NOTTINGHAM BUSINESS SCHOOL

MSc Accounting and Finance

Strategic Management Accounting Module

ACCA40537

Assessment brief
Assessment methods
This indicates the type and weighting of assessment elements in the module
Element Weighting Type Description
number
1 100% Report 4500 word individual report based on a case study,
designed to assess all learning outcomes (a) to (e).

Learning outcomes
Learning outcomes describe what you should know and be able to do by the end of the
module.

Knowledge and understanding. After studying this module you should be able to:
(a) Demonstrate a systematic understanding of management accounting, and apply
judgement and technique in the analysis of relevant data to determine the
appropriate information required by management to contribute to a range of
strategic planning, control and decision-making situations;
(b) Critically evaluate management accounting techniques, quantitative methods and
resource management strategies, in relation to their appropriateness to the
changing business environment;
(c) Demonstrate a systematic understanding of and an ability to critically evaluate
management decision making techniques in a range of complex, unstructured
situations and uncertain environments, making justified recommendations to
management;

Skills, qualities and attributes. After studying this module you should be able to:
(d) Synthesise information from a number of academic, regulatory and advisory sources
in order to gain a coherent understanding of theory and practice pertaining to the
activity of management accounting and strategic management;
(e) Deal with complex issues both systematically and creatively, make sound
judgements possibly in the absence of complete data, and communicate conclusions
clearly.

___________
SCENARIO – Alarm Ltd

Alarm Limited (referred to as Alarm) was established in January 2005 and started by two
individuals. The Managing Director had a marketing background, and the Operations
Director had an engineering background and experience of working with alarm and
security systems. Alarm provides services related to intruder alarms, fire alarms, CCTV,
access control (allowing free flow of authorised personnel) and integrated systems that
could be linked to building and energy management systems. Services include design,
supply, installation, monitoring through alarm receiving centres and key holder facilities
and maintenance. Markets served include commercial and industrial businesses, public
sector (state owned) premises and domestic homes. The company is based in London
and services are provided to the area known as Greater London.

The organisation is defined as a Small and Medium-sized Enterprise under the European
Commission definition as an organisation having fewer than 250 employees and has
either (a) annual turnover not exceeding €50 million (approximately £40 million) or (b)
an annual balance-sheet total not exceeding €43 million (approximately £34 million).
During the 17 year period to end of 2021 the company had grown its revenue at an
average rate of 36% per annum (from £0.5m in 2005 to £37m in 2021) and its profit
before interest and tax by an average of 45% per annum (from £0.025m in 2005 to
£4.5m in 2021). This represents an increase in operating profits from 5% of sales
revenue in 2005 to 12% of sales revenue in 2021 (representing a return on capital
employed of 22.5%). Even following the economic difficulties created by the financial
crisis of 2007-2009 Alarm managed to grow its business. The founders put this success
down to creating a company ethos of developing customer relationships and of
establishing a system of capturing customer information and using this to inform the
development of the growth strategy. The company also operated an employee share
scheme which enabled employees to benefit from company success and, from comments
made in interviews with staff members, undoubtedly contributed to staff motivation for
the company to succeed. An organisation chart is included as Appendix A.

Two key factors are striking about the management of the company. Firstly, the
emphasis placed on cash rather than profit, almost to the point of ignoring the normal
profit and loss account reporting.

Managing Director “We started off with very little capital so in the early days cash flow
was everything in order to grow. We’ve just kept the same ethos as we got bigger.

Financial Director “I started as the accountant a couple of years in, and was surprised,
pleasantly so, that Mike [MD] and James [Operations Director], understood the
importance of focusing on cash. Although in hindsight I think that was probably because
they didn’t fully understand accounting methods, but we’ve kept the same thing going.
All our internal reporting, forecasts and plans essentially focus predominantly on cash,
not profit – which gives the accounting team an interesting time - but everybody,
wherever you are in the organisation, understands the concept of cash in – cash out.”

The second key element is a culture of customer service and relationship building which
was not so surprising in a B2B (business-to-business) service sector company.

Marketing Director, “We look carefully at which market sectors have potential for us, and
then within that the potential customers where we can add the most value and build up
a long term relationship. […. ] Referrals are key to our business so happy customers are
essential.”

The board of directors are convinced that the company is well placed to continue its
success, but some concerns have become more relevant in recent times.

Business environment

The most worrying aspect facing the industry is the uncertainty created by the UK’s
decision to exit the European Union together with the current Pandemic. Although Alarm
deliberately restricts its geographic coverage to the Greater London area many of its
clients operate on an international scale and the marketing and sales team at Alarm
have noticed that many investment decisions of their clients are on hold (i.e., not being
made until the impact of the uncertainty is clearer). Concerns about what this might do
to the UK economy in the short to medium term could impact on their business in
several sectors. For example, the residential housing development sector is affected by
developers having the confidence to build new homes in the knowledge that they can sell
them at a reasonable profit, but a depressed economy, whilst the need for housing might
be there, the willingness and ability of people to enter the housing market might be
affected. This is not a big sector for Alarm, but contracts with housing developers to
install intruder and fire alarms to all new properties in a development can be profitable
for Alarm as the equipment is relatively inexpensive and quick and easy to fit.

Apart from the uncertainty there is also the issue of legislation and regulation around
health and safety, privacy, surveillance and construction industries that needs to be
clarified. The Managing Director had recently been at a public meeting relating to a plan
to reduce the surveillance cameras operating in certain parts of London. This had
attracted the attention of the local community who were protesting strongly against the
proposals. In conversation with a member of the local authority he had learned that this
might be a recurring issue in the future. Local authorities were having to make difficult
decisions about where to cut spending to save money and were caught between targets
for crime prevention, a benefit of CCTV surveillance, and the cost of providing the
systems.

Larger clients in the public sector (state) such as local authority premises and schools,
colleges, and universities, which Alarm include within this sector, are also struggling to
make improvements under the squeeze on state spending and the shift from state to
private funding of higher education. The commercial clients in the service sector,
particularly the financial services sector such as banks, are cutting back on new
investments in premises, but investing more in sophisticated prevention of cybercrime
initiatives. The Marketing Director thinks that this is an area that Alarm should diversify
into but would need to acquire the technical skills in order to do so. Tourism and within
that hotels, however, is a buoyant sector at the moment as many large hotels are taking
the opportunity to refurbish the rooms and facilities in anticipation of an upturn in tourist
visitors to London and the surrounding areas in the next few years.

The key driver for change in the industry over recent years has been technology as
systems have become increasingly more integrated with mobile monitoring and motion
detection and recognition systems becoming the norm. Alarm maintain very good
relationships with their suppliers and have arrangements for reciprocal exchange of
marketing information so that they work together to provide customers with the best
systems available. As part of this relationship key suppliers provide training for Alarm’s
engineering and sales and customer support teams so that they are always up to date.
The downside to this is that Alarm may become reliant on its existing supplier
relationships and lose flexibility if a new supplier enters the market with a new
technology. The Board of Directors are also aware that many of the suppliers are much
larger than Alarm and therefore the company could become the target for a takeover bid
from a supplier wishing to pursue a strategy of forward integration. Particularly due to its
successful growth strategy and profitability over the years.

Based on the need to stay up-to-date, and to harness the knowledge of customer needs
into new technology developments and products, Alarm took the decision two years ago
to enter into a joint venture agreement with a Security Systems Supplies (SSS) Limited,
also an SME, but a very high-tech company, with the purpose of developing new security
technologies. This is still a fairly small scale involvement, but Alarm has an office on
their partners site based at the Heathrow Innovation Park and has seconded two
members of staff to work at the Joint Venture office at Heathrow. Alarm has been using
SSS Limited as a preferred supplier for the last ten years. SSS Limited, whilst small, sells
its systems nationally, although they are based at Heathrow, London.

Alarm operates in an industry that is constantly developing better technology and many
of its remote systems are operated by batteries, which are not that environmentally
friendly and require careful disposal after their useful life has expired. Alarm works
closely with suppliers and customers to ensure that when equipment and systems are
upgraded and that as much as possible is recycled or disposed of in an environmentally
friendly way. The founders of Alarm set out to provide services of the highest quality
standards to its customers and operates to high ethical and sustainable standards. This
is extended to the treatment of its workforce and the management style which is very
open, inclusive of everyone and staff are actively encouraged to participate in decision
making. The board hold a quarterly review meeting to which all staff are invited where
the progress of the company is discussed. The company has also invested in staff
training, recognising the need to be as up-to-date as possible, but also because highly
trained staff provide better customer service. In terms of training received by the
suppliers this was provided either at the supplier’s premises, or at a training centre that
Alarm had established to train, not just their own staff, but also staff of the clients that
required training for the installed systems. This training centre was in a separate
building they had purchased close to their normal offices and was a building they had
purchased outright for £300,000 and fitted out specifically for training needs. Due to this
attention to staff welfare Alarm has a very low staff turnover but does have an aging
workforce. The Board has been very careful to manage the growth in numbers and has
access to specialist contract staff that can be employed on a contract by contract basis
when work requirements dictate that a short term increase in engineering staff is
necessary. Their work is subject to strict quality standards and checks by the
engineering team managers to ensure that standards are maintained.

In terms of financial performance, they have performed better than other companies in
their sector. It is difficult to make direct comparisons as some of the sector operate on a
much larger scale, i.e., nationally or are part of an international group but Yana
Pasclovichski, the Financial Director, recently presented the figures below to the
quarterly review meeting, although she did explain that they were an estimate based on
best available data.
 Data for half year ended 31st December 2021
Ind sector Alarm
estimate
(i) Return on capital employed 10% 22.5%
(ii) Profit before interest and tax
(operation profit) 8% 12%
(iii) Asset turnover 1.25 times 1.875 times
(iv) Current ratio 2:1 1.2:1
(v) Gross profit percentage 80% 70%
Note: only materials are
treated as direct costs.
(vi) Gearing 40% debt 15% debt

Recent developments

Potential merger with Security Systems Suppliers (SSS) Limited

The Board of Directors of both companies have been in discussions about merging the
two companies together. Based on their experience and exchange of knowledge during
the two years of their Joint Venture they have developed a new security system known
as SecurePlus. The feedback provided to SSS from Alarm’s experience of fitting and
maintaining systems has helped to develop what they believe will be a market leading
system.

The two Boards of Directors are in talks to potentially turn their existing joint venture
into a merger. The Boards thinking is that the two companies would keep their individual
management and systems and operate as two divisions under an umbrella company.

An approach by National Provider plc

A larger competitor of security systems, National Provider plc, has recently approached
the Board of Directors at Alarm with the intension of making an offer to buy the
company. It had become known to them that James, one of the founding members, was
thinking of retiring. The initial reaction of the Board was to reject the approach but after
consideration they had decided to respond in a noncommittal manner, just to see what
the offer might be. They have received nothing at the time of writing but expect to
receive a formal communication from National Provider in the next few weeks. National
Provider is known in the sector for its aggressive advertising and pricing strategy in
attracting customers.

The shareholders of Alarm are as follows:

Shareholder % holding

Mike – MD and founding member 30%

 James – Operations director and founding 30%
member

AceHigh Investments (an investment fund 20%

owned and managed by a close friend of
James)

Employee share scheme 20%

Customer profitability

Alarm Limited has always been keen to develop relationships with customers and as such
has been collecting data relating to customers via their Customer Relationship
Management system. Jie Ling, a member of the management accounting team has been
supported in studying for an accounting qualification and has recently covered the
technique of customer profitability analysis. Based on data gathered from the systems
Jie Ling has provided the following figures and notes relating to three customers, for one
financial year.

All three customers have had several contracts completed during the year and have
included design, installation, and maintenance.

Industrial Public sector Residential

customer customer customer
(property
developer)
Sales value of contracts during the 100,000 50,000 70,000
year (£)
Materials costs (£) 25,000 10,000 10,000
Design costs incurred (£) 5,000 5,000 10,000
Installation costs incurred (£) 50,000 20,000 20,000
Number of sales force visits during 10 5 25
the year
Number of customer service calls 20 10 75
during the year
Engineering manager quality 10 20 60
inspection visits during the year
Average days for collection of debt 30 45 90
Data related to sales visits
Estimated annual cost of sales force visits based £250,000
on salary and travel costs
Number of sales visits undertaken during year 1,000
Data related to customer service department
Annual costs of customer service department £50,000
(direct staff costs only)
Average number of customer service calls dealt 2,000
with during the year
Data related to quality visits
Estimated costs associated with quality visits £100,000
during year (includes salary and travel to site
costs)
Average number of quality visits made each year 500
by engineering managers.
Finance costs per annum calculated as : (Annual sales value x 10%) x Average
 collection period/365)

Investment appraisal

National Provider plc has recently made an approach to acquire the business of Alarm
Limited. Yana Pasclovichski, the Financial Director of Alarm Limited has asked you to
help her out with an exercise. Yana has put herself in the role of the National Provider
and has put together a scenario of what they might do should they make a bid. The
purpose is to gain an insight into what a reasonable purchase price should be. Yana
thinks that if she was working for National Provider she would calculate the value of
Alarm using a method of 5 years purchase of the NPV of profits as adjusted by savings
and costs of acquisition. She feels that this would be an appropriate start point for
negotiations, ignoring any premium they might expect to add.

Yana has made the following estimates.

The annual profit before interest and tax of Alarm Limited last year was £4.5 million.
With adjustments for non-cash items Yana estimates that the net operating cash
generated was £6.0 million. This could be used as the starting point. However, as the
new business takes over there will be an erosion of goodwill as well as an increase in
costs due to inflation. Both of these will have the effect of reducing the net cash flow in
future years. To account for this Yana would use £6m as the cash generated from
operations in the first year but reduce this by 10% compound in each subsequent year.

National Provider are known to be cost cutters. Yana estimates that they will make
savings in staffing of 6 engineers at an average of £30,000 per annum each; they would
not need the procurement staff due to centralising purchasing within their own company,
therefore saving 2 x £20,000 per annum; they would lose 1 key account manager,
saving £30,000 per annum; one sales manager £30,000 per annum; the secretary,
£18,000 per annum and 4 accountants due to centralisation would also go, saving 4 x
average of £25,000. The Board of Directors would not be retained saving £650,000 per
annum. These salary costs will be saved in each year but would have expected to be
increased by 3% compound in each year, so the actual benefit increases each year.

There would of course be redundancy costs to pay and this Yana estimates to be about
£1.2m in total due to the long service of most of the staff. This would be paid
immediately the deal is signed.

Savings achieved by utilising central purchasing and the buyer power enjoyed by
National Provider would be in the region of £500,000 per annum to which 2% inflation
could be applied. Also, the training centre would not be needed so this could be sold and
would achieve a net value of £650,000 at today’s prices if sold on the open market,
which she suspected that National Provider would do at the earliest opportunity once the
acquisition had been made, receiving the income in year 1.

Yana has estimated that the appropriate cost of capital to use in the calculation would be
approximately 6%.

As the tax position of National Provider would be different to that of Alarm Limited Yana
suggests that we ignore taxation.
It has been suggested that the Balanced Scorecard, as developed by Kaplan and Norton
would be an appropriate model with which to monitor the performance of the company in
the future
Appendix A - Organisation structure
Managing
Director
(56)

Finance Operations Marketing and

HR Director
Director Director Sales Director
(3)
(6) (34) (9)

Personnel
Key
Manager and Management Engineering Sales
Accounts
Secretary to Accountant Manager Manager
Manager
the Board (5) (25) (4)
(3)
(2)

Accounting Customer
Assistants
Team Service/ Sales
(2)
(5) Support (3)

Engineers Sales team (4)

(Fitters) (25)
(Includes 4
Team leaders)

Service
Design Procurement
Coordinators
(4) (2)
(2)

Numbers in brackets represents number of staff. The numbers represent shown for the
managers indicates the number of staff under their control.
Requirements:

Part (a)
Critically evaluate how the concept of strategic management accounting, including any of the
models and techniques covered on the course, would benefit the Board of Directors of Alarm
Limited in the development, implementation, and evaluation of the corporate strategy.
[Guidance - Your answer should include a discussion of the definition of SMA; an explanation
of the models and tools selected, including an evaluation of the benefit to the Board of
Directors in their strategy development, implementation, and evaluation. You should utilise
and make reference to the academic literature provided within your answer. Use the Harvard
referencing system throughout.]
25%

Part (b)
You are a consultant to Alarm Ltd and have been asked specifically to provide guidance on
several issues by the Managing Director. Write a report to the Board of Directors of Alarm
Ltd providing:

(a) An analysis of the company’s current strategic position taking into account both strategic
and financial information (you should utilise appropriate models and frameworks of your
choice to aid your analysis and explanation to the Board of Directors).

20%

(b) Utilising the figures provided by Yana above undertake the NPV calculation to provide an
estimate of the likely value of Alarm Limited. Discuss any reservations you might have
about the estimates that Yana has made.

If you were the National Provider what else would be taking into account when making
your decision. This can include elements you might include to improve the realism or
usefulness of the NPV calculation suggested by Yana, or non-financial issues that you
would consider. 20%

(c) Utilising the information provided by the management accountant relating to customer
profitability analysis:

1) Provide a report for the Board of Directors of Alarm Limited evaluating the benefits of
customer account profitability analysis to the organisation.

2) Prepare a customer account profitability analysis in respect of the three customers

for which details were provided by Jie Ling above.

3) Provide suggestions as to how the profitability from the residential property

developer customer could be increased.

15%
(d) In response to the proposal to adopt a balanced scorecard:

1) A critical evaluation of the balanced scorecard as a performance management tool

(include examples of performance measures that might be appropriate within each
perspective of the scorecard). You should also include a justified recommendation as
to whether Alarm Ltd should adopt a balanced scorecard approach to performance
management.

10%
10
(e) Also make recommendations within your report as to how the accounting team can
contribute to the achievement of Alarm Ltd desire to increase its reputation for being a
sustainable business.

10%
NOTE: Percentages given provide an indication of weighting placed on each assessment
element and therefore provides guidance on the space and time you should devote to each
element within your answer.

Overall word count limit 4,500 (+ or – 10%)

Please note that this work should be submitted by 20/03/22 11pm

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 PRESENT VALUE TABLE

Present value of 1 ie (1 + r)-n Where r = discount rate, n = number of periods until

payment.
Discount rates ( r )

Period
s
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386

11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239

11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162

11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.169 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065

12