Study Notes - PM - F5 - Performance Management

Performance Management
ACCA
Performance Instructor
Management Rizwan Maniya
Email - Rizwan@vifhe.com WhatsApp Number +923212436266
About My Self
1. Teaching ACCA from last 14 years
2. Subject's specialist if ACCA PM, FM & APM
3. Currently teaching physically at KnS School of Business Studies
4. Have produced various Global and Nationwide position holder in PM, FM, APM
Paper Introduction
Advance of Paper MA
Transition for F2
1. Expectation
2. Question types
3. Exam timing
Email - Rizwan@vifhe.com Whatsapp -923212436266
Paper Structure Section Wise

Section A Section B Section C
15 OT Questions 3 Case Style Questions 2 Contructed response
Sections 2 marks each 10 marks each Questions
(15 x 2) 30 Marks (10 x 3) 30 Marks
Advanced Costing
Yes Yes No
Techniques
Decision Making
Yes Yes Yes
Budget & Control Yes Yes Yes

Performance Measurement
Yes Yes Yes
The two 20-mark questions will come from decision making techniques, budgeting and control and/or
performance measurement and control areas of the syllabus. These questions may also include requirements
related to the information systems area of the syllabus.
PM Passing Rates - Last 5 attempts

Sep 2019 41
Dec 2019 38
March 2020 35
Sep 2020 39
Dec 2020 40
March 2021 44

1. The Session will be 30% Knowledge and 70% Practice Based

2. All key areas of the syllabus will be discussed with practice
3. The session will equally focus on Objective Test and Constructed response questions
4. The session will equally focus on Calculations and Theory
5. There will be significant focus of examination techniques and how to gain easy marks
6. The marking scheme will be discussed in order to make it clear how to approach the
answer
7. Examiner reports and technical articles will be used
8. Objective test question bank will be used which will be like exam environment
9. Constructed response questions will be solved using spread sheets and word processing
sheets using ACCA Platform

1. Candidates do not read the scenario actively

2. Candidates do not understand question requirements
3. Candidates are struggling to use spread sheets to optimum
4. Candidate do not relate answers with scenario
5. Candidates are struggling in theory based Objective test questions
6. Candidates are facing time management issue
7. Candidates are not covering the entire syllabus
8. Candidates are not focusing on gaining easy marks.
9. Candidates are lacking examination technique


Budgets types
Fixed Flexible Incremental Zero based Activity based

Rolling Budget
Budget Budget Budget Budget Budget
Fixed Budget Fixed Budget
1. Single activity level budget 1. Prepared at different activity

levels
2. Control fixed cost
2. Prepared at actual activity
level(Flexed Budget)
Purpose is like with like controlling

Budgets types
Incremental
Budget
Budgets start from previous period budget or actual results
Cover inflation Incorporates Known changes
Useful - Stable Conditions
Advantages Disadvantages
1. Less time consuming activity as only increment 1. Prior period issues and uneconomic activates will
requires justification. continue in next period
2. It encourages wasteful spending to ensure the budgets
are met.

Budgets types
Zero based
budget
The budgeting process starts from scratch which requires justification relating to every activity
Useful - Discretionary cost & Public sector organization
Steps
Decision package states the purpose of the activity
Evaluate and rank each package
On the basis of ranking allocate the resources.
1. Efficient allocation of resources as it remove wasteful 1. Time consuming and costly budget
spending and uneconomic activities 2. Ranking activities may be difficult when the activity
2. Staff involvement increases benefits are of qualitative nature
3. Managers consider alternatives 3. Decision packages requires skills which manager need
to have to prepare decision packages

Budgets types
Rolling Budgets
Budgets which is regularly updated by adding a further period once the previous period has expired
Useful – Dynamic
conditions
1.Reduces uncertainty 1. Time consuming and costly activity
2.More realistic budgets are prepared 2. Provides less opportunity to control actual
3. Control will be based on recent plan results due to frequent budgeting

Budgets types
Activity based
Budgets
Budgeting approach in which budgets are made for each overhead activity
1.The budgets focuses on activities 1.This budgeting approach is costly and time
2.Its provides opportunity to control overhead consuming as budgets will be prepared for each
over head activity
cost by controlling the activity level

Learning Curves
Define
• First time the production time will be highest
• Repetition of job will reduces the time
• Learning process will stop eventually
Calculations
Double approach Previous average x LR
Log approach y= ax^b
Limitations
• Labour intensive environment
• Stable conditions
• Work is repetitive and labour turnover is low
Budgets affected
Labour Budget Overhead Budget Production Budget
Material Usage Budget Material Purchase Budget Cash Budget
Spread sheets
Define
Simplify and saves time Error can be done
Over dependent risk

Different budget options
Qualitative factors
Sensitivity analysis
Security issues
Corrupt a model
Variances Favourable Adverse
• CHEAPER MATERIAL IS • CHEAPER MATERIAL IS

Material Mix USED MORE USED LESS
• EXPENSIVE MATERIAL IS • EXPENSIVE MATERIAL IS
USED LESS USED MORE
1. More than one material
input
• • Cheaper material is used more

Cheaper material is used less and and expensive material is used
2. Material are expensive material is used more less
Material Yield interchangeable • Good control over production •
process Poor control over production
process
• WHEN MORE PROFITABLE • WHEN MORE PROFITABLE

PRODUCT SOLD MORE PRODUCT SOLD LESS
Sales Mix • LESS PROFITABLE PRODUCT • LESS PROFITABLE
1. More than one product SOLD LESS PRODUCT SOLD MORE
sold
•
DECREASE IN PRICE
2. Products are • FAVORABLE MARKET • INCREASE IN PRICE
interchangeable CONDITIONS • ADVERSE MARKET
Sales Quantity CONDITIONS
• GOOD QUALITY PRODUCT • POOR QUALITY PRODUCT

Formula
Material Mix Variance
Actual Input in Actual Input in Quantity Std Rate per Cost
Standard Mix Actual Mix Variance input Variances
material
Material Yield Variance

Actual Input in Actual Input in Quantity Std Rate per Cost
Standard Mix Actual Mix Variance input Variances
material

Formula
Sales Mix Variance
Actual Sales in Actual Input Quantity Std Rate per Cost
Actual Mix in Actual Variance input Variances
Mix material
Quantity Variance
Standard Input in Actual Input Quantity Std Rate per Cost
Standard Mix in Standard Variance input Variances
Mix material

Material price variance Material usage variance
(Original Standard price per kg - actual price per Standard price per kg ( Original Standard quantity
kg) x actual material quantity purchased/consumed allowed - actual quantity) Where standard quantity
allowed = standard kg per unit x actual units
Variances Planning - Planning Errors Operational - Real Performance
Formula
Planning price variance Operational Price variance
Material Price (original standard price – revised (revised standard price – actual price)
standard price) x actual quantity x actual quantity

Planning usage variance Operational Usage variance
Original Standard price per kg x Original Standard price per kg x
Material
Usage (original standard quantity allowed (revised standard quantity allowed –
– revised standard quantity actual quantity)
allowed)

Performance Management Labour rate variance Labour efficiency variance
(Original Standard rate per hour - Actual Standard rate per hour x (Original
rate per hour) x ctual hours paid Standard hours allowed - actual hours
worked)Where standard hours allowed =
standard hours per unit x actual units
Variances Planning - Planning Errors Operational - Real Performance
Formula
Planning rate variance Operational rate variance
(Original standard rate – Revised (Revised standard rate – Actual rate)
Labour Rate
standard rate) x actual hours x actual hours
Planning efficiency variance Operational Usage variance

Original Standard rate per hour x Original Standard rate per hour x
Labour (Original standard hours allowed – (Revised standard hours allowed –
Efficiency Revised standard hours allowed) Actual hours)

Sales price variance Sales volume variance

(Actual price - Original standard Standard profit per unit x ( Actual
price) x actual units sold units - Original Standard units)
Variances Formula Planning - Planning Errors Operational - Real
Performance
Revised selling price per unit – (Actual selling price per
Original standard selling price unit – Revised selling price
Sales Price per unit) x actual units sold per unit) x actual units sold
Standard profit /contribution Standard profit

Sales Volume per unit (Revised standard sales /contribution per unit
units – Original standard sales (Actual sales units –
units) Revised sales units)

Beyond Budgeting
Problems of traditional budget
Timeconsuming Share holder value Prevent flexibility
Meeting target Sales targets Unethical behavior
Difference between traditional and beyond budgeting model
Traditional budgeting Beyond budgeting
Budget type Fixed annual plan Rolling budget, continuous
planning
Targets & rewards Incremental targets Relative target and rewards
Fixed rewards
Resources Pre-defined resources On demand resources
Culture Centralization and focus Decentralization and focus
on numbers of value creation


Profit maximization Cost minimization

Steps
NON-GRAPHICAL STEPS GRAPHICAL STEPS
1. DEFINE VARIABLES 1. CONVERT INEQUALITIES INTO EQUALITIES
2. CONSTRUCT OBJECTIVE FUNCTION 2. GRAPH EACH EQUATION
3. IDENTIFY AND CONVERT CONSTRAINTS INTO
3. IDENTIFY FEASIBLE REGION
INEQUALITIES
4. IDENTIFY NON-NEGATIVE CONSTRAINTS 4. IDENTIFY POINTS IN THE FEASIBLE REGION
DETERMINE OPTIMUM POINT

BY INSPECTION METHOD ISO CONTRIBUTION / COST LINE
Additional contribution earned if one extra unit of scarce resource becomes available
Shadow price at its original cost.
Slack
17/08/21
Amount by which the resources is under-utilized

24
CALCULATION
Weighted average C/S Ratio
Weighted average
Weighted average break even
Average C.P.U Average S.P
Weighted average margin of Total contribution for all products Total sale revenue for all products
safety
Total no of units Total no of units
Target profit
GRAPHS
Multi Product Break even
1. Sales revenue line
2. Fixed cost line
3. Total cost line
Multi Product Contribution

1. Sales revenue line
Multi Product Profit/Volume
1. Highest C/S ratio line
2. Variable cost line
2. Constant mix line
3. Total cost line

1. Price or demand function

2. Profit maximisation
•Alegebriac Approach - MC = MR
•Tabular Aprroach
Price skimming: Charging high prices at initial Price penetration: Charging low prices at the
phase of the product life cycle. initial phase of the product life cycle.
Conditions Conditions
a. Product life cycle is short a. Target is of higher market share
b. Inelastic demand b. Elastic demand
c. Production is limited at early stage c. Discourage competition
d. When there are barriers for competitors d. Quickly want to move to growth & maturity
stages
Relevant IRRelevant
Incremental cost / Income Sunk Cost
Opportunity cost Committed Costs
Notional costs
Re-apportionment of
existing fixed costs
One Off Contract Make or Buy

Decision
Shut Down Decision Further Processing
Decision
Risk - With probability

Uncertainty - Without probability
Decision makers Risk seeker, Risk Averse, Risk neutral, Sore loser
Techniques
Expected value Long term average
Decision Rule
Maxi max Maxi min Mini max regret rule
Maximum from maximum Maximum from minimum Minimum from maximum regrets
Sensitivity analysis Identify critical variable
Simulation Deal with multiple variable
Type of tree-diagram used in determining the optimum course of action, in

Decision tree
situations having several possible alternatives with uncertain outcomes

Critical Success Factors are strongly related to the mission and strategic goals of your business
or project. Critical Success Factors focus on the most important areas and get to the very heart
of both what is to be achieved and how you will achieve it.
Key performance indicators

Measure whether CSF will be achieved or not
Financial indicators Non- Financial indicators
Strike a balance

Performance measurement
Financial Indicators Non-Financial Indicators
Financial Ratios
Profitability Ratios Gearing Ratios Investor ratios
Note
Critical Success Factors – Key areas of the business
Key Performance Indicators – Measure CSF achievement

Profitability Ratios
Return on capital employed Profit margin

(Operating profit) x 100
Capital employed
Gross profit Net profit

Asset turnover margin margin
Operating profit Gross profit x
Sales_____ Net profit x 100
margin 100
Capital employed Sales
Operating profit x 100 Sales
Sales Earning per share

Profit after tax and preference dividend
Number of shares

Liquidity Ratios
Current ratio: Current Asset Quick Ratio: Current Asset – stock

Current liabilities Current liabilities
Inventory holding period

Inventory X 365
Cost of sales
Account payable payment period Account Receivable collection period:

Trade payables x 365 Trade receivables x 365
Cost of sales Credit sales

Risk related
ratios
Financial gearing Interest cover

PBIT
Finance cost
Debt x 100 Debt x 100

Equity
(Debt +
equity)
Operational gearing
Fixed cost
Total cost

Non financial indicators
Balance Score Card

Financial perspective Customer perspective
Measures shareholder value creation Measures customer satisfaction
Example: Examples:
1.Return on capital employed 1.No. Repeat Customers
2. Profit Margin 2.% Customer complains
Internal perspective Innovation and learning

Measures efficiency of process Measures how business is developing it self for future
Examples: Examples:
1.% System down time 1.% Revenue form new products
2.Labour tunover 2.No staff training hours

Non financial indicators
Building Block Model – Service

Industries
Dimensions(CSF)
1.Financial performances
2.Competitiveness
3.Quality
4. Resource utilization
5. Flexibility
6. Innovation
Standards(KPI) Rewards
1. Ownership 1. Clarity
2. Achievable 2. Motivation
3. Equity 3. Controllability

It represents the revenue per unit from the supplying division and cost per unit for
receiving division.
Objectives of transfer pricing system
Goal Performance
Autonomy
congruence measurement
Types of transfer pricing
 General rule (Theoretical transfer price)

(Marginal cost + opportunity cost)
 Market prices
 Adjusted Market Price
 Cost based approach
Marginal cost Total cost Total cost plus

Revenue Profit Investment

Cost center
center center center
Return on Residual
investment Common problems income
Manipulation Aging of asset

Evaluate the efficiency of an investment or to compare the efficiency of a number of

different investments
Formula
Relative measure Correlation
Easily understood Dysfunctional
behavior
No need for COC
Investment can earn over the minimum rate of return
Formula
Correlation No comparing
Dysfunctional
Does not relate
behavior


Activity based costing

Method of allocating overhead costs to products and services
Cost pool Cost driver
Steps
 Identify cost pools and their allocated cost

 Identify logical cost drivers for each cost pools
 Calculate overhead absorption rate for each cost pools
 Absorb overheads into the individual products by using the rates
calculated in step 3.
1. Fair allocation 1. Insignificant overheads
2. Significant overheads 2. Production related
3. Cost control 3. Detailed accounting records
4. All Overheads not production 4. Cost may exceed benefit
Ways to close
Steps
Market price • Cheaper material
Desired profit • Reduce material losses
Target cost Maket Price - Desired Profit
Current cost
• Cheaper labour
Cost gap Current cost – Target cost • Labour training
• Reduce overhead by ABC
• Move to machine intensive
Difficult in services
Advantages • Economies of scale
industry
• Price • Value analysis
Characteristics Qualitative
• Working method Information
Simultaneity
• Customer Heterogeneity
requirement Intangible
• Cost reduction Perishability

Definition Entire life Revenue Entire life cost True profitability
Stages Advantages
Development
Introduction Pricing decision
Growth Eight to ninety
Maturity Right decision
Decline Target cost
Short life cycle

Through put accounting ratio

Throughput per unit
Hours per unit Decision rule
Throughput accounting ratio = Throughput per hour

Operating expense If TPAR > 1 : Feasible to make the
per hour product
Total operating If TPAR < 1 : Not feasible to make
expenses
Ways to improve TPAR:
Total 1.Increase selling price per unit
hours 2.Decrease material cost per unit
3.Decrease time to make each unit
4. Decrease the operating expense

Multi Product Decision making
1. Contribution per unit 1. Throughput per unit

2. Contribution per limiting factor hour 2. Through Put per limiting factor hour
3. Ranking 3. Ranking
4. Devise optimum production plan 4. Devise optimum production plan

/0
21
Internal Cost External Cost

•Improved systems and checks in order to avoid •Usage of energy and water
penalties •Forest degradation
•Waste disposal cost •Health care costs
•Product take back cost •Carbon emission cost
•Regulatory cost such as taxes
•Back end cost such as decommission cost, disposal of
inventory
ACCOUNTING FOR ENVIRONMENTAL COST
Input/outflow analysis
This technique records material inflows and balances this with outflows on the basis that, what comes in, must go out.
Flow cost accounting

This technique uses not only material flows but also the organizational structure. It divides the material flows into three categories: material, system and delivery
and disposal
Environmental Activity-based costing

In an environmental accounting context, it distinguishes between environment-related costs, which can be attributed to joint cost centers, and environment
driven costs, which tend to be hidden on general overheads
Lifecycle costing
Within the context of environmental accounting, lifecycle costing is a technique which requires the full environmental costs, arising from production of a product
to be taken account across its whole lifecycle.

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Performance Management

2. Subject's specialist if ACCA PM, FM & APM

3. Currently teaching physically at KnS School of Business Studies

Paper Structure Section Wise

Budget & Control Yes Yes Yes

PM Passing Rates - Last 5 attempts

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

1. The Session will be 30% Knowledge and 70% Practice Based

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

1. Candidates do not read the scenario actively

Email - Rizwan@vifhe.com Whatsapp -923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Fixed Flexible Incremental Zero based Activity based

Fixed Budget Fixed Budget

1. Single activity level budget 1. Prepared at different activity

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Cover inflation Incorporates Known changes

Useful - Stable Conditions

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Over dependent risk

Variances Favourable Adverse

• CHEAPER MATERIAL IS • CHEAPER MATERIAL IS

• • Cheaper material is used more

• WHEN MORE PROFITABLE • WHEN MORE PROFITABLE

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Material Yield Variance

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Planning efficiency variance Operational Usage variance

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Sales price variance Sales volume variance

Standard profit /contribution Standard profit

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Profit maximization Cost minimization

DETERMINE OPTIMUM POINT

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Multi Product Contribution

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

1. Price or demand function

Opportunity cost Committed Costs

One Off Contract Make or Buy

Risk - With probability

Sensitivity analysis Identify critical variable

Simulation Deal with multiple variable

Type of tree-diagram used in determining the optimum course of action, in

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Key performance indicators

Financial indicators Non- Financial indicators

Email - Rizwan@vifhe.com WhatsApp Number +923212436266

Financial Indicators Non-Financial Indicators

Profitability Ratios Gearing Ratios Investor ratios