APM - Mock - Questions Answers

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ACCA MOCK
Advanced Performance Management
Advanced Audit and Assurance
Time allowed: 3 hours 15 minutes

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Section A – This question is compulsory and MUST be attempted
Q 1 Upkeep is an international not-for-profit, humanitarian organisation that is

operating in more than 80 countries worldwide. Upkeep is engaged in both
development and emergency response activities in the countries, mostly the
organisation focus on economic empowerment, infrastructure development and
education of the countries it has a representation in.
Upkeep keeps a very close watch on the budgets that are approved by the donors
to ensure that the expenses are kept in control. Upkeep gives most weightage to
the variance analysis in the performance appraisal of the management. The second
most important performance indicator is the net surplus or deficit of income over
expense margin calculated by dividing the net surplus/deficit for the period with
total donations or receipts during the period. The third most important
performance indicator is the return on investment (ROI) of the organisation,
calculated by dividing the net surplus/deficit for the period with the total general
funds available for the period. The executive management is very concerned about
the performance of the company as all the three key performance indicators (KPIs)
have significantly deteriorated.
The operational management responded to the concerns of the executive
management by explaining that; mostly, the money received from donors is in a
different currency, the conversion of the funds into the functional currency is
usually the cause of over expenditure, which the management believes is not in
their control. They also challenged the key performance indicators stating that
these are not effective to evaluate the performance of not-for-profit agencies. The
net surplus/deficit margin should not be the main concern of Upkeep and the
executive management should try to include the non-financial performance
indicators in the appraisal process, which would better suit Upkeep.
Executive management is aware that the set indicators are not ideal but is
concerned about using non-financial performance indicators that cannot be
properly quantified to allow objective judgment. The executive management has
hired a consultancy and advisory firm called ‘AB consultants and advisors’, to help
them evaluate the performance of the company. The financial data, presented in
appendix A, on which the three main KPIs were calculated was shared with the
consultants. You are a manager working in the firm hired by the management for
the task mentioned and have been selected to head this assignment.
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Required:
Write a report to the executive management of Upkeep to:
(a) Evaluate the usefulness of the current KPIs of the organisation.
(8 marks)
(b) Explain the importance and need of non-financial KPIs for Upkeep.
(4 marks)
(c) Recommend some KPIs that can better evaluate the performance of Upkeep.
(10 marks)
(d) Show how the performance evaluation of Upkeep will change if the new
proposed KIPs are used for performance appraisal.
(20 marks)
(e) Recommend changes in the existing 3 KIPs, if management is reluctant to
adopt the proposed new KIPs by the consultancy and advisory firm.
(4 marks)
Professional marks will be awarded for the format, style and structure of the
discussion of your answer. (4 marks)
(50 marks)
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Appendix A
2014 2015
Description Budget Statement of Budget Statement of
surplus/deficit surplus/deficit
Grants received $800,000 $801,000 $1,000,000 $1,002,500
Direct program ($600,000) ($750,000) ($800,000) ($982,500)

activities
Shared/admin ($100,000) ($150,000) ($100,000) ($170,000)
costs
Net $100,000 ($99,000) $100,000 ($150,000)
surplus/deficit
General funds $500,000 $401,000
Beneficiaries targeted 160,000 180,000 200,000 300,000

individuals individuals individuals individuals
Phases of the project 5 5 7 8
completed
Post implementation 80% 95% 80% 98%
satisfaction survey
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Section B – TWO questions to be attempted
2 The new CEO of MLK Ltd. is a great supporter of standard costing. He believes
that the key for effective standard costing is perfect budgeting. The CEO has
freshly joined the company and feels that the current costing system is not
optimal for the company. The company makes 3 different products, product A,
product B and product C. Each product is manufactured and assembled at a
different factory and targeted at different markets.
The existing practice of the management is to make annual budgets and compare
the actual performance monthly. The performance of the management is
evaluated based on the joint results of the three products monthly. New CEO
believes that the current practice is unfair for the product managers, as they are
completely autonomous in the decision making in all aspects (including capital
investments, marketing and distribution) of their product manufacturing and sales.
Though the CEO thinks of standard costing as a very reliable technique for
monitoring and control, however, he believes that the target costing could prove a
better technique for this company.
The CEO is not at all satisfied by current performance evaluation performed by the
company. Appendix A lists the extracts of the financial information that were used
in the performance evaluation.
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Notes:
1- Total fixed costs are apportioned among the products based on their
production.
2- During the period, manager A invested $200,000 in new machinery that would
improve the production process.
3- Half of the total profit made by MLK Ltd. is distributed among the managers of
each department if the variance of net profit is favourable, to ensure that the
goals of the managers are in-line with the goals of the company. The company
believes that the apportionment based on the size of the division is a fair measure,
therefore the bonus is distributed based on the capital structure of the division
(capital employed).
4- New CEO believes that the change in the actual production and sales should be
depicted properly in the budgets when computing variances.
5- CEO also believes that the current scheme for bonus distribution is not just, the
bonus should be apportioned based on the performance of each product in
generating net profit (instead of capital employed). The remainder policy of profit
distribution remains unchanged.
6- CEO is also of the opinion that each product depicts a division of the company,
the managers of the division are independent and autonomous, therefore, the
performance appraisal for the company should be performed based on the
divisions instead of the company as a whole.
7- It has also been agreed that based on the market of each product, product A
should earn a mark-up of 20%, product B should earn a markup of 25% and
product C should earn a mark-up of 40%. Based on CEO’s assessment and market
survey, CEO believes that the current sale price of each product is sufficient, the
company should try to target a reduction in cost.
Required:
(a) Using the data in the appendix and accompanying notes, re-compute the
variances and bonus. Comment on the impact, the new computations have on
the performance evaluation of the managers. (11 marks)
(b) Comment on the drawbacks of the standard costing system and how can
target costing fill these gaps for MLK Ltd. (4 marks)
(c) Show how target costing can be used by MLK Ltd. as the basis of performance
management system. Compare the results of target costing and standard costing
from part ‘a’. (10 marks)
(25 marks)
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3 Floor Co. is a multinational manufacturer and distributor of toys. Recently,

the management has been very concerned about the efficiency of the company
and believes that modern business practices and management techniques can
help improve the efficiency of the company. The management is interested in
adopting six sigma approach to achieve this object, however, the management
does not properly comprehend the mechanics of this method. They have hired
you, an expert, to present and give a detailed report on what six sigma technique
is and how can it help manufacturing and distribution companies.
Floor Co. has seven manufacturing sites around the globe and distributes their
products to 80 counties. They also have retail outlets in 5 of these countries, apart
from this they also offer licensing. The management is also thinking about
changing their performance measurement technique to balanced scorecard.
Required:
(a) Explain what balanced scorecard is and how it functions.
(10 marks)
(b) Prepare notes that you would use (as an expert) when presenting the six
sigma approach to the management of Floor Co. The focus of the presentation
should be on the suitability of six sigma for Floor Co.
(15 marks)
(25 marks)
A BIG THANKS TO
FOR THIS MOCK

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ACCA MOCK
Advance Performance Management
APM
Advanced Audit and Assurance
Time allowed: 3 hours 15 minutes

Attempt all three questions
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1 To: Executive management - Upkeep

From: Manager – AB Consultants and Advisors
Date: DD-MM-YYYY
Subject: Performance indicators for Upkeep
Introduction
We have been hired as consultants to help management of Upkeep in improving
the performance of the organisation by evaluating the current appraisal process
and providing recommendation where possible to improve the appraisal process
to ensure that the objectives of Upkeep are achieved with as minimum
resources as possible.
The report is divided into five sections and appendixes, the first section
evaluates the current KPIs of Upkeep, the second section explains the
importance of the non-financial indicators that might suit Upkeep, the third
section lists some of the KPIs that we believe will help improve the performance
of the organisation, the fourth section compares the current performance taking
account of old and new (proposed) KPIs and, finally, in the last section we list
some of the changes in the current KPIs that Upkeep is using to better function
in the environment in which Upkeep operates, as we acknowledge that fact that
a change at such a strategic level is not easy and takes time. After all these
sections of the main body, the report ends with a summarised conclusions
paragraph.
Usefulness of the current KPIs

The current KPIs that Upkeep has are not very suitable for the company, as they
are fit for profit oriented business. Upkeep does not aim to make profit,
therefore indicator like net surplus or deficit of income over expense margin and
return on investment are not suitable for Upkeep. These indicators are relatively
less useful for companies like Upkeep, even if this ratio is high, how can this ratio
help Upkeep become better. Maximisation of net surplus is not an objective of a
humanitarian company. Management should not waste time in evaluating such
indicators, which will lead the company nowhere. The last indicator of Upkeep
that is used by the management uses variance analysis to keep a close eye on
the expenses. This indicator can help management to evaluate the economy of
the resources it is using to achieve the objectives. It is a good KPI to evaluate the
performance of Upkeep, as controlling cost will help Upkeep achieve objectives
economically.
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Non-financial KPIs for Upkeep (importance and need)

The objectives of not-for-profit organisations (NPOs) are usually non-financial
ones, the objectives cannot be easily quantified, therefore, the indicators of such
companies should include non-financial KPIs. The performance of such companies
should not be evaluated only taking account of financial indicators, aspects like
quality, relations, satisfaction and effectiveness are very important NOPs. The
current mechanism for performance evaluation in Upkeep only take account of
financial KPIs and ignore the qualitative aspects of the company. Humanitarian
companies like Upkeep strive for a concept what we call ‘value for money’ (VFM),
the VFM can is achieved by the economy (cost of inputs), efficiency (inputs in
relation to outputs) and effectiveness (quality of outputs). The aspects of VFM are
too complicated to just be covered by financial indicators, hence, including a mix
of financial and non-financial KPIs is necessary for companies like Upkeep to
evaluate their performance appropriately.
Recommendation of KPIs for Upkeep

Looking at the working environment of Upkeep, we recommend the following KPIs
for Upkeep:
1- Beneficiaries reached per grant received – calculated by dividing total

beneficiaries by grants received.
2- Cost incurred per beneficiaries reached – calculated by dividing total cost
incurred for the period by beneficiaries reached.
3- Growth rate of grants received – calculated by dividing the increase (or
decrease) in grant received by base figure of grants received (i.e. previous year’s
figure).
4- Direct program costs in relation to total costs of Upkeep – calculated by dividing
the direct program activity costs by total costs incurred during the period.
5- Total cost incurred per phase completed – calculated by dividing the total costs
incurred for the period by total phases completed.
6- Total grants received per satisfied beneficiary – calculated by dividing total
grants received for the period by total satisfied beneficiaries.
7- Cost incurred per satisfied beneficiaries – calculated by dividing total cost
incurred for a period by satisfied beneficiaries.
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Performance evaluation of Upkeep based on new KPIs

Please refer to appendix A and B for the details of calculations. Appendix A details
the KPIs that we have recommended in the previous section of this report and
appendix B details the KPIs that Upkeep already uses.
Looking at the calculations, we can see how drastically the performance evaluation
differs in both mechanisms. Let’s first have a look at how the current framework
would show performance of Upkeep. Apart from grants received all the variances
are adverse, the net deficit in both years have increased significantly, depicting an
increase in the inefficiency of the organisation. Moving forward to the next KPI, net
surplus or deficit of income over expense margin also shows a worsening of the
position from 12% deficit to 15%. However, this KPI as discussed above is not very
ideal to judge the performance of a humanitarian organisation. To increase this
margin should not be an objective of this company, as all the funds that are
received are for welfare and humanitarian activities, any savings cannot be retained
by the company, all expenses as depicted in the budget should be carried out,
however, if the company does perform all the activities economically, the surplus
can be used by Upkeep to invest in extended activities as approved by the donors.
However, this can be ensured by proper a budgetary system. The last indicator is
even more inappropriate for companies like Upkeep, ROI is purely a profit oriented
indicator, there is no objective, or rather a concept, of financial return in
humanitarian organisations. Still, the ROIs for both years, calculated for Upkeep,
show an increase in the deficit from 20% to 37%. Now let’s shift out focus to the
indicators in appendix A, the beneficiaries per grant have increased, this indicator
shows that more beneficiaries can be entertained with each $ of grant received.
This can be considered good for Upkeep as it can invest more on each beneficiary
now, however, a stable ratio can be considered more optimal depicting as the
grants are increasing so are the targeted beneficiaries. An increase shows that the
target beneficiaries are not increasing at the same pace. The next indicator is the
cost per beneficiary, the cost per beneficiary has been reduced, this is a good sign.
This shows that the total admin costs are reducing and Upkeep is reaching
beneficiaries more economically, this ratio is indicating an increase in both economy
and efficiency of Upkeep. The next indicator is the growth in the in the grants
received, this is one of the most fundamental indicators that Upkeep should adopt,
the data shows that there is a growth of 25% in the receipts, the organisation
should focus great efforts on the maintenance or increase of this indicator.
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The next indicator is the portion of direct cost as compared to the total cost incurred
by Upkeep. It shows an increase, this is a good sign, depicting that admin costs are
reducing and direct program costs are increasing, indicating effectiveness of Upkeep.
The net indicator on our list is total cost incurred per completed phase, the indicator
depicts a lowering of cost incurred to complete each phase, again an indicator of
economy and efficiency of Upkeep. The next indicator is total receipts per satisfied
beneficiaries, this indicator is showing a decrease, this should be an area of concern
for Upkeep, indicating that the satisfied beneficiaries’ number is relatively lowered in
2015. Moving ahead to the last indicator, we can see the cost per satisfied beneficiary
has also decreased, again this either depicts lowered satisfied beneficiary number or
increase in efficiency and economy of Upkeep.
As we can see correct indicators allow a company to focus their efforts in areas that
really matter for a company.
Changes in the existing 3 KPIs

We recommend the following changes in the current indicators for the time being
until Upkeep is ready to change the entire performance evaluation system:
1- Add more detailed variance analysis, detailing breakup of the direct and shared
costs, to have a better picture of the cost structure.
2- Change the net surplus or deficit of income over expense margin to simple direct
program expense margin calculated by dividing the direct expenses with the total
grants received, it is a better indicator of efficiency.
3- Change the ROI to a tailored fundraising ROI, tracking the efficiency by changing
the denominator of the ratio from general funds to capital employed (fixed assets).
4- Change the ROI to depict costs incurred instead of net surplus made, as controlling
cost can be considered a better objective of NPO rather than increasing the net
surplus.
Conclusion
As stated in the report, Upkeep should change the current appraisal structure of the
company, current KPIs are not optimal for Upkeep. New proposed KPIs can help
Upkeep to better evaluate its VFM, but as it is a strategic change, we recommend
some temporary changes in the current scheme of indicators to evaluate the
performance for the time being.
Sincerely
Manager – AB Consultancy and Advisory
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Capital Employed ($) 500,000 500,000 500,000 Nil
Re-commutation of bonus
Eligibility for division A: not eligible as the net profit variance is adverse $10,000.
Eligibility for division B: not eligible as the net profit variance is adverse $6,000.
Eligibility for division C: eligible as the net profit variance is favourable $5,800.
Bonus distribution:
Manager of division A: Nil
Manager of division B: Nil
Manager of division C: $42,523 (Working 1)
Impact the new computations of performance evaluation

As evident from the new calculations, each of the division if seen in isolation (taking
account of the flexed budgets), shows a better picture of the performance of the
company. Both divisions A and B have an adverse variance while only division C
shows favourable picture. Hence, according to the policy of the company, only
division C is eligible for the bonus. Additionally, the size of division should not be
used as the basis of bonus division, as it can be seen, product C has the lightest
capital investment but is most profitable among all the three products, switching to
net profit generated as the basis of allocation of bonus seems a batter variable. We
can see how the profit attributable to the division has significantly increased after
using net profit as the basis of apportionment.
(b) Drawbacks of standard costing

1. Expensive and time consuming process.
2. 2. Ignores qualitative aspects of the business like the quality of raw materials.
3. Ignores concepts like lead time and customer satisfaction.
4. Can only work in companies that manufacture or deal in standard products.
Cannot be applied on non-standardised production processes.
5. Standard costing has a reactive nature, cannot ensure prevention from
inefficiencies.
Advantages of using target costing
1. Target costing takes company towards cost optimisation, this company has set its
standards around net profit, which makes it very clear that the company is cost
oriented. Target costing can help a company reach its desired cost structure.
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2. Predictability of profit can be achieved, as the company will set the cost markups,
it would know how much profit will be achieved from the operations.
3. Target costing has a more proactive approach, focusing on both price and cost
control.
4. Analysis from target costing can be used to help improve processes and remove
duplications or inefficiencies.
5. Can be used by companies that do not deal in standardised products, although
MLK Ltd. has three standard products, devising standards for all three products is a
time consuming process, principles of target costing can be uniformly applied on an
entire organisation.
According to target costing, only product B has a cost gap, meaning, it is not as per the
management’s expectations in generating mark-up on the cost. Remaining both
products (A and C) are performing better in terms of target costing, therefore, we can
say that these products are efficiently produced. However, the results of standard
costing are very different, according to standard costing only product C shows
favouable variance.
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We have seen the drawbacks of standard costing and advantages of target costing,
the comments of CEO appear accurate, the company should adopt target costing to
monitor its performance.
Working 1:
Total profit generated: $120,200
Amount of profit attributable to bonus: $120,400 / 2 = $60,200
Amount of bonus attributable to division C: $85,045 / $120,400 x $60,200 =
$42,523
Working 2:
Target cost for product A = $10 / 1.2 = $8.33
Target cost for product B = $12 / 1.25 = $9.6
Target cost for product C = $20 / 1.4 = $14.29
3 (a) Balanced scorecard

The balanced scorecard is a performance management process that uses
automation tools to help managers control and monitor business activities.
Balanced score’s popularity is due to the fact that it focuses on the strategy of the
organisation and mixes the financial and non-financial factors when evaluating the
performance. The name ‘balanced’ is given to this tool as it evaluates the
performance of a business from 4 perspectives:
1. Financial indicators – focus on inputs and costs, e.g. ROI, ROCE, ROE, etc.
2. Customer indicators – focus on soft issues like quality, perception and
satisfaction, e.g. delivery time, customer complaints, new customer, customer
retention, etc.
3. Internal business processes indicators – focus on economy and efficiency, e.g.
unit costs, yields, setup costs, etc.
4. Learning and growth indicators – focus on innovation and improvements, e.g. life
cycle costing, R&D ratio, time to market, etc.
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(b) Notes on six sigma
Introduction slide
Six sigma is an approach that aims at improving the quality and eliminating
defects. The philosophy of six sigma is to improve the quality of outputs by
identifying the flaws in the business processes and removing them. The process
of six sigma uses the concepts of statistics in identifying the standard deviations
in the process.
This approach is very popular among the businesses, no matter which sector
they relate to. The focus of six sigma is not on cost but rather on the elimination
of defects and customer satisfaction. Multinational companies are adopting
these modern techniques for managing business activities because the focus of
such techniques is considered superior to traditional business tools and
techniques that were more cost driven.
Process of six sigma

Six sigma can be achieved by a DMAIC methodology that helps in the
implementation of the philosophies of six sigma in business operations. The
DMAIC stands for define, measure, analyse, improve and control.
Define
The customer specifications and requirements are used to define the processes
and systems of the company. The goals of the company are altered to become in
line with what customers want.
Floor Co. needs to hold a survey to ensure that it knows what the customers
expect from the company. The business should be directed by the expectations
of the customers because we all know that ‘customer is always right’.
Measure
Next step would be to collect data on the existing processes in place, to see how
they are achieving the objectives. This step relates to how the processes are
functioning now. The processes should be structured in such a way as to achieve
the objectives that are aimed at customer satisfaction. This should be relatively
easy for Floor Co., the management needs to gather all the data they have on
the existing processes, the monitoring reports, quality control reports, internal
audit reports or management letters issued by the external auditors. The
management can also start a more focused data gathering process, especially
aimed at the implementation of the six sigma.
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Analyse
The next stage of the process is to analyse the data collected from the current
processes. The analysis is performed to identify the root causes of the issues that
the current processes have embedded in them. The focus of the analysis is to
evaluate cause and effect relationship. The data that is gathered by Floor Co. will
have to be analysed in detail by the management. This is a key process, so
management needs to invest sufficient efforts to ensure that correct causes of the
issues in the current processes are identified.
Improve
This next step is aimed at improving the current processes, this can have two
alternates, either the current processes are improved by inserting patches where
needed, or the management could devise new processes for the updated
objectives. Management of Floor Co. needs to evaluate the results of the analysis,
to see if they can amend the current processes to new objectives or would they
need to devise new processes.
Control
The final stage of the six sigma implementation methodology is to control and
monitor the progress, management of Floor Co. would need to have a close watch
on the progress of the change that they approved. The continuous monitoring
enables the management to identify issues in the implementation at an early stage,
and therefore, corrective actions can be taken to ensure that the desired results are
obtained.
Conclusion
So, in order to now conclude the discussion we have done on six sigma, I believe
switching to six sigma is a wise move for a business like Floor Co. However, to
ensure that the desired results are obtained, we would need to follow some kind of
a methodology, one such methodology is DMAIC. If management follows this
approach it would be easy to implement the philosophy of six sigma. Thank you!
ACCA
APM (INT)
QUESTIONS
Mock A
We're not sure whether it is Becker's mock exam or

Kaplan's, or someone else's. Whomever it is, we are
grateful to them.
MO CK A QUES TIONS
SECTION A
This ONE question is compulsory and MUST be attempted
1 Prisec Group: Company information
Prisec Group (Prisec) is a listed company providing security solutions to a range of private
and public sector clients. Its main client is the domestic government of Mayland, with
which it has a number of contracts. The most significant contract is the prison contract.
Prison contract
As part of a government initiative almost 25 years ago, the government, through the
Mayland National Prison Service (MNPS), invited private sector consortiums to tender to
design, build, manage and finance a number of new prisons in Mayland. Prisec Group
joined forces with a construction company, Bowlan Buildings (BB), and together they
successfully won tenders to build and run two prisons in the North West of the country. BB
financed and constructed the prisons and retains responsibility for the maintenance of the
prison buildings, whilst Prisec manages the operational running of the prisons itself for
which it receives an annual fee.
BB will transfer legal ownership of the prison buildings to the public sector after 25 years.
However, the contract to run the prisons will end early next year and a new contract to run
the prisons has recently been put out to tender. Prisec has just been informed that it has
been shortlisted to submit a detailed tender, but is aware that although it is the current
provider, success is by no means certain.
The environment in which Prisec operates
Prisec’s CEO has identified a number of challenges, risks and uncertainties in the
environment and he has tasked you, a performance management expert, to use a PEST
analysis to discuss the environment in which Prisec operates, and the impact this may have
on Prisec’s plans to tender to run the prisons for another year.
Since the Mayland government launched its initiative to use private firms in the running of
prisons, there have been a number of high profile problems with such schemes both within
Mayland and internationally. There have been serious security breaches in cases where
private firms were contracted to run the services (from prisoner escapes through to arms
caches found on prison premises) and some private providers have been found to be
exploiting their workforce; paying too little, exceeding working hours directives and
providing inadequate training. In addition, one private provider responsible for three
prisons in the south of the country recently became insolvent raising the spectre of
relocating hundreds of prisoners at short notice.
In Mayland this has led to growing demands for the government to take running prisons
back into the public sector. The main political party in opposition to the Mayland
government supports these demands although an election is unlikely to be called for
another two years at the earliest. Prisec was not named in connection with any of the
reported problems but the Mayland government is concerned to ensure that all contractors
it deals with apply the highest standards and have made it clear that contractors on all
tender shortlists will be assessed on a wide range of factors before a decision is made.
3
ACCA APM: AD VANCE D PERFOR MAN CE MA NA GEMEN T
As the domestic economy of Mayland is currently in recession, the government is under

pressure to reduce public spending still further and Prisec knows it will need to minimise its
own costs if it is to submit a competitive bid and still make a profit from the tender.
However there have recently been changes in the required outcomes for the prison service,
with much more emphasis on better outcomes for offenders. Consequently, all prisons will
now have to meet targets in areas such as reoffending rates for released prisoners and
hours per week spent by prisoners on purposeful activities.
This has to be achieved against a backdrop of a rapidly rising prison population (the number
of prison inmates in Mayland has doubled over the past ten years) which has put the
system under great pressure. The increase is in part due to a change in sentencing
guidelines implemented by the government and partly (it is widely believed) as a result of
the economic downturn.
Certainly the demographic of the prison population is changing, with an ever higher
number of prisoners in the 16 to 25 age range with registered home addresses in the most
deprived areas of the region.
A particular problem for prisons in Mayland has been the increasing prevalence in drug use
and dependence amongst prisoners that has led to a large increase in violence. To crack
down on such problems, a range of mobile narcotics and explosives tracers have been
developed which can detect the presence of an illegal chemical in the air within 10 seconds
of taking a sample. In addition, there is an increasing trend towards 360o video surveillance
and the tagging of prisoners with electronic bracelets to monitor movement. Sophisticated
software then trawls the movement of prisoners throughout the prison to identify the
potential for conflict and violence before it occurs. These advances are growing in
popularity within the prison service but the costs of procurement, installation and
monitoring are all still extremely high.
The balanced scorecard
The Mayland government assesses potential contractors according to a public sector
variant of the balanced scorecard. Under this version of the model, although the financial,
learning and innovation and internal business perspectives are assessed as in the private
sector, the customer perspective is split between the perspective of the users of the service
(for example the prisoners) and the perspective of those paying for the service (i.e. the
government and the Mayland taxpayers). In preparation for the final tender selection, the
Prisec Group board has therefore been asked by MNPS to provide performance data for a
range of performance indicators. Initial data for some of the measures has been gathered
by Prisec and is provided in appendix 1, along with the related new government targets for
private sector prison providers released earlier this year by the MNPS.
The CEO would like you to complete some of the work on the balanced scorecard. Firstly,
he wants a brief explanation of what the balanced scorecard is and for you to advise on the
steps to follow when implementing the balanced scorecard.
Secondly, the CEO has requested an assessment of Prisec’s performance using the
perspectives of the balanced scorecard as used by the Mayland government, briefly
detailing any additional information that would be useful.
4
MO CK A QUES TIONS
Performance improvement
The CEO is keen to ensure that Prisec’s performance is good enough to meet all the MNPS
targets and has scheduled a board meeting to discuss strategy and plans for performance
improvement. The action plans put forward by the management team include the
following three potential courses of action designed to deal with staff matters:
(i) Reduce officers’ leave to increase average officer to prisoner ratios.
(ii) Offer prison officers an incentive payment for each three-month period worked
without a day off sick.
(iii) Introduce six-monthly performance appraisals for staff identified as underperforming.
The CEO wants you to evaluate the viability of the three suggestions put forward by the
management team to improve performance.
Required
Write a report to the board of Prisec to:
(i) Respond to the CEO’s request for work on the PEST analysis and the impact of the
environment on the tender. (16 marks)
(ii) Explain the balanced scorecard and advise on the implementation steps. (5 marks)
(iii) Assess Prisec’s performance using the balanced scorecard perspectives detailing
any additional information needed. (16 marks)
(iv) Evaluate the three courses of action to improve performance. (9 marks)
Professional marks will be awarded for the format, style and structure of the discussion
of your answer. (4 marks)
(Total: 50 marks)
5
Appendix 1: Performance data
Key Performance Indicators Prisec Prisec

MNPS targets 20X3
20X2 20X1
Assaults on prisoners, staff and others <9% of average prison
17 15
population
Average staff sickness <9 working days per year 15 15
Current ratio >1.5 2.1 2.0
Gearing ratio (debt/equity) <1.0 0.6 0.5
Interest cover >4 4.1 4.3
Prisoners held in a cell designed for a <18% of average prison
25% 22%
smaller number of prisoners population
Prison records complete, accurate >85% of average prison
78% 75%
and up-to-date population
Prisoners are supervised as per their >95% of average prison
86% 79%
assigned supervision level population
Prisoners attending at least 2 offender >35% of average prison
30% 25%
behaviour programmes per year population
Prisoners reoffending within six
>45% of prisoners discharged 47% 53%
months of discharge
Prisoners’ supervision levels are >55% of average prison
41% 32%
reviewed every six months population
Prisoners to achieve basic skills >50% of average prison
30% 22%
awards or higher population
Prisoners to have job/education/
>25% of prisoners discharged 9% 9%
training by one month of discharge
Prisoners with access to ICT training >10% of average prison
7% 6%
population
Quick ratio >1 1.21 1.30
Rate of positive results from <11% of average prison
33% 29%
mandatory random drug test population
Ratio of prison officers to prisoners At least 1 officer per 4 prisoners 1 to 7 1 to 6
Increase/(reduction) in carbon >4% reduction in emissions year
0.05% (2%)
emissions on year
Increase/(reduction) in energy >3% reduction in consumption
2% 2%
consumption year on year
Average staff training days >5 days per staff member 2 days 3 days
Time spent by prisoners engaged in 14 15
>24 hours a week
purposeful activity hours hours
Use of 360o camera surveillance >15% of communal floor area 8% 8%
6
MO CK A QUES TIONS
SECTION B
BOTH questions are compulsory and MUST be attempted
2 Grigs: Company information
Grigs is a listed components manufacturer based in the country of Beeland. After a year of
reduced turnover and criticism in the financial markets of how the Board was coping with
the economic downturn, the CEO has resigned.
Remuneration package for the new CEO
Recruitment for a new CEO is underway. Grigs wants to ensure that the reward scheme for
the CEO is suitable.
The remuneration committee is now discussing the remuneration package that might to be
offered to the company’s new CEO. Members of the committee have put forward different
proposals. These include:
(i) The CEO must be offered a salary at least 20% more than the average of similar sized
companies in order to attract the best candidates.
(ii) It is essential to offer a salary linked to turnover to improve performance and stop
the current slide.
(iii) The CEO should be offered share options, exercisable in one year’s time, on at least
3,000,000 shares, at an exercise price of 25% below the current market price of 120
cents. Grigs currently has 400 million shares in issue. The estimated value of these
share options is $2.1 million. Such generosity would not be well received by
shareholders given recent newspaper commentary about the excessive
remuneration of senior managers in some companies.
(iv) Remuneration should be a basic salary plus a bonus based on a proportion of the
economic value added (EVATM) of the company. 1.5% per year was the suggested
proportion.
Economic value added (EVATM)
Grigs is calculating EVATM for the first time. The remuneration committee would like to
understand the total annual cost to the company of the bonus based on the financial data
for Grigs for the most recent year. This financial data is included in appendix 1.
Evaluation of remuneration proposals
The remuneration committee would also like you to evaluate the four proposals and to
recommend a suitable remuneration package.
Required:
(a) Discuss the objectives of a suitable reward scheme for the new CEO of Grigs.
(4 marks)
(b) For the EVATM suggestion, estimate the total annual cost to the company of the
bonus based on the information available in appendix 1.
All assumptions should be clearly stated (5 marks)
(c) Evaluate the four suggestions made and recommend a suitable remuneration
package. (16 marks)
(Total: 25 marks)
7
Appendix 1: Financial data for Grigs for the most recent year
Year ended 31 December
20X2
$ million
Operating profit 117.2
Interest (20)
––––
Profit before tax 97.2
Tax at 35% (34.0)
––––
Profit after tax 63.2
––––
$ million
1 January 20X2 1 January 20X3
Capital employed 443 459
Notes:
(1) $5.4 million and $7.0 million was spent on marketing in each of the years 20X2 and
20X1 respectively. This was to build the long-term brand of Grigs.
(2) Grigs incurred non-cash expenses of $5.6 million in 20X2.
(3) The company’s weighted average cost of capital is 9.5%.
8
MO CK A QUES TIONS
3 Company information
BB Innovations (BBI) is a large manufacturer of unmanned aerial vehicles (drones). The
company was founded 10 years ago by two experienced technology industry experts who
identified an opportunity to take advantage of accelerated technological developments and
advancements in the field of smart electronics. The company has built a strong reputation
in the industry and is well regarded as a manufacturer of cutting-edge, high quality
technology.
BBI has several divisions, each of which specialises in manufacturing drones for a specific
market; namely the business market, the military market and the hobbyist market. Each
division is highly decentralised and autonomous although control is retained through the
agreement of common goals and a target ROI set at head office level. Divisional managers
are appraised on the basis of this target ROI.
Adoption of a virtual (network) form
BBI is an entrepreneurial company and keeps track of technological advancements and
breakthroughs. In addition to continued growth in the drone market, it has also identified
opportunities that exist in artificial intelligence (AI), augmented and virtual reality, robotics
and 3D printing. The company would like to be able to capitalise on some or all of these
opportunities but recognises that it does not have the infrastructure or capital required to
grow the business at the speed required.
Therefore, one strategy for growth that the board is considering pursuing is the
restructuring of BBI into a virtual (network) form. BBI would continue to manufacturer its
drones in house but it would outsource many of its other technology functions including
the manufacturer of new technology (such as AI and 3D printers) and also functions such as
distribution, marketing and finance. However, before committing to this strategy the board
would like to understand the potential advantages for BBI of adopting a virtual
organisational form. The board would also like to understand the potential problems in
planning, controlling, measuring and managing performance arising from the proposed
virtual form and would like some advice on how these could be overcome.
Value-based management (VBM)
Finally, the board are conscious of the need to focus on shareholder value if they are to
continue to grow the business successfully. ROI has been a useful measure of performance
in that it is simple to calculate and to understand and has enabled divisional performance
to be easily compared. However, the board are now considering the implementation of a
value-based management (VBM) approach. Although they have some understanding that
this approach takes the interests of shareholders as its primary focus, they require a
broader understanding of what is meant by VBM and how it could be applied to BBI.
Required:
(a) Discuss the potential advantages for BBI of adopting a virtual organisational form.
(5 marks)
(b) Assess the potential problems in planning, controlling, measuring and managing
performance arising from the proposed virtual form and advise BBI on how they
may be overcome. (13 marks)
(c) Explain what is meant by value-based management (VBM) and discuss how it could
be applied at BBI. (7 marks)
(Total: 25 marks)
(Total for Section B: 50 marks)
9
MATHEMATICAL TABLES
PRESENT VALUE TABLE
Present value of 1 i.e. (1 + r )−n where r = discount rate, n = number of periods until payment
Periods Discount rate (r)

(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 1
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 2
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 3
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 4
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 5
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 6
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 7
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 8
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 9
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 10
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 11
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 12
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 13
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 14
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 15
(n) 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 1
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 2
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 3
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 4
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 5
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 6
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 7
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 8
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 9
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 10
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 11
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 12
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 13
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 14
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 15
10
MO CK A QUES TIONS
ANNUITY TABLE
1 − (1 + r )−n
Present value of an annuity of 1 i.e. where r = discount rate, n = number of periods
r
Periods Discount rate (r)
(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 1
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 2
3 2.941 2.884 20829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 3
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 4
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 5
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 6
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 7
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 8
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 9
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 10
11 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 11
12 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 12
13 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.103 13
14 13.00 12.11 11.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367 14
15 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8.559 8.061 7.606 15
(n) 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 1
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 2
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 3
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 4
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 5
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 6
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 7
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 8
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 9
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 10
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 11
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 12
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 13
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 14
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 15
11
12
ACCA
APM (INT)
ANSWERS
Mock A
We're not sure whether it is Becker's mock exam or

Kaplan's, or someone else's. Whomever it is, we are
grateful to them.
MO CK A ANSWER S
SECTION A
1 PRISEC
Key answer tips

(i) PEST is examined in a number of ACCA papers. In the context of APM, the PEST
model looks at the macro-environment and its influence on organisational
performance. It is used to identify key performance management issues (and not
simply as a tool for strategic analysis).
(ii) This is book knowledge and should provide some relatively easy marks. Be sure to
answer both parts of the requirement.
(iii) Don’t be overwhelmed by this. There are 16 marks available here but that means
just 4 marks for each perspective. Be sure to use the information in the scenario.
Your answer should be succinct and focused (an answer plan will assist with this).
(iv) There are 3 marks available for each strategy. Begin by planning your answer –
brainstorm 3 to 4 points for each strategy – there may be a natural tendency to focus
on the negatives but try to also (briefly) mention some of the positives of the
suggestions put forward.
Report
To: Board of Prisec Group (Prisec)
From: A Accountant
Date: January 20X3
Subject: Prison tender, performance appraisal and performance improvement
Introduction
This report used PEST analysis to discuss the environment in which Prisec operates and the
impact this may have on its tender to run the prisons. It then describes the balanced
scorecard, the steps to use when implementing it and appraises Prisec’s performance using
the balanced scorecard. Finally, it evaluates the suggestions for performance
improvement.
(i) PEST analysis and the impact of the environment on the prison tender
Prisec is operating at a difficult time for privately run prisons in Mayland and will
need to use and manage its resources carefully to be sure of securing and profiting
from the contract from the MNPS when the bids are considered.
Political factors
Prisec is reliant on the government of Mayland for much of its current business and
with the contract to run the prisons up for renewal, the influence of the government
over the way it does business cannot be understated. The most obvious influence is
that the government, via the MNPS, sets targets which must be achieved by all
private prisons, and if Prisec is to be confident of securing the contract for the
continued running of those prisons in the North West it will need to focus its
resources on achieving them.
3
However, on a more general level, private prisons are operating in Mayland because
of the current government policy of outsourcing prison provision to the private
sector. The current poor publicity surrounding these private sector providers, whilst
it not directed at Prisec specifically, could bring about a policy change that would
have far reaching implications for current providers. Whilst this is unlikely to happen
immediately, if the current government lose the next election, the new government
may decide not to renew existing contracts when they end. This risk must be
considered when Prisec is deciding what price to charge for the contract over the
next few years.
Another factor affecting Prisec is the changes to sentencing guidelines which impact
the number of offenders sent to prison. Prisons are judged in part on levels of
overcrowding within the jails yet this may be difficult to avoid if they are required to
accept higher numbers of prisoners. Prisec will need to consider what, if any,
provision can be made if prisoner numbers continue to rise.
Economic factors
For all companies operating in a recession, the risk of a downturn in revenues leading
to reduced profits and a loss of liquidity has to be considered.
The financial problems of other private providers have clearly worried the Mayland
government and led to financial targets for the companies with which it contracts.
Whilst Prisec appears to be financially stable it will need to investigate what action
(such as the payment of penalties) will be triggered should it cease to meet the
targets in future years.
It has been suggested that the economic downturn is in part responsible for the
increase in prison numbers. If this situation were to worsen, the pressure on space
within all Prisec’s prisons would become more intense. This could cause practical
problems like cell overcrowding and reduced opportunities to provide purposeful
activity and training, and may lead to an increase in disorder and violence.
The recession has also put Prisec under pressure to reduce its costs in order to keep
the tender price at a competitive level. Making the required cuts in energy
consumption and carbon emissions may help to reduce costs. However, the
government targets for prisons’ performance cover a whole range of areas – from
staff sickness to prisoner training, which will make spending reductions difficult to
achieve without affecting performance in a key target area. It will therefore be
necessary for the management of Prisec to think creatively about how outcomes can
be achieved for less (using techniques such as business process reengineering for
example).
Social factors
As the demographic of the prison population changes, so the way in which prisoners
are managed will need to be adapted. Higher numbers of young people could for
example impact the way in which purposeful activity should be organised – with
games and sport perhaps being more suitable for young people than sedentary
activities. An increase in the numbers from deprived backgrounds is likely to impact
the types and levels of training required to ensure prisoners achieve basic skills
awards and have a job, education or training set up for after their discharge as they
may have had more educational problems before arriving in the prison system.
4
MO CK A ANSWER S
An additional issue for Prisec is the growing prevalence of drug usage amongst
prisoners. Clamping down on the use of drugs in prisons and reducing the associated
violence will require greater investment in expensive technologies such as the mobile
tracers that have become available. It is also likely to have implications for the
wellbeing of prisoners affecting the medical care provided. Prisec will need to be
able to demonstrate that it has strategies in place to manage these drugs related
issues within its prisons.
Environmental targets have become ever more important and as a private company
working for the government, Prisec is being set environmental targets similar to
those which govern public sector businesses, as illustrated by the MNPS 20X3 targets
requiring reductions in carbon emissions and energy consumption. To achieve these
targets Prisec may need to work with its consortium partner BB who retains
responsibility for the maintenance of the buildings and probably therefore manages
their heating and insulation. As BB is set to return the buildings to the state in just a
few years it is unlikely to want to invest heavily in green technologies, but basic
improvements should be possible to assist Prisec in its efforts. Prisec will need to
ensure that these issues have been discussed with BB before its final bid is
submitted.
Technological factors
The new developments in video surveillance will clearly impact Prisec as targets have
been set by MNPS concerning the use of 360o cameras. The cost implications must
be carefully considered as acquiring the ability to monitor movement around the
prison will not improve safety and behaviour unless the footage captured by the
videos is either being watched by staff (which will mean additional recruitment), or
monitored with software (which will also need to be acquired and staff trained to use
the information it provides in a practical way). Techniques such as life cycle costing
will enable Prisec to ensure all the costs are taken into account when budgeting for
the cost of meeting the tender performance targets in this area.
Prisec may also wish to take advantage of some of the other developments such as
tagging of prisoners. However, there are also potential issues surrounding civil
liberties and the impact on prisoner behaviour which may need to be taken into
account, as well as the more obvious cost issues.
One other key area which Prisec will need to consider is the adequacy of its
management information system. To achieve each of the KPI targets will require the
development of subsidiary targets in a range of specific areas (for example to ensure
prisoners have the required level of skills awards may require targets for factors such
as teacher days booked, hours of learning time per prisoner, acquisition of computer
terminals etc.) Without an integrated information system, which captures the
necessary data and allows management to monitor and correct performance as
necessary, Prisec will struggle to meet its targets.
(ii) Description of balanced scorecard and implementation steps
The balanced scorecard is a tool for evaluating performance and is based on internal
and external information. It includes financial measures (these reveal the results of
the actions already taken) and non-financial measures (these are drivers of future
performance). The balanced scorecard will allow the government to look at the
organisation from four important perspectives; financial, learning and innovation,
internal and customer. Within each perspective there will be a series of goals (CSFs)
and measures (KPIs). These should be aligned to Prisec’s overall strategy and vision.
5
There are four essential activities which have to be executed rigorously if the
implementation of the balanced scorecard is to succeed:
1 Make the strategy explicit – Prisec’s strategic objectives will form the basis of
the scorecard.
2 Choose the measures – these should be aligned with the strategy and the
relationship between the measures should be understood.
3 Define and refine – Prisec’s management reporting systems need to track and
report the measures regularly. The things being reported should be
periodically refined.
4 Deal with people – the people in charge at Prisec should be properly managed
and rewards should be linked to scorecard measures.
(iii) Performance appraisal using the balanced scorecard perspectives and additional
information
Financial perspective
Financially Prisec appears to be stable. The current and quick ratios and the interest
cover are all safely above the targets set by MNPS which suggest that liquidity is not
a problem for the company. Its gearing ratio is significantly lower than that required
by the Mayland government and may mean that Prisec has the potential to take out
loan finance to help make the improvements it needs to meet targets in other areas.
Further data from the past few years would be needed to give a clearer picture of the
long-term financial stability of the company, such as:
• Revenues, broken down by private and public sector clients, along with the
number of years left to run on any significant contracts.
• Profit margins for Prisec alongside other similar providers for comparison.
• Share price movements over the past few years.
Customer perspective – sponsors
From the perspective of the sponsors of the prisons which would include the general
public via the taxes they pay, Prisec appears to be providing an acceptable service.
Prisoners rarely escape custody and increasing numbers attend behaviour
programmes which may help to reduce their chance of reoffending once released.
Although reoffending rates are currently higher than the targets set, they are close to
the target and falling. However, reoffending rates are only given for the first six
months after release and it would be useful to see how these change the longer
prisoners are outside prison. This is of particular importance as so few prisoners are
released to any job, training or education provision. This is an area which needs
significant improvement – future opportunities for discharged prisoners will be vital
to help reduce their need to reoffend once released.
In common with what appears to be occurring in most of Mayland, drug use amongst
Prisec’s prisoners appears to be on the rise – with over a third of prisoners testing
positive for drugs. Clearly there is major work to be done if this is to be reduced.
Unless drug use in prisons is eliminated, prisoners will leave prison likely to commit
further crimes to obtain and pay for their drugs.
6
MO CK A ANSWER S
Customer perspective – users

The current experience of prisoners in Prisec prisons is not good enough. Not only is
it some way below that required by the Mayland government, it appears to be
moving further away from the targets. A quarter of the prisoners are living in cells
designed to hold a smaller number of inmates.
The percentage has increased over the past two years and given rising prison
numbers in the population may yet get worse. These cramped conditions will make
time spent by inmates out of their cells even more important.
However, access to other activities appears to be well short of the targets set. Time
spent in purposeful activity is less than 60% of the target level (14 hours rather than
24) and very few prisoners are currently provided with the ICT training and other
basic skills which will occupy them (as well as being needed to improve their chances
of work on release). Training levels are at least rising (which will be a challenge if the
population of the prison is rising at the same time), suggesting that some action is
being taken to improve performance in this area.
Only 9% of inmates leave prison with a job or education or training programme to go
to. More work must clearly be done in this area (the target is 25%) if prisoners are to
have the chance of a better future after release.
Internal business perspective
Prisec appear to run the administrative side of the organisation efficiently, although
it still needs to improve further to meet its 20X3 targets. Records are largely up-to-
date with levels still improving, most supervision is in-line with the assigned levels of
supervision and a high percentage of prisoners do attend the required levels of
offender behaviour programmes. Although supervision levels are not reviewed as
often as the new targets require, this is also improving.
However, there is one key area of weakness and this involves the crucial area of
staffing. Staff sickness days are too high at over 2 weeks per year which suggest poor
morale and staff training is below target and falling. Without proper training, staff
cannot be expected to manage the complex and stressful environment in which they
work. In addition, the ratio of prisoners to staff is rising (which is possibly because
prison numbers are rising faster than staff can be recruited). This puts individual
officers under more pressure and perhaps at risk of assault (assaults on others within
the prison are also far higher than target). Levels of assaults are rising and although
this may be in part the result of cramped conditions and drug use, it is likely to be
made worse by poor handling of situations by overworked staff with low morale.
Innovation and learning
Prisec has clearly made an initial investment in the 360o surveillance cameras, and
although this coverage needs to double, it can presumably be achieved if the funds
are available. The area where clear improvements are required is in the reduction of
carbon emissions and energy usage. Currently energy use is rising year on year and
although carbon emissions decreased in 20X1, they did not reduce further during
20X2. As discussed above achieving these goals may require a joint effort with
Prisec’s consortium partner BB.
7
(iv) Viability of suggestions put forward to improve performance

Reducing staff leave
Whilst reducing leave will mean more staff available during each shift, this is a short-
term solution which is fraught with difficulties:
Staff morale is already low and it is likely that reducing leave will simply make this
worse. This could lead to more sick days and a spiralling problem of understaffing.
What’s more, if staff are not rested they are more likely to make poor decisions, or
mishandle potentially dangerous situations leading to an increase in the number of
assaults for example. If recruitment of more staff is not currently proving easy, it is
also unlikely that reducing the package on offer will improve matters.
Whilst cancelling leave during a crisis to ensure sufficient staff cover may be a
reasonable response to a problem it is not a solution to an understaffed organisation
and would be best avoided.
Offering incentives for no days off sick
This incentive scheme has the potential to be successful, subject to various factors.
Vroom argues that a person will work to obtain a goal (here the incentive payment)
provided that they 1) want what is offered (known as valence) and 2) believe they
can achieve it (expectancy).
For the incentive to work therefore, firstly the payment must be significant enough
that the officers will believe it is worth having. Secondly the officers must believe
they can avoid taking sick leave (i.e. the days taken at the moment do not involve
genuine sickness which would lead to unavoidable absence) and that the payment
will actually be forthcoming if they do. If Prisec can get the rate right and convince
the staff the offer is genuine and the officers are able to avoid taking sick days, then
the incentive scheme may work.
It is worth bearing in mind that the incentive may also cause officers to come in to
work when they are really unwell. This could lead to the spread of illness and to
officers at work who cannot perform their tasks properly and care must be taken to
avoid this.
Appraisals for underperforming staff
The problem with this strategy is that it is inappropriate to appraise only those staff
where problems have been identified.
Appraisals can be a valuable way of improving employee performance. By reviewing
how an employee has performed over the past appraisal period, the appraiser can
identify appropriate training and development needs and take action to meet those
needs, whilst ensuring that good performance is rewarded. It also allows future
performance objectives to be set. If this is done well it should motivate employees to
work hard and in a way which supports the firm’s needs.
However, if the appraisal process is handled badly, the employee may feel they are
being unfairly criticised and become even more demotivated. Selecting only those
staff who are believed to be underperforming makes this a far greater risk, and
stigmatises them even if their performance improves as (presumably) they will
continue to be subject to appraisals.
Prisec would be better to introduce appraisals for all staff members regardless of
their current level of performance.
8
MO CK A ANSWER S
Marking scheme
Marks
(i) 1 – 2 marks per well discussed point
Political factors
Government awards contracts and is main client
Government policy on outsourcing
Changes to sentencing guidelines
Economic factors
Financial targets introduced
Impact on prison numbers
Need to reduce costs to stay competitive
Social factors
Impact of more young people from deprived backgrounds
Growing drug use
Environmental targets and need to work with BB
Technological
Use of 360o cameras and need for careful costing
Other new developments
Adequacy of MIS ––––
Maximum 16
––––
(ii) Definition, 1-2 marks up to a maximum of 2 2
1 mark for each of the four steps 4
––––
Maximum 5
––––
(iii) 1 – 2 marks for each point made, up to a maximum of 4 for each
perspective
––––
Maximum 16
––––
(iv) 1 – 2 marks for each point made, up to a maximum of 3 for each strategy
––––
Maximum 9
––––
Professional presentation: up to 4 marks 4
––––
Total 50
––––
9
SECTION B
2 GRIGS
Key answer tips

Part (a) is simple bookwork and an easy starter. In part (b) everything you need to know for
the EVATM is given to you. Set out your workings clearly and state all assumptions. In part
(c) make sure you relate all comments to the specific scenario.
(a) Objectives of CEO’s reward scheme

The objectives of the CEO’s reward scheme for Grigs include the following:
• To further Grigs’ objectives through the achievement of the CEO’s objectives
(the two sets of objectives should be aligned) since what gets measured gets
done and what gets rewarded gets repeated. The scheme should motivate the
CEO to maximise performance.
• To enable the recruitment and retention of an appropriately skilled and
experienced CEO the reward scheme offered will need to be competitive and
attractive.
• To provide a fair, consistent and transparent system for rewarding Grigs’
senior management team.
• To control Grigs’ salary costs. As discussed, the reward scheme should be
competitive and attractive but after a year of reduced turnover for Grigs and
criticism in the financial markets, the cost should not be viewed as excessive
and should not outweigh the benefit that the new CEO brings to Grigs.
• The reward scheme must comply with legal requirements and ethical
obligations.
• To ensure the CEO’s attitude to risk is aligned with that of the organisation. It is
unclear from the scenario what the risk appetite of Grigs is. The risk appetite
will, however, need to be considered so that the reward system motivates the
CEO to work in a way that is reflective of this risk appetite.
(b) (W1) NOPAT
$ million
Operating profit 117.2
Add back: non-cash expenses 5.6
marketing capitalised (no amortisation given) 5.4
Deduct:
tax paid (assume the figure given is tax ‘paid’ not ‘charge’) (34.0)
lost tax relief on interest ($20m × 35%) (7.0)
–––––
NOPAT 87.2
10
MO CK A ANSWER S
(W2) Adjusted value of capital employed

$ million
Opening value at 1 January 20X2 443.0
Marketing spend capitalised prior year 7.0
–––––
Adjusted value of capital employed 450.0
EVATM calculation
$ million
NOPAT (W1) 87.2
Less: adjusted capital employed 450 (W2) × WACC 9.5% (42.75)
––––––
EVATM 44.45
Conclusion
If the CEO were to receive 1.5% of EVATM this would be $666,750.
(c) General comments
Suggestions (ii) to (iv) link remuneration to financial performance only and so ignore
the importance of non-financial performance indicators, such as quality, innovation
and customer satisfaction. Other than the economic downturn we are not told why
Grigs has seen its performance fall. It would be preferable if the executive directors
analysed the business environment, both internal and external to Grigs, and
identified the critical success factors that need to form the basis of future strategy if
Grigs is going to improve performance.
Note: While one could argue that linking remuneration to such CSFs is more
important to operational managers rather than a CEO, there should be some scope to
incorporate them. Tesco plc, for example, links CEO remuneration to a wide range of
measures, both financial and non-financial, using a balanced scorecard approach.
Furthermore, these suggestions focus on short-term performance (one year) and so

risk short termism. For example, a new CEO could initiate a strategy of cutting
research and development costs that could boost results for the next year but at the
expense of eroding Grigs’ competitiveness in the longer term.
Suggestion (i) – salary
The suggestion of having a high salary is intuitively attractive in that most companies
believe they need to attract the best managers, and high remuneration is necessary
to achieve this. Whilst this may be the case, the link between a high salary and
managerial performance is not proven.
Paying more than the current ‘going rate’ also has the effect of leading to continuing
increases in senior management salaries, which might be unpopular with
shareholders, employees and other stakeholders. Certainly, 20% seems excessively
high.
In addition, rather than looking at whether the salary is competitive it makes more
sense to consider the whole remuneration package taking into account bonus
potential, pension and so on.
11
There is also no suggestion of remuneration linked to performance here. Simply

having a high salary may attract good candidates but in isolation is unlikely to
motivate them to address the company’s problems. For many quoted companies the
performance related element could be as high as 70% of total remuneration.
The suggestion must also be viewed in the light of the current economic downturn
and it may be the case that senior executives’ expectations regarding remuneration
are lower than would be the case in more prosperous times.
Suggestion (ii) - linking salary to turnover
This is probably the least credible suggestion made by the remuneration committee
as the link between shareholder value and sales is weaker than that for profit or long
term cash flows.
Although sales growth and market share might be important, this should not be at
the expense of cash flow and wealth creation. An extreme example would be that
turnover, and hence the CEO’s remuneration, could be increased by halving the price
of the company’s products. This is not, however, very likely to create wealth.
However, if Grigs’ main problem has been falling turnover, then the suggestion has
some merit.
Suggestion (iii) – share options
Share options have been commonly used by companies for many years. They are
intended to motivate senior managers to take decisions that will result in share price
increases and wealth creation, and goal congruence between shareholders and
managers. To some extent they may achieve this, but potential problems are:
• Share price increases may be caused by factors outside of the control of
managers, yet they will still be rewarded for such increases.
• The appropriate size of the option package is difficult to determine.
• The market price can fall by up to 25% and the director will still benefit.
Many large companies have recently been criticised for offering share options deals
that are too generous. Certainly, $2.1 million appears to be quite generous to an
unproven manager.
The period of the option at only one year is also very short; an option over a three-or
five-year period would give more time for the policies of the new CEO to be reflected
in the share price.
Suggestion (iv) – EVATM
Economic value added measures the annual wealth creation after taking into account
a charge for the amount of capital employed. Remuneration schemes linked to EVATM
are intended to reward the creation of value to the organisation.
This is a valid objective as it should ensure goal congruence between the CEO and
shareholders. However, EVATM is not suitable for all types of organisation (for
example, financial services companies), and may be creatively increased by relatively
low levels of investment – at least in the short term.
If an EVATM based incentive scheme is to be used it might be better to base it on a
percentage of the incremental EVATM achieved by the new CEO rather than a
percentage of the total EVATM.
12
MO CK A ANSWER S
Conclusions and recommendations

The remuneration strategy needs to foster a culture of outstanding performance,
taking into account both the long-term and short-term needs of the business.
Thus the package of the new CEO should comprise a fixed element (salary) and a
performance related aspect that depends on both short and long-term performance.
The rewards for short-term performance should be a mixture of cash and share
options while long-term performance should result in more share options. Overall,
the component of share options should be larger than cash to ensure goal
congruence between shareholders and management. In either case, share options of
different duration should be used to reduce the dangers of short termism.
Detailed targets should include a range of measures, possibly using a balanced
scorecard approach. Financial measures should include EPS, EVA TM, total shareholder
return, profit before tax and ROCE. Non-financial objectives could include customer
satisfaction and any other CSFs identified.
Marking scheme
Marks
(a) 1 mark per relevant point discussed
Max 4
(b) Adjustment to profit 2
Adjusted value of capital employed 1
EVATM calculation 1
Bonus cost 1
–––
Max 5
–––
(c) 1 marks per explained / justified point subject to the following maxima
General comments 3
Suggestion (i) 3
Suggestion (ii) 3
Suggestion (iii) 3
Suggestion (iv) 3
Conclusions and recommendations 3
–––
Max 16
–––
Total 25
–––
13
3 BBI
Key answer tips

Part (a). Ensure you review the articles on the ACCA website for this paper. The examiner
expects you to have done so. The website contains an article on ‘complex business
structures’ and discusses many of the points needed to answer this requirement (and
requirement (b)).
In part (b) many of the problems identified will have a common solution; the use of a robust
service level agreement (SLA). Therefore, it will save time and make for a more professional
answer if the problems are discussed first and then the solutions are discussed at the end.
Part (c) – the current performance management system relies heavily on the use of target
ROIs. Although this has its merits, VBM is a much more robust approach; the measures
used are directly aligned with shareholder wealth and the use of VBM should make BBI
more forward looking (a necessity in the fast moving technology industry).
(a) A virtual (network) organisation exists as a network of contracts, outsourcing many of

its functions. BBI is considering outsourcing the manufacture of new technology and
functions such as distribution, marketing and finance. There are a number of
potential advantages to BBI of adopting a virtual organisational form:
• BBI have identified opportunities that exist in AI, augmented and virtual reality,
robotics and 3D printing. The formation of a virtual organisational form would
enable them to exploit these market opportunities.
• BBI does not have the infrastructure or capital required to grow the business at
the necessary speed. The formation of a virtual organisation would reduce
infrastructure costs and the capital required.
• BBI would be able to compete with larger organisations that already have a
share of these new technology markets or that have the capital and
infrastructure required to successfully move into these markets. By forming a
network of partnerships with other organisations, BBI will appear larger than
they actually are and will be able to share the costs, risks and expertise.
• A virtual form will give BBI an advantage over its non-virtual competitors in
that it will give them the flexibility to meet the needs of a particular project or
business opportunity. Links with a reputable group of partners should enable
BBI to take advantage of identified opportunities quickly and successfully.
• BBI will continue to manufacture its drones in house. It makes sense for BBI to
concentrate on (what may be considered to be) its core competence and to
outsource other aspects of its business operations.
(b) Although there are a number of potential advantages for BBI of adopting a virtual
organisational form, it may also encounter problems in planning, controlling and
measuring performance and there may be an impact on performance management:
• The agreement of common goals and metrics between the partners in the
virtual organisation may also be difficult.
• There is a potential for loss of control since BBI will have no legal right to
manage the other organisations.
14
MO CK A ANSWER S
• Planning may be difficult in that a traditional budgeting and variance analysis

system is unlikely to work. Planning will instead require the consideration of
factors such as ensuring capacity requirements can be fulfilled or the
agreement of prices charged by suppliers.
• Non-financial aspects of control will be particularly important. Factors such as
quality customer service, accurate delivery or ethical behaviour will be of
upmost importance but controlling these aspects will be challenging.
• Information gathering may be difficult if the information systems of the
various parties are different and not compatible.
• There may be a loss of competitive advantage due to outsourcing many
aspects of production and other business functions. The company is respected
as a manufacturer of cutting edge, quality technology. The formation of a
virtual form may remove the opportunity for it to build on this reputation and
to fully capitalise on its in-house skills and competencies.
• Monitoring of the workforce may be difficult since the workforce will not be
BBI’s own employees and they will also work in different locations.
• Finally, confidentiality of information may be a potential risk since
information will be shared with partners who may also work with competitor
organisations.
To overcome these problems:
• BBI will need a robust service level agreement (SLA) in place agreeing:
– goals and common measures between partners
– minimum standards in respect to factors such as quality
– prices that will be paid
– the responsibilities and expectations of the workforce
– confidentiality of information.
• With regards to the potential problem of information gathering, it may be
possible to implement a common information system (or perhaps more
practically a common interface system) between the parties.
• The potential for a loss of competitive advantage could be managed by
outsourcing only non-core activities to trusted partners who have a core
competence in that area.
• Effective monitoring of the workforce could be assisted through cultural
controls and payment by results.
(c) Value-based management (VBM) is an approach to management whereby BBI’s
strategy, objectives and processes would be aligned to help the company focus on
key drivers of shareholder wealth (for example, revenue, operating margin or cost of
capital) and hence maximise this value.
VBM would take the interests of BBI’s shareholders as its primary focus. It begins
with the view that the value of BBI is the total value of its discounted cash flows and
that effort should be made at all levels (strategic, tactical and operational) to
increase the value and hence these cash flows.
VBM focuses on measures such as EVA and NPV making the organisation more
forward looking. These measures are directly aligned with shareholder wealth
whereas the current measure of ROI is not necessarily aligned with shareholder
wealth, leading instead to the potential for dysfunctional behaviour.
15
The application of VBM would require BBI to:

• Develop a strategy to maximise value. For example, the formation of a virtual
organisation and expansion into the product markets discussed in
requirements (a) and (b) may be part of this strategy.
• Identify key value drivers (such as revenue) and set targets for each of these.
• Develop a detailed plan for achieving these targets, for example focusing on
factors such as the pricing and design specification of the new products.
• Align the workforce’s performance measurement and rewards to the targets
set.
Marking scheme
Marks
(a) 1 mark per relevant advantage
Maximum 5
–––––
(b) 1 mark per relevant disadvantage Up to 8
Up to 3 marks for SLA, up to 3 marks for other solutions Up to 5
–––––
Maximum 13
–––––
(c) 1 mark for each point explaining VBM Up to 4
1 mark for each explained point re application at BBI Up to 4
–––––
Maximum 7
–––––
Total 25
–––––
16

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A BIG THANKS TO

FOR THIS MOCK

Advanced Audit and Assurance

Time allowed: 3 hours 15 minutes

Section A – This question is compulsory and MUST be attempted

Q 1 Upkeep is an international not-for-profit, humanitarian organisation that is

Grants received $800,000 $801,000 $1,000,000 $1,002,500

Direct program ($600,000) ($750,000) ($800,000) ($982,500)

General funds $500,000 $401,000

Beneficiaries targeted 160,000 180,000 200,000 300,000

Section B – TWO questions to be attempted

3 Floor Co. is a multinational manufacturer and distributor of toys. Recently,

FOR THIS MOCK

Advanced Audit and Assurance

Time allowed: 3 hours 15 minutes

1 To: Executive management - Upkeep

Usefulness of the current KPIs

Non-financial KPIs for Upkeep (importance and need)

Recommendation of KPIs for Upkeep

1- Beneficiaries reached per grant received – calculated by dividing total

Performance evaluation of Upkeep based on new KPIs

Changes in the existing 3 KPIs

Capital Employed ($) 500,000 500,000 500,000 Nil

Impact the new computations of performance evaluation

(b) Drawbacks of standard costing

3 (a) Balanced scorecard

(b) Notes on six sigma

Process of six sigma

Advanced Performance Management

We're not sure whether it is Becker's mock exam or

1 Prisec Group: Company information

As the domestic economy of Mayland is currently in recession, the government is under

Appendix 1: Performance data

Key Performance Indicators Prisec Prisec

2 Grigs: Company information

Periods Discount rate (r)

Advanced Performance Management

We're not sure whether it is Becker's mock exam or

Key answer tips

Customer perspective – users

(iv) Viability of suggestions put forward to improve performance

Key answer tips

(a) Objectives of CEO’s reward scheme

(W2) Adjusted value of capital employed

Furthermore, these suggestions focus on short-term performance (one year) and so

There is also no suggestion of remuneration linked to performance here. Simply

Conclusions and recommendations

Key answer tips

(a) A virtual (network) organisation exists as a network of contracts, outsourcing many of

• Planning may be difficult in that a traditional budgeting and variance analysis

The application of VBM would require BBI to:

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