difficult to estimate future revenues or costs.
• Though the regular updating of the budget required in rolling budgeting is costly, time consuming and
possibly a distraction for divisional managers, it does seem that rolling budgets are suitable for divisions
which operate in a continuously changing environment.
Question # 3
Activity Based Costing (ABC)
• Activity Based Costing (ABC) allocates costs to products based on the activities which actually drive the
cost to better allocate the costs.
Lifecycle costing
• Taking all costs into account, starting from costs incurred before production started to the costs which
have to be borne after production ceases.
• Knowing the costs over the entire lifecycle of a product will help a company better evaluate its
investment decisions, determine appropriate prices and generate an acceptable margin.
Environmental Management Accounting (EMA)
• Environmental management accounting (EMA) involves the production of non-financial and financial
information to support internal environmental management processes.
• This could involve measuring the physical movements of inputs to a production process, such as
materials and energy, and outputs such as waste.
• Managers have no incentive to reduce these environmental related costs as they are not even aware of
them, or the costs of poor environment practices.
• EMA allows an organization to identify environment related costs and take steps to control them. Such
costs are often categorized into conventional costs, contingent costs and reputation costs.
• Conventional costs: Includes the cost of energy and raw materials.
• Contingent costs: Includes costs which are incurred in the future for example decommissioning costs. The
estimation of such costs is unlikely to be accurate. Identification of such costs will help in accurate
estimate of these costs and help prevent managers from focusing on short-term performance only.
• Reputation costs: Incurred where an organization acts in a way which may cause harm to the
environment. It includes sales lost as a result of loss of reputation. These costs are hard to quantify.
Making managers aware of these reputation costs should focus their attention on the need to manage
the risks of them occurring.
Question # 4
Critical success factor of high quality design
• High quality creative designs CSF will help achieve the objective to delight clients with the quality of
work.

• Identifying this CSF will not directly help achieve the stated objective of providing clients with access to
local and specialist knowledge. External suppliers may have more specialist knowledge.
KPI to buy 90% internally
• Setting a KPI should lead managers to try and achieve this target, as they are appraised and presumably
rewarded according to their performance against this target.
• Having this target will only help achieve the objective of delighting clients if the quality of the design
done internally exceeds that done by third party external designers.
• Encouraging the use of internal services may not help achieve company’s objective to offer specialist and
local knowledge to clients.
Transfer pricing policy
• The purpose of a transfer pricing policy is to encourage subsidiaries autonomy, facilitate performance
evaluation and to promote overall goal congruence.
• A transfer pricing policy helps to prevent subsidiaries from acting in an entirely self-interested way where
this may not be in the best interests of the company as a whole.
• The ability of the head office to impose a transfer price, or the existence of a clear transfer pricing policy,
would allow managers more time to deal with other aspects of the business, such as ensuring client
satisfaction.
• A transfer pricing policy will enable the performance of the individual subsidiaries to be fairly measured.
• The basis for the prices set between subsidiaries in different countries should also be clear about how
exchange rate movements are to be reflected in the transfer price.
• Policy should also ensure that the prices are likely to be acceptable to the local tax authorities.
Advantages of setting transfer prices on the basis of market value
• Increases efficiency of selling subsidiary which has to compete with external suppliers to keep prices at
market rates.
• Where a market value transfer price is used, it will usually be beneficial for buyer and seller, as well as for
the entire company. This is because selling and administration costs overall for both parties are reduced
and the buyer should get better customer service and reliability of supply by buying internally.
• There may be cost savings due to no allowance being made for marketing and bad debt costs. This can be
shared by buying and selling subsidiary by adjusting the market value transfer price.
Disadvantages of setting transfer prices on the basis of market value
• The use of external market transfer price will only be the optimal transfer price when a perfectly
competitive external market exists.
• The market price may be temporary, changing according to changing economic conditions. In which
case, the transfer price would need to be frequently changed if it were to continue to reflect market
conditions. This would be time consuming and probably confusing to the subsidiary managers.
• Where allowance is made in transfer price for reduced cost, it will be difficult for buyer and seller to
agree on a single amount of adjusted market price.

June 2017
Question # 1
Linking the mission to current KPIs
• Operating profit margin shows that the organization is profitable and also as a margin, it indicates
efficiency in cost control.
• Secured revenue indicates the amount of revenue which is contracted and so has greater likelihood of
being earned.
• Management retention links to the need for best talent though it does not measure the developing of
that talent.
Evaluation of the strategic performance dashboard
• None of the measures are external, looking at the competitive environment.

• No breakdown of ROCE is provided for each business unit.
• As most figures are ratios it is not possible to gauge the absolute scale of the business.
• The report does have good qualities as it is brief and clearly presented. Further the information is both
financial and non-financial allowing different elements of the mission to be measured.
Building block model
• The model takes the important step of distinguishing within the dimensions of performance between
what is the desired outcome (results) and what are the drivers of those results (determinants). It then
highlights the need to measure both within the performance reporting systems of an organization.
• The standards are the target level for the specific measures chosen for each dimension appropriate to an
employee’s performance.
Question # 2
Target costing
• Target costing begins with taking the price which the market will pay for the product for a given market
share. From that the required profit margin is deducted to arrive at a target cost. The difference between
the estimated cost for the product and the target cost is the cost gap.
• A big advantage of using target costing is that it is often easier to reduce costs of a product at the design
stage rather than after it has entered production.
Kaizen costing
• Unlike target costing, which occurs at the beginning of a product’s life, Kaizen costing is a process of long-
term continuous improvement by cost reduction throughout the life of the product.
• Generally, Kaizen costing is used over longer periods, and it is likely the full benefits of this approach will
not be achieved in such a short timescale.
• Target costing can achieve large cost reductions at the design stage of the product whereas kaizen
costing reduces costs in much smaller, incremental steps.

Question # 3
Effectiveness of existing Warehouse Information System
• The data input is manual and therefore prone to error. This is time consuming and costly.
• Incorrect information in the WIS wastes time by needing teams to investigate the discrepancies.
• Company should consider use of radio frequency identifiers to ensure that accurate data is input into the
WIS.
• An effective information system may interface directly with the manufacturer’s and retail customers’
information systems through electronic data interchange.
The 5Ss in the adoption of lean principles – Structurise, Systemise, Sanitise, Standardise and Self-discipline
Structurise
• This involves introducing order where possible for example by ensuring that inventory is arranged in such
a way that it is easy to find.
Systemise
• This principle involves organizing items so that they are easy to use.
Sanitise
• This principle means to be tidy and avoid clutter. This helps make things easy to find and helps make a
safe working environment.
Standardise
• This principle involves finding the best way of undertaking a process or a task and applying it consistently.
Self-discipline
• This principle relates to sustaining the other Ss by motivating employees.
Question # 4
Appraisal of performance of divisional manager and division
• A key characteristic of divisional performance measurement is that divisional managers, and the divisions
themselves, should only be appraised on performance that they control. For example, costs which are
not controlled by divisional managers, such as apportioned head office costs, should be added back to
profit when appraising manager’s performance.
• The net profit arrived at after items which are not under manager’s control are added back is known as
the ‘controllable profit’. This is what divisional managers should be appraised on.
• Divisional performance should be evaluated on all the items which relate directly to the division which is
its traceable profit.
• Traceable profit: Reported profit + Allocated head office costs
• Controllable Net Profit: Reported profit + Depreciation + Allocated head office costs – Deduct currency
gain. Controllable Revenue: Reported revenue – Deduct currency gain.
Economic Value Added (EVA)
• EVA makes adjustments to the financial profit to calculate the economic value generated by each
division, and then makes a deduction for the cost of the capital invested in the division.
• EVA avoids distortion from estimates and financial policies.
• EVA encourages managers to take a long-term view: for example, advertising costs would be capitalized
as these generate future value. The use of EVA would encourage managers to incur costs, such as these,
which will benefit the business in the long term.
• However, the calculation of EVA is backwards looking, and based on historical financial information,
whereas shareholders need information about future performance on which to base their decisions.
• EVA takes into account the cost of capital.
December 2017
Question # 1
To:
From:
Date:
Subject:
Positive features of the award-winning dashboard
• The dashboard measures the achievement of the objectives and strategies of the business.
• The report presents a balanced view of the business’s performance. It deals with various perspectives:
shareholders, customers, internal business an innovation.
• The forecasts for next year are given and also there are non-financial determinants of performance such
as design and customer service which will drive the future short-term competitive position of the
business.
• The dashboard is kept brief as the board will have an opportunity prior to the board meeting to use it to
identify issues requiring further analysis at the meeting.
• There is a short narrative commentary which deals with the major commercial points arising from the
dashboard.
Integrated reporting
• Integrated reporting has a focus on opportunities and risk, how resources are allocated and performance
both recent, historic and expected in the future. There are six capitals involved in value creation including
traditional tangible and financial assets but also including human, intellectual, environmental and social
assets.
• A key part of the integrated report is linking performance of strategic goals and the ability to create
value. This will require a less structured and more contingent approach to reporting.
Total Quality Management (TQM)

• Total Quality Management is a management approach which seeks to have no defects in resource or
relationship management.
Quality costs
There are four categories of quality costs:
• Prevention costs: Costs to prevent the production of engines which fail to meet specifications.
• Appraisal costs: Costs incurred in inspecting products to ensure that they meet specifications.
• Cost of internal failure: Costs associated with making good products which are identified as sub-standard
before delivery to the customer.
• Cost of external failure: Costs associated with making good products which are identified as sub-
standard after delivery to the customer.
Question # 2
Return on Capital Employed - ROCE
• One benefit of using ROCE as a performance measure in the benchmarking exercise is that it gives a
percentage figure and can compare businesses of different sizes. ROCE does not, however, give the
absolute level of return.
• ROCE is easy to calculate. The figures required to compute ROCE are readily available from published
data which makes this a good financial performance measure for benchmarking.
• ROCE may be distorted by accounting policies or where different businesses have different levels of
intangible assets.
• A big disadvantage of ROCE is that it may encourage managers not to invest in new non-current assets.
Earnings before Interest, Tax, Depreciation and Amortization – EBITDA
• Easy to calculate from published data

• Acts as a proxy for cash flow however it does not take account of changes in working capital.
• Tax and interest are distributions from profits, unrelated to the underlying performance of the business.
Excluding them from measures of performance, therefore, gives a better understanding of the underlying
performance of a company.
Question # 3
Importance of non-financial performance indicators to measure the performance of not-for-profit

organizations
• There may not be a revenue stream.

• It may be difficult to define a cost unit.
• Not-for-profit organizations undergo more public scrutiny and have multiple stakeholders, so non-
financial indicators will be necessary to manage expectations.
• The outputs or benefits of the services provided are non-financial in nature, for example, giving prompt
and high-quality treatment to patients. Therefore, NFPIs are required to measure performance.

Value for money
• Value for money in public sector organizations can be measured using the three Es’ : Economy, Efficiency
and Effectiveness.
• Economy: means obtaining resources at the lowest cost.
• Efficiency: relates to obtaining the greatest possible outputs from the resources available.
• Effectiveness: means how well an organization achieves its objectives.
Extent to which the management style is budget constrained
• A budget constrained management style emphasizes the need to achieve short-term performance
measures, for example, the annual financial budgets. An advantage of this is that it ensures that a
company operates within the financial constraints.
• This management style encourages short termism.
• This management style encourages manipulation of results, or the way they are measured, to show
better performance.
Question # 4
Importance of incorporating risk and uncertainty in making long-term decisions
• Risk relates to the variability of outcomes, the probabilities of which are known, or can be estimated.
• Uncertainty occurs where the outcomes and their probabilities are unknown.
• Exogenous variables arise from outside the business, but over which the business has no control.
PEST analysis
Political factors
• By identifying factors such as political instability or conflict company can improve its’ long term
performance by sourcing raw material from more stable regions. The political situation in a region can
change rapidly, which might make it difficult to incorporate these risks into long-term planning, as there
is a high degree of uncertainty.
Economic factors
• Economic factors such as variation in long-term interest rates can influence company’s performance by
affecting exchange rates or overall consumer demand. By identifying these factors, company could hedge
against currency exchange rates.
Social factors
• Overall demand for a product will be influenced by social factors such as consumer tastes or increased
awareness of for example healthy eating.
Technological factors
• Any technological advancements could be incorporated in net present value calculations for the factory.

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P5 summary book Taha Popatia

1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

CUSTOMER INTERNAL INNOVATION AND FINANCIAL

1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

DIMENSIONS STANDARDS REWARDS

1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

DEFINE MEASURE ANALYSE IMPROVE CONTROL

1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

potential benefits and potential problems of subcontracting work

1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Value for money audits

Economy, efficiency and effectiveness

Intangibility, Heterogeneity, Simultaneity and Perishability

• Intangibility: not easily measurable.

Potential problems in the successful implementation of the activity-based costing system

Operational Activity-Based-Management (ABM)

Strategic Activity-Based-Management (SBM)

2|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Financial performance and marketing

Building and monitoring CSFs

Information for establishing CSFs

3|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Performance indicators linked to the CSFs

Value based management

Evaluation of VBM based measures against traditional profit-based measures of performance

4|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Factors which will affect a company’s environmental strategy

Quantitative models and Qualitative methods

Qualitative problems apparent in the company’s structure and performance

5|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

6|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

ROI, RI and EVA

• Controllable return on investment = operating profit/ capital employed.

Market Based Pricing

Cost Based Pricing

New information system

1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

2|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Fitzgerald and Moon’s building block approach

Main building block improvements

Boston Consultancy Group (BCG)

3|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Cost categories that would aid transparency in environmental reporting

Environmental accounting techniques

4|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Three categories of risk appetite:

Key features of performance measures:

Lynch and Cross – performance pyramid

5|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

Usefulness of the pack that is provided to the board of governors

• Pack addresses the financial and educational performance of the school.

6|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

The suitability of branch information as a means of assessing managers performance

Impact of collection and use of quality costs

Kaizen costing approach

Just in time purchasing and production