(a) Analyse the financial performance of the two airlines, including reasons for

the differences in the two businesses' performance.

Profitablilty

ROCE

Flago Co capital employed= 9676

Budget Co capital employed=2946

= operating profit/capital employed *100

Flag Co - 1239/(15376-5700)*100 = 12.8%

Budget Co -404/(4062-1116)*100= 13.7%

Operating profit margin

=operating proft/ revenue

Flag= 1289/11333*100= 10.9%

Budget Co= 6.07%

Asset turnover

Asset turnover= Revenue/ capital employed*100

Flag= 11333/(15376-5700)*100=1.17

Budget co= 6654/(4062-1116)*100=2.25

ROCE of Flago co is 12.8% and Budget Co has 13.7%. Budget co has a higher % because their ability to
generate sales from $1 of capital employed is 2.25. Where as Flag co, for every $ of capital employed, the
sales is 1.17. Also, budget co has a lower assst turnover than flag co, which resulted in higher ROCE.

Budget co earns a lower operating margin than flag co. Budget Co has lower revenue which could be
because of their prcing strategy., Budget Co has a lower prices than Flag Co. As for asset turnover, it
shows how much revenue is generated from each $ of capital employed. Budget Co's asset turnover is
2.25 where as flag co is 1.17 times. The lower operating margin of budget co is offset by the higher asset
turnover as ROCE= ASSET TURNOVER*OPERATING MARGIN. (2.25*6.07%=13.7%)

Liquidity

Current ratio= Current assets/ current liabilities'

Flag Co= 3404/5700= 0.59

Budget Co= 885/1116=0.79

A ratio in excess of 1 desirabe. But both companies are below the standard. They could necassary
measures to increase liquidity ratios in order to be able to cover current liablities quicker. However, both
are service industries and they would not have much inventory. This is not worrying.

Risk

Capital gearing= debt/equity*100

Flag Co = 110.43

Budget Co= 51.46

Interest Cover= operating profit/ finance cost

Flag Co =4.95

Budget Co= 8.08

Flag Co has a high level of long term borrowings. This adds to the risks of the business as interest on
these amounts have to be paid no matter what their operating profit is. Flg co needs to take relavant
measures in order to lowers the risk levels in their company. Budget Co has lower levels of capital
gearing and interest cover and this could be due to the owners, investment equity in the company.
Overall, Budget Co seems to be in a safer postion than Flag co.

Seat occupancy Rate

availabe seats/ seats occupied

Flag Co =66%

Budget Co= 95%

Flag Co has lower seat occupancy rate which could be because they charge higher prices. Budget charge
lower prices hence they have a higher %.

Budget co also seems to be more fuel efficient.

(b) Briefly explain how Fitzgerald and Moon's building block model could be used to manage
the performance of a service business.
Fitzgerald and Moon’s building block model provides a framework for service companies to design
performance measurement systems which are linked to management rewards. It provides a system of
targets (standards) which will motivate managers to improve business performance.

There are three building blocks in the model. The first block gives six dimensions, meaning the aspects of
performance which must be measured in a service business. These are:

• Financial performance, for example, profitability and growth.

• Competitiveness which measures an organisation’s standing against its competition.

• Quality of the service offered.

• Flexibility of the organisation in providing the service.

• Innovation which addresses the ability to introduce new processes and services.

• Resource utilisation which measures productivity and efficiency.

These six dimensions should be split into results (financial performance and competitiveness) which are
the outcomes of past decisions and determinants (quality, flexibility, innovation and resource utilisation)
which drive future performance and results.

The second block relates to setting standards. To motivate managers, it is important that they take
ownership of standards (that is accept or internalise them) and the standards appear achievable and
equitable (fair).

The third block relates to the rewards managers are offered for achieving the standards. These must
have clarity (the performance measurement scheme must be understood by managers), they must be
motivating (rewards must be attractive) and controllable (not subject to influences outside the
manager’s control).

Data testing: testing models or hypotheses on existing data.

Data mining: analysing data to identify patterns, relationships and correlations. Note
that data mining refers to the analysis process, not the finding of the items themselves.
There are a number of aspects of data mining:
 Finding relationships between variables;
 Applying known structures to new data;
 Identifying groups and structures within the data that have similarities other
than those connected by known structures ( clustering );
 Spotting unusual items (outliers) or items that appear to be in error;
 Finding a function that expresses the relationship between the data with as
little error as possible (covered in Chapter 10);
 Providing the results in a user-friendly, easy-to-see, form.
Predictive analytics: a type of data mining which aims to predict future events (e.g. the
likelihood that a customer may be persuaded to buy a more expensive product), very
often using statistical or machine learning techniques.
Text analytics: scanning emails and word documents to extract useful information (e.g.
keywords that indicate an interest in a product). Similarly, voice analytics (but with
audio).
Statistical analytics: used to identify trends, correlations and changes in behaviour.

Transaction Processing System – systems used by operational staff to capture data and
make processes more efficient, improving the accuracy and timeliness of information.
Management information systems – systems which convert data from internal and external
sources into information used by management at all levels and across all functions to enable
them to make timely and effective decisions.

n MIS is, therefore, any system for:

 obtaining data;
 processing it to produce useful information; and
 distributing this to the relevant managers or members of staff.
Decision Support Systems – a computer-based information system that supports managers in
decision-making, often utilising analytical modelling techniques.

Executive information system – a system designed to assist the decision-making of senior

management of an organisation by providing summarised information from both internal and
external sources relevant to meeting the strategic goals of the organisation. It is a specific type
of decision support system.

Enterprise resource planning system – a software system which provides a

seamless flow of information across an entire organisation using a shared database.
The "modules" which may be found in an ERP system typically include the following:
 Accounting and financial;
 Inventory control;
 Supply chain management;
  Material requirement planning;
 Customer relationship management

Customer relationship management (CRM) – the practice, strategies and technologies used
to manage customer interactions and data, to improve customer service, retain customers and
drive sales growth.

At a basic level, CRM software consolidates customer information and documents (e.g.
purchasing history, demographics and returns) for easy access and management.
CRM captures, analyses and distributes all relevant data from customer and
prospective customer interactions to everyone in the organisation. This distribution of
information helps an organisation better meet customer, product and service needs. For
example, data can be used to create target customer profiles to find opportunities to
upsell and reward them for their loyalty.
Characteristics of a sound CRM system include:
 Easy import of data from existing databases.
 Ease of use (e.g. an intuitive interface and good user support).
 Adaptability (as the business should grow).
 Improved customer satisfaction.
 Easy reporting and tracking features.

Steps in Target Costing

1. Determine the price the market will accept for the product based on market
research. This may take into account the market share required.
2. Deduct a required profit margin from this price − this gives the target cost.
3. Estimate the actual cost of the product. If it is a new product, this will be an
estimate.
4. Identify ways to narrow the gap between the actual cost of the product and
the target cost
Tear down analysis" (also called "reverse engineering") − involves examining a
competitor's product to identify possible improvements or cost reductions.
Value engineering − involves investigating the factors which affect the cost of a
product or service. The aim is to improve the design of a product so the same functions
can be provided for a lower cost or save cost by eliminating those the customer does
not value.
Some writers distinguish between four elements of value:
1. Utility or use value − how useful the product is to the owner.
2. Esteem value − how the product increases the owner's sense of well-being.
3. Scarcity value − the high value of diamonds is a result of their scarcity.
4. Exchange value − the amount the owner sells the product for.
 1. Development stage (planning and design stage) – The product is
designed and developed during this stage. Prototypes may be produced.
Manufacturing processes will also be created, including any special
machinery required to make the product. Cash flow will be negative at this
stage, as there is no revenue.
2. Introduction phase/launch – Special pricing strategies may be used during
the launch of a new product, such as market skimming or market penetration.
Companies also need to consider that the pricing strategy used at the
introductory stage may affect demand in later years. For example, setting a
low price initially may discourage competitors from entering the market. This
will allow the company to enjoy higher demand later in the product lifecycle.
3. Growth – Competition may rise due to new suppliers entering the market.
This may force lower prices.
4. Maturity – Most profits are made during this phase. Prices may be stable.
The company's price strategy during this phase is more likely to focus on
maximising short-term profits, unlike in the introduction phase.
5. Decline – Prices may fall with demand unless a niche market can be found.

During the planning and design phase, many of the decisions made about the product's design
will determine the costs which will be incurred in the future. These are committed costs.

EMA – the identification, collection, analysis and use of two types of information for
internal decision-making: physical information on the use, flows and rates of energy,
water and materials (including wastes); and monetary information on environment-
related costs, earnings and savings.
– Environmental Management Accounting Research and Information Centre (EMARIC)
It is important to remember that there are two aspects to environmental management
accounting:
 Physical information, which focuses on the physical use of scarce resources
and how much waste occurs.
 Monetary information on environment-related costs, earnings and savings.

 Environmental prevention costs are the costs of activities undertaken to

prevent the production of waste (e.g. spending on redesigning processes to
reduce the amount of pollution released into the atmosphere).
 Environmental detection costs are those incurred to ensure that the
organisation complies with regulations and voluntary standards (e.g. costs of
auditing the organisation's environmental activities).
 Environmental internal failure costs are costs incurred to clean up
environmental waste and pollution before it has been released into the
environment (e.g. costs of disposing of toxic waste).
  Environmental external failure costs are costs incurred on activities
performed after discharging waste into the environment (e.g. costs of cleaning
up an ocean after spilling oil).

Environmental activity-based costing applies ABC principles to environmental costs so that the
environmental costs are apportioned "correctly" to the products which use the drivers which
cause the costs to be incurred.

Normally many environmental costs are hidden in general overheads and therefore
apportioned to products using inappropriate drivers. This can mean that product costs
do not truly reflect the environmental costs associated with making them.
Under environmental ABC:
 Environment-related costs are attributed to joint environmental cost centres
such as sewage plants or incinerators.
 Environment-driven costs, on the other hand, are hidden in general
overheads (although they vary with the amount of throughput) and do not
relate directly to a joint environmental cost centre. Such costs are allocated to
environmental activities using the key drivers of the activity. For example, the
activity of monitoring emissions may be driven by waste emissions in kg. The
costs of monitoring emissions can then be apportioned to products based on
kg of emissions produced by each product.

categories of environmental costs:

 Conventional costs: costs having environmental relevance (e.g. costs of
buying energy and other scarce resources).
 Potentially hidden costs: those environmental costs which are recorded, but
simply included in general overheads, so management is not aware of them.
 Contingent costs: potential future costs (e.g. costs of cleaning up damage
caused by pollution). (In financial statements, contingent costs might be
disclosed as contingent liabilities or recognised as provisions.)
 Image and relationship costs: the costs of producing environmental reports
and promoting the company's environmental activities

Input-Output Analysis
Input output analysis of "mass balance" aims to make it clear to management how much
waste is being generated by their activities. The aim is simply to compare the output of
a production process (in physical units) with the input on the basis that "what comes in
must go out".
Flow Cost Accounting
Flow cost accounting is a more detailed version of input-output analysis. Input-output
analysis considers only the physical inputs and ensures that these are accounted for as
physical outputs at the end of the production process. Flow cost accounting considers
the inputs and outputs for each process, to identify the waste for each process.
Flow cost accounting examines not only the physical quantities of material, but also the
costs and values of output and waste for each process.
The costs used in flow cost accounting are sometimes categorised as follows:
 material costs;
 system costs, which are the costs incurred within the various processes which
add value to the product (e.g. wages and overheads); and
 delivery and disposal costs, which are incurred in delivering goods to
customers or disposing of waste.

Contribution would also be the funds available to cover fixed costs. If there is insufficient
funds to cover fixed costs, the entity would be making a loss.
Any excess of contribution over fixed costs is profit.

The breakeven point is a measure of the lowest activity level at which the activity is
viable; where:
Total contribution = Total fixed costs
The point where the total cost and revenue lines intersect is the breakeven point (BEP).

Contribution/sales ratio (also called contribution margin) is the proportion of selling price
which contributes to fixed overheads and profits.
=Contribution per unit/ SP per unit

PV Charts
Advantages:
 Multi-product PV charts enable the user to see easily the relationship between
revenue and profit. Breakeven revenue can also be seen.
 Identifying the most and least profitable products should lead to improved decision-
making.
Disadvantages:
 The PV chart assumes either a constant sales mix or assumes that products are sold
in order of increasing C/S ratio. The actual sales mix is likely to deviate from these
assumptions, making the conclusions about breakeven revenue incorrect.
 The chart shows only profits plotted against revenue. It does not show variable costs
or output in units.
 The chart assumes that products can be sold in order of profitability, which ignores
the fact that sales of one product may depend on sales of another.
Problems of using ROI

The main disadvantage of using ROI is that the percentage increases as assets get older. This is because
the carrying value of the assets decreases as a result of higher accumulated depreciation, hence capital
employed falls. This, in turn, can lead managers to hold onto ageing assets rather than replace them,
especially where their bonuses are linked to ROI. It may be that division P’s manager would not have
made the same decision which Head Office made to invest in the more advanced technology for this
reason. Another disadvantage is that ROI is based on accounting profits, which are subjective, rather
than cash flows. It is therefore open to manipulation. Additionally, it does not take into account the cost
of capital. It merely looks at profits relative to capital employed without taking into account the cost of
the capital which has been invested. It is therefore not consistent with maximising returns to investors.

The benefits to an organisation of using the balanced scorecard to assess performance instead of relying
solely on financial measures are as follows:

Not all organisations have profit or financial return as the main objective. In an altruistic not-for-profit
charity such as Medcomp, the objectives are based on delivering a service which can be measured in
benefit to people who are unable to pay for the service. Therefore, it is necessary to have measures
which are not purely financial to reflect the different emphasis of the mission and supporting objectives.
Financial performance indicators are ‘lagging’ indicators. This means that the events and decisions which
caused these indicators occurred long ago. The balanced scorecard includes ‘leading’ indicators. For
example, the learning and growth perspective may encourage spending on training or techniques which
will depress profits or increase costs in the short term, but will have much greater benefits in the future.
The balanced scorecard helps to align key performance measures with strategy at all levels. This means
that all employees will be able to link their individual goals to those of the organisation as a whole. The
benefit of this is that it ensures that what gets measured is important to the organisation. Financial
measures used in isolation are relatively easy to manipulate in the short term. For example, a high return
on investment figure may be considered an indicator of good performance whereas it may have been
caused by a manager delaying the purchase of a necessary asset. The balanced scorecard provided a
range of indicators which makes this type of manipulation more difficult to conceal.

Using expected values implies choosing the project with the highest expected value regardless
of the risk associated with each one. Expected values are more appropriate for events that are
repeated, since the expected value is an average of the outcomes.