ACCA Paper P5 – Advanced Performance management

ACCA Paper P5 – Advanced Performance management
Course slides For exams in June 2008

Syllabus A Strategic planning and control B
Economic, fiscal, market and environmental factors C Performance measurement systems and design D Strategic performance measurement E Performance evaluation and corporate failure F Current developments and emerging issues in performance management

Examiner & Format of the Exam
Examiner: Shane Johnson Format of the Exam Marks Section A Two compulsory questions 60-70 Section B Two questions from a choice of three up to 20 marks each 30-40 Total 100

Topics examined in the December 2007 exam
Question 1 Operating and financial performance measurement, performance comparisons Question 2 Residual income, EVA Question 3 Sensitivity analysis, CSF, ERPS Question 4 ABM Question 5 Porter’s five forces, corporate failure

The BPP Learning Media classroom slides
What do these slides cover? A selection of key areas of the syllabus Using the slides Use the slides as a point of reference Add detail by talking around the slides (eg using material from the corresponding Study Text chapter) Consider adding slides yourself to suit your course Recommend students attempt appropriate questions from the Practice & Revision Kit

Introduction to strategic management accounting
Chapter 1 Study Text Chapter 1 Introduction to strategic management accounting

Management Information Hierarchy
Anthony’s Hierarchy Management Information Hierarchy STRATEGIC PLANNING MANAGEMENT CONTROL OPERATIONAL CONTROL

Roles of management accountant
Information Control Targets Rewards

Strategic Planning Strategy Strategic Planning
A course of action to achieve a specific outcome Strategic Planning The formulation, evaluation and selection of strategies for the purpose of developing a long-term course of action.

Strategic Planning Scope Characteristics Information

Management Control Scope Characteristics Examples

Operational Control Scope Information

Rational model 3 main stages Strategic analysis
Strategic choice Strategic implementation of our current position to get to our desired future position to make a success of our strategic choice

Key features of planning model
Strategy to achieve objectives Formal process Led from top “Drilled-down” through organisation

The rational model STRATEGIC CONTROL POSITION AUDIT MISSION &
OBJECTIVES CORPORATE APPRAISAL STRATEGIC OPTIONS STRATEGIC CHOICE STRATEGIC IMPLEMENT’ ENVIRONMENT ANALYSIS

The rational model Advantages Guides activities Provides a standard
Communicates Legitimacy Identifies risks Problems Assumes formality Separate from operations Bureaucratic Inflexible Lack commitment

Environmental Analysis
PEST Porter’s 5 forces Understand inherent attractiveness of industry Understand impact of individual forces

Corporate Appraisal Identify Strengths Weaknesses Opportunities
Threats INTERNAL ANALYSIS MISSION & OBJECTIVES CORPORATE APPRAISAL ENVIRONMENT ANALYSIS

Position Audit Identify Strengths Weaknesses INTERNAL ANALYSIS
MISSION & OBJECTIVES CORPORATE APPRAISAL ENVIRONMENT ANALYSIS

SWOT Analysis INTERNAL : RELATIVE TO COMPETITION STRENGTHS exploit
WEAKNESSES rectify OPPORTUNITIES seize THREATS nullify EXTERNAL: PRESENT TO ALL INDUSTRY MEMBERS

Gap analysis – fixed period
OBJECTIVE SALES GAP FORECAST TIME

Gap Strategies Efficiency Expansion Diversification

Product life cycle (PLC)
Time Sales Volume Introduction Growth Maturity Decline Sales Profit

Lecture Example 1 What advantages and disadvantages do large companies such as Marks & Spencer face when relying on the rational model to derive new strategy ?

Lecture Example 1 Advantages Focus on key strategic issues and risks
Coordinates and integrates diverse business activities within the organisation Improves communication with stakeholders Encourages goal congruence Avoids damaging short termist behaviour

Lecture Example 1 cont.. The drawbacks of rational planning include
Too infrequent to allow the business to operate flexibly and dynamically Deters creative, innovative and radical strategy making Loss of entrepreneurial thought processes Could cause firm to pursue wrong policies if planning assumptions of plan are wrong Can be complicated and difficult to implement because there is only limited staff involvement in the planning process

Freewheeling opportunism
“..should not bother with strategic planning..” Advantages Short term opportunities grasped Reactive Encourages initiative Creative Disadvantages Control difficult Long term opportunities missed Purely profit driven Not Proactive The ultimate in informality

Benchmarking How Understand your own business processes
Establish who/what to benchmark Collect and analyse data Implement improvements A method to improve performance within a considered and well thoughtout framework.

Benchmarking Who Internal – between SBU’s
Functional – best in any industry Competitive – direct competitors Strategic – competitors’ strategies A method to improve performance within a considered and well thoughtout framework.

Benchmarking – why ? Advantages No best solution Position audit
Identify CSF’s Identify potential advantage Problems No best solution Reactive Information dependant

Risk & Uncertainty Accounting for risk ROCE Payback NPV Cost-benefit
Quantify risk Rule of thumb Probability Sensitivity Standard deviation If the option is going to accepted by powerful stakeholder (remember Mendelow’s Grid form Chapter 2) then move on, otherwise a compromise must be sought.

Question practice – end of Chapter 1
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit. Q1 Q2 Q3 Q4

Alternative approaches to budgeting for control
Chapter 2 Study Text Chapter 2 Alternative approaches to budgeting for control

Budget Cycle Determine Budget Control Planning Operate

Budgeting and budgetary control - Summary
Budgeting is part of planning & control Managers should only be assessed on those items they can control Feedback control is reactive, feedforward proactive The level of budget set and the amount of participation will impact motivation

Budgeting and budgetary control - Summary
Flexible budgets are ideal for planning, flexed for control Incremental budgets build in slack and inefficiency, ZBB uses efficient allocation of resources Rolling budgets are useful in time of uncertainty ABB looks at managing the causes of costs Beyond budgeting focuses on cashflow forecasts and KPI’s

Fixed/Flexible/Flexed Budgets
original budget based on single level of activity Flexible to cope with different levels of activity useful at planning stage Flexed necessary as a control device based on actual activity level

Alternative budget models
Incremental v Zero Based Budgeting more efficient allocation of resources budgetary slack discouraged resistance time/effort Periodic v Rolling (continuous) Budgets producing more realistic budgets ABB Beyond Budgeting

Adaptive management process
Beyond Budgeting Move away from traditional budgeting Adaptive management process Employee empowerment

Behavioural aspects of budgeting
Impact of budgeting system on human behaviour: unites employees against management possible negative results protective groups finding fault victimised express superiority

You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit. Q5 Q6 Q7 Q9 Q10

Changes in business structure and management accounting
Chapter 3 Study Text Chapter 3 Changes in business structure and management accounting

Traditional v Modern Manufacturing
focus was on manufacturing in long production runs any idle-time was adverse little product diversity Buffer inventory Production is priority Focus: COST Modern produce in shorter production runs/producing on demand inventory is unacceptable & will accept some idle-time complex/diverse product ranges Customer is priority Focus: FLEXIBILITY Summary sheet to go through at start of chapter

Quality management TQM Traditional Get it right first time
Constant improvement Design for quality Quality costs defined: Appraisal Internal failure External failure Prevention Abandon variances Traditional Not value adding Resource intensive Tolerance of waste within limits

Elements of TQM Work teams given responsibility for their area
Clear identification of ‘customer’ Clear identification of ‘supplier’ Quality circles Any bonus paid on quality improvements

Implications of TQM Cross functional teams – new control systems
Multiple measures for teams Resources required to implement improvements Management Accounting should be a quality circle (supplier/customer to/of other areas)

Functional organisation
Accounts Production Company Purchasing Sales

Departments & Divisions
Department – functional specialism Division – semi-autonomous business unit Advantages Lower staff input Product comparisons Uses local knowledge Junior staff morale Disadvantages Co-ordination Loss of control Conflict

Divisionalisation approaches
Functional departments Geographic division Product/brand division Customer/market

Centralisation v Decentralisation
Pro-centralisation Central decisions Wider view Resource allocation Cheaper management Crisis decisions Pro-decentralisation Management overload Junior managers morale Local decisions Faster decisions Develop junior managers Separate spheres of responsibility

Multi-Divisional

Network organisations
Outsourcing Functions Line Authority Clients A B C

Porter’s Value Chain Identifies specific points where a firm can organise and perform its activities most effectively to gain competitive advantage Benefits along the value chain can be achieved due to integration, automation and better information exchanges

Value Chain Support Activities Firm Infrastructure
Technology Development Human Resource Management Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Discuss each element and talk about their linkages and how the margin is derived. I tend to use differentiation versus cost leadership as how to achieve a high margin [the illustrative examples are useful here]

Business Process Re-engineering
Start from scratch Re-define business processes Add value to customers FUNDAMENTAL RADICAL/DRAMATIC

Steps in BPR Identify Business Objectives
Identify specific processes to be redesigned Evaluate existing processes Identify Potential IT applications Design and build new processes and systems Implement

Activity Based Costing (ABC) and ABM
Examined Dec 2007 Production set up costs Machine oil & Machine repairs Supervisor’s salary ACTIVITIES No. of production set ups OAR No. of machine hours No. of labour hours COST DRIVERS

Effect of information technology on modern management accounting
Chapter 4 Study Text Chapter 4 Effect of information technology on modern management accounting

Information needs and IT within organisations
Traditional usage Internal processes focus Cost reduction Localised benefits Solving internal problems Technology led Total system development Exploitation limited by system Strategic usage External customer focus Value creation Shared benefits Solving customer problems Business led Incremental development Exploitation of information

Intranets Internal network Hold centralised, digitised information
Accessible by all

EDI Electronic Data Interchange Computer to computer interchange
Standardised, agreed exchanges Used between business partners

Extranets Allow external, authorised users access to internal information Use internet technology Help to link the supply chain

Databases Systems which hold collections of records and files, designed in such a way as to facilitate access to the whole user community

Database Administrator
Database Structure Database Administrator User 1 User 2 Database Management System Store

Data Warehouse A separate database that stores current and historical data of potential interest to managers throughout the company (Laudon and Laudon)

Components of a Data Warehouse
Internal operational data historical External sources Data Warehouse Information directory Data access and analysis Queries Reports OLAP Data mining Extraction and Transformation

Other Systems CRM Systems SCM Systems ERP Systems
Facilitate the creation of a comprehensive customer profile giving everyone in the organisation one view SCM Systems - Provide links across the supply chain to enhance efficiency and sharing of information ERP Systems Provide firm wide integration of processes and information

You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit. Q17 Q18

Impact of world economic and market trends
Chapter 5 Study Text Chapter 5 Impact of world economic and market trends

Lecture Example Despite having a wide range of business interests Virgin have received wide and often negative press about the standard and value for money of its rail service. Suggest environmental factors which Virgin management should consider and continuously monitor during their rail business planning process

Lecture Example Virgin Rail
Government legislation (integrated transport policies, safety measures, etc.) The franchiser’s power and attitude Competition Level of service Pricing

Lecture example cont… Performance Customer comments
Media comment and adverse publicity Technology (availability of new rolling stock) Network Rail policies, programmes and plans

Cost plus pricing Full Cost plus Marginal Cost Plus
Relevant cost approach Marginal costs plus mark up Minimum price considering opportunity cost All costs plus mark up

Pricing Strategies Premium pricing Price discrimination
By age By time By place Product bundling Psychological pricing Multiple products/loss leaders Discounts

Porter’s 5 Forces POTENTIAL ENTRANTS INDUSTRY SUPPLIERS BUYERS
Examined Dec 2007 POTENTIAL ENTRANTS INDUSTRY COMPETITORS SUPPLIERS BUYERS Everyone will have come across this, the importance here is to understand how it can be sued. It has been tested extensively SUBSTITUTE INDUSTRIES

BCG Matrix Relative Market Share Market or Industry Growth Rate Star
High Low Market or Industry Growth Rate High Low Star Question Mark Explain the various boxes and how high growth can be related to the growth phase of the PLC and low growth related to the mature phase. I have found many students do not make the connection, which could be useful in the exam. Cash Cow Dog

Ansoff’s Matrix PRODUCT Present New Present Withdrawal Consolidation
Penetration Product Development MARKET Diversification Related Unrelated Market Development New Ansoff help to generate various ways to grow Talk through each box, but use the next slide for related diversification

You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit. Q19

Impact of national fiscal and monetary policy on performance
Chapter 6 Study Text Chapter 6 Impact of national fiscal and monetary policy on performance

What should a company consider when assessing performance?
Culture Economics Competitive forces Politics Technology Funding Legal factors

Organisational culture
Values Attitudes Norms Expectations “the way we do things round here” Handy

Levels of Culture Basic – which guides behaviour within the organisation Overt – expressed in the organisation and members Visible – style of office and dress rules etc

Other environmental and ethical issues
Chapter 7 Study Text Chapter 7 Other environmental and ethical issues

Stakeholders: connected Customers external Suppliers internal
Competition Employees Local Community

Stakeholder mapping Matrix
Interest Low High Low Minimal Effort Keep Informed (+)/(-) support/oppose new strategy (+) (-) Power Keep Satisfied Key Players High This explains how the various categories of stakeholder need to be managed.

Position in Matrix: (Open to discussion)
Customers – High power, high interest Suppliers – Low power, high interest Competition – Low power, high interest Employees – Low power, high interest Local Community – Low power, high interest

Views on Stakeholders Strong View Weak View
All stakeholders have legitimate claim on management Management should adopt a balanced approach Weak View Management should focus on enhancement of shareholder wealth Management should only consider other stakeholders if assisting the core objective

Ethics and the organisation
Sources of pressure UK government EU Consumers Employees Pressure groups Scope Treatment of stakeholders Green issues Support for the disadvantaged Dealing with unethical entities

Corporate Ethics Considerations Two approaches Who are stakeholders?
Organisation exists to maximise shareholder wealth Organisation should benefit all stakeholders Considerations Who are stakeholders? Implications? Rights? Considered rights? Honest dealings? Compensation? Consequences?

Professional Ethics Objectivity Professional competence
Professional behaviour Technical standards Integrity Confidentiality

Ethical codes Content Employee – employer relationship Customer care
Supplier relations Bribery Implementation Senior mgmt support Followers prosper Offenders punished Explained to staff Detail provided Staff have access

Management accounting and information systems
Chapter 8 Study Text Chapter 8 Management accounting and information systems

Characteristics of management information
Strategic Planning Tactical Mgt and control Operational control

Information at different levels
In the exam you must be able to identify the key features of information at different levels in the organisation The differences relate to: The nature of the role/tasks The nature of the decision making The format, source and level of detail An overview slide to show students why they need to learn this

Lecture example New outlets Strategic E-commerce strategy Pricing
Promotion strategies Tactical Staff rota Inventory replenishment Operational Only use if students don’t generate ideas – these are only examples. This lecture example is useful as it will encourage students to see that this paper is getting them to look at a business and not just the information.

Management Information Systems (MIS)
In relation to the information issues raised in Chapter 1, organisations must develop a range of appropriate MIS The design and selection of the MIS system needs to take into account the information needs of the organisation

Sources of management information
Chapter 9 Study Text Chapter 9 Sources of management information

Information …is data that has been processed in a way to be meaningful and useful to its recipients. Information is data with added business value. Information systems collect, process and provide information for use within the organisation.

Sources of organisational information
Internal sources Formal 1. Management accounting information 2. Control procedures, records and general correspondence 3. Appraisal systems Informal 1. Cross-departmental networking 2. The “Grapevine” 3. Social gatherings

Sources of organisational information
External sources Formal 1. Commercial data vendors 2. Government and official authorities 3. Trade associations and professional bodies Informal 1. Suppliers and other intermediaries 2. Customers and their representatives 3. The Internet

The Internet The Internet – an international network of networks, both commercially and publicly owned E-commerce – the process of buying and selling using computer mediated communications Some basic definitions to start off with – may be useful

Recording and processing methods and management reports
Chapter 10 Study Text Chapter 10 Recording and processing methods and management reports

Lecture example – Security # 1
Suggest ways in which computer facilities and equipment can be physically protected.

Answer Secure location
(i) locked doors, access cards, security guards, reception personnel, keypad access Personnel controls (i) ID cards – including photograph (ii) sign in/out procedure IT (i) alarm systems Portable equipment (i) register to include booking out procedures, barcoding/postcode marking Checking (i) equipment audits

Lecture example – Security # 2
How might unauthorised access to a computer system be prevented and, if it cannot be prevented (and 100% prevention is unlikely), how the offenders might be discovered and apprehended?

Answer Hardware (i) card access to rooms, (ii) firewall computers,
(iii) CCTV Software (i) passwords, (ii) virus checkers (iii) computer access logs (iv) file access logs Organisational arrangements (i) internal audit (ii) division of duties

Viruses A virus is a piece of software which may damage the software and data held on the computer. Writing, distributing or planting viruses is an offence under the Computer Misuse Act. Cheap, commercial, anti-virus software is available from many sources. Many organisations also install firewalls on computers connected to the internet.

Performance hierarchy
Chapter 11 Study Text Chapter 11 Performance hierarchy

The performance hierarchy
Vision Mission Goals Objectives Specific Vague Timebound Timeless

Mission / mission statements
Provides rationale as to why an organisation exists States long term direction Effective when all members work towards rather than against its main principles

An effective mission should contain:
Campbell et al Purpose Strategy Policies & Behaviour Standards Values & Beliefs

Mission Statement Examples
Purpose Strategy Behaviour standards Values & beliefs Profit, service, to be the best Quality, cheap, global Open door policy Animal testing, staff welfare, environment

Mission statements Advantages Nature Common culture Focus
Goal congruence Criticisms Vague/meaningless Not representative Implementation needed

The role of objectives S - specific M - measurable A - agreed
R - realistic T - time bound

Objective setting Mission Vertical consistency Horizontal Consistency

Gap analysis Objective Objective eg profit GAP Forecast Time

Ansoff’s Matrix PRODUCT Present New Present Withdrawal Consolidation
Penetration Product Development MARKET Diversification Related Unrelated Market Development New Ansoff help to generate various ways to grow Talk through each box, but use the next slide for related diversification

Scope of strategic performance measures in the private sector
Chapter 12 Study Text Chapter 12 Scope of strategic performance measures in the private sector

Introduction Aim of private company is to maximise shareholder wealth
Analysis can be performed across 4 areas: Profitability Liquidity Gearing Shareholders’ ratios

Different firms and time periods Debt/equity, interest cover
Financial analysis Examined Dec 2007 Profitability and return Debt and gearing Liquidity Shareholders ratios Must compare Different firms and time periods ROCE, margins, asset turnover Debt/equity, interest cover P/E, div cover, div yield, EPS, div cover Refer the students to appendix 1 if they cannot remember how to calculate basic ratios. It is assumed knowledge from paper 2.4 Receivables/payables/inventory days, current ratio, acid test

Basis for comparison Over time Against other companies
Same sector? Different sector? Industry averages Against other measures

Limitations/strengths of ratios
Need a comparator Must be clearly defined Inflation effects Differing bases Historical Strengths Easier to understand than absolutes Changes over time can be seen Gives context Can help create targets Summary of results

Profit as a measure Advantages Simple Relates to shareholder wealth
Disadvantages Easily manipulated Short term enhancement Absolute measure

ROCE/ROI Advantages Disadvantages Reliance on profit Relative measure
Profit before interest and tax Average capital employed. x 100% Advantages Relative measure Easily understood Relates to asset consumption Disadvantages Reliance on profit Which investment base to use?

RI Controllable divisional profit – notional interest charge
Examined Dec 2007 Controllable divisional profit – notional interest charge (Head Office Investment x ROI) Advantages Fewer dysfunctional decisions Can account for risk Disadvantages Profit based absolute measure Investment base? Determining ROI? Inter-divisional comparisons difficult

NPV calculations 1+m = (1+r) x (1+i) Cashflows Must be Future
Incremental Cash Cashflows Exclude inflation Use current/real cashflows Discount at real rate, r Include inflation Use money/nominal cashflows Discount at money rate, m Note that in domestic investment appraisal questions, the examiner’s approach tends to be to ignore inflation and discount at the real rate. However due to the effect on the exchange rate, in overseas questions they will usually have to inflate and use the money rate. I tell them that it is best to use real flows at the real rate only if they spot a real annuity. 1+m = (1+r) x (1+i)

Sensitivity analysis How much can NPV change before NPV is negative?
Examined Dec 2007 How much can NPV change before NPV is negative? Sensitivity = NPV total PV cashflow NPV total = 1,148 PV of resale value = 4,000 * =4,000 * 0.636 =2,544 Let them calculate sensitivity to resale value

Sensitivity = 1,148 2,544 = 45% If the chain sells for 45% less than our initial estimate the NPV of the project will be zero. If the estimate is further out than this, the project would return a negative NPV.

Strategic performance issues in complex business structures
Chapter 13 Study Text Chapter 13 Strategic performance issues in complex business structures

Porter’s 5 Forces Threat of New Entrants Bargaining Power of Suppliers
Examined Dec 2007 Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Customers Competitive Rivalry Substitute Industries

Lecture Example Using the model identify the forces and their strength for a clothing manufacturer

Lecture Example Buyers – retail stores, strong
Suppliers – staff (labour), manufacturers (fabric and equipment) weak Substitutes – Other manufacturers, strong New Entrants – Easy to set up on basic level (China currently entering market), strong Competition – Brands, strong

Lecture Example Buyers – Value adding activities, keeping up with trends Suppliers – Single supplier deals regularly reviewed Substitutes – Build reputation (no subs for clothing!) New Entrants – Build reputation Competition – Branding or niche products

BCG Matrix Relative Market Share Market or Industry Growth Rate Star
High Low Market or Industry Growth Rate High Low Star Question Mark Explain the various boxes and how high growth can be related to the growth phase of the PLC and low growth related to the mature phase. I have found many students do not make the connection, which could be useful in the exam. Cash Cow Dog

Uses of The BCG Internal balance Assess trends Evaluate competitors
Evaluate risk Strategic uses

Ansoff’s Matrix PRODUCT Present New Present Market Penetration
Product Development MARKET Diversification Related Unrelated Market Development New Ansoff help to generate various ways to grow

Divisional performance and transfer pricing issues
Chapter 14 Study Text Chapter 14 Divisional performance and transfer pricing issues

EVA Calculate NOPAT – interest rate (WACC) x net assets
Examined Dec 2007 Calculate NOPAT – interest rate (WACC) x net assets (or capital charge) NOPAT Take reported profit after tax Adjust for non-cash items Add back net interest cost Economic depreciation is a cost Net Assets – usually replacement cost Shareholder funds plus long term debt This is based upon the article written in Student Accountant. There are other adjustments which could be made, but essentially we are trying to approximate to a cash equivalent of profit. Economic depreciation represents the cash flows which would be incurred in maintaining the assets at their current level. The net cost of interest is stripped out to avoid double counting interest – it is included in the k x net assets term. K is the cost of capital – they have not seen this in any detail so you may wish to tell them it is the WACC, but go no further at this stage.

Example 20X8 NOPAT = 160 + 30 + 20 x 0.7 = 204 Net Assets = 1,100
Profit after tax = 160, depreciation = 30, tax rate = 30%, interest = 20, WACC = 15%, replacement cost of net assets = 1,100 20X8 NOPAT = x 0.7 = 204 Net Assets = 1,100 EVA = 204 – 15% x 1,100 = 39

EVA Advantages  Measures value added to Shareholders Cash based
Easy to communicate Disadvantages X Lots of adjustments to profit Historic measure Relies on estimate of interest rate Difficult to make comparisons Ensure that students learn some advantages and disadvantages. This has been examined in the past (July 2002) and may be examined again.

Aims of Transfer Pricing System
Controllability one product one price and easily agreed, simplicity Goal congruence divisional decisions benefit whole company Autonomy motivation Performance evaluation ensure reward goes where it’s due Remember: Does the company want the transfer to take place?

A transfer pricing situation – The Brewery Group
Beer Beer Rooms

Avoiding dysfunctional behaviour
Set price to earn a return in one division and incur cost in another Enable profit centres are measured commercially Allow profit centre managers to agree on transfer

Methods of setting transfer price
Market price Use external market price where there is an external market Adjusted market price to reflect savings Cost Based Approach Actual v Standard Standard full cost plus % Standard variable cost plus %

Selling Division transfers at MC
When is this desirable? If there is no external market for Division S If there is an external market for S and it has spare capacity Who benefits? If there is spare capacity then the whole group should benefit Reaction of the Selling Division? S will be unhappy with a TP at MC

Methods of setting transfer price
Dual pricing Use variable cost and transfer share of profits at end of year to supplying division If external market exists charge receiving division variable or marginal cost supplying gets market price Two Part Tariff Variable cost for transfer plus fixed costs at year end Opportunity Cost Based Approach

Opportunity Cost Based Approach
MinimumTP (accepted by transferring division) If external market for intermediate product if S is at full capacity, then it may have to forego income from the external market and the opportunity cost will be lost contribution if S has spare capacity - it will not be forgoing any income and hence the transfer price will be at MC No external market no opportunity cost - transfer at MC

Opportunity Cost Based Approach
Maximum TP (accepted by receiving division) Lower of External Market Price and Net revenue in receiving division Where net revenue = final selling price LESS own divisional costs

Transfer pricing in practice
Negotiation Head Office intervention Head Office cost allocations

International Transfer Pricing
Global company with many subsidiaries around the world Taxation consideration Possibly manipulate pricing system to earn high profits in a low tax country But tax authority impose ‘Arm’s length’ price

Chapter 15 Study Text Chapter 15 Scope of strategic performance measures in not-for-profit organisations

Not-for-profit organisations
Prime goal for assessed by economic measures Profit making may be part of this activity however Examples Charities, Councils, Forces, Colleges, NHS

Public Sector bodies Citizens Charter Set and published standards
Quality via privatisation League tables Complaints procedures User to consumer

Lecture Example Highlight problems that may occur when using league tables Tunnel Vision Lack of true comparability Creative accounting Self fulfilling prophecy

VFM example – washing up liquid Economy – more clean plates per $
Efficiency – more clean plates per squirt Effectiveness – plates as clean as they should be

Behavioural aspects of performance measurement
Chapter 16 Study Text Chapter 16 Behavioural aspects of performance measurement

Performance measurement and behaviour
Accountability Agency theory Hard and soft accountability Controllability Variable costs Fixed costs Uncontrollable factors Factors beyond the control of the manager Reward schemes Link to performance Group scheme

Management styles and motivation
Hopwood’s management styles Budget-constrained Profit-conscious Non-accounting Motivation challenging but achievable goal congruence

Alternative views of performance measurement
Chapter 17 Study Text Chapter 17 Alternative views of performance measurement

Balanced Scorecard Internal Customer Innovation & Learning Financial

Advantages of Balanced Scorecard
Considers all strategic measures Holistic view Avoids short term arguments Considers business activity linkages Forces organisation to look externally Useful for risk assessment

Balanced Scorecard Features Development Broad outlook
internal & external matters financial & non-financial Identifies customer needs Development Specific to company Can be created at all levels of management

The Performance Pyramid
Lynch & Cross Corporate Vision Market Financial Customer Satisfaction Productivity Flexibility Quality Delivery Cycle time Waste Operations

Performance pyramid Derives from the idea that the organisation operates at different (management) levels Each of these levels has different concerns But they should support each other in achieving business objectives LINKAGES

Problems of PM in Service Businesses
S imultaneity H eterogeneity I ntangibility P erishability

Fitzgerald and Moon’s Building Blocks
Dimensions base measure on these areas Dimensions Profit Competitiveness Quality Resource utilisation Flexibility Innovation Standards/Targets ensure equity/fairness Standards Ownership Achievability Equity Rewards Clarity Motivation Controllability Rewards need to be clear

Non- financial performance indicators
Chapter 18 Study Text Chapter 18 Non- financial performance indicators

Problems with Financial Performance Indicators
Only monetary terms Focus on past Not full picture Short term focus Solution = NFPIs

Value of NFPIs Quick Anything can be measured Easy to calculate
Not as easy to manipulate Qualitative or quantitative Can focus on key areas like customer satisfaction, quality

Must be linked to financial measures
Problems of NFPIs Information overload Detail vs. big picture Out of date Must be linked to financial measures Balanced Scorecard

Lecture Example 1 In the role of coffee shop manager, suggest some NFPI for your business Returning customers Comments Occupancy Knowledge of staff New product take up Stock outs

Predicting and preventing corporate failure
Chapter 19 Study Text Chapter 19 Predicting and preventing corporate failure

Predicting business failure
Examined Dec 2007 Declining industries End game Product revitalisation Declining companies Slatter’s ten symptoms Measures Liquidity Z score Argenti’s A score

Strategies for improvement
Identify the causes of decline and strategies to deal with them Strategic drift Counteracting Review leadership

You should now be able to attempt the following key question from the BPP Learning Media Practice and Revision Kit. Q59

Current developments in management accounting techniques
Chapter 20 Study Text Chapter 20 Current developments in management accounting techniques

Changing role of the Management Accountant. Burns and Scapens
Provision of information that is; Forward looking External Assists meeting of objectives Links to strategic core Planning and control Changes arose due to Technology Management structure Competition

Modern Japanese techniques
TQM JIT Target costing Kaizen costing Continuous improvement

Raw material & components
Just In Time Supplier Base JIT purchasing Manufacturing Resources Planning (MRP 2) Advanced Manufacturing Technology Total Quality Management Computer Integrated Manufacturing Raw material & components Work-in Progress Finished Goods Demand Pull Customers

Target costing To reduce the life-cycle costs of new products through cost reduction: Pre-production planning R&D Refer to the diagram in 7.2 as you chat through these points or tell them to cross it out as they will never learn it!

Implementing target costing
Define product spec & sales volume Target selling price Required profit Target selling price X less: target profit (X) Target cost X Estimated cost Estimated cost – target cost = cost gap Reduce costs or negotiate with customer

You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit. Q60 Q61 Q62

Current issues and trends in performance management
Chapter 21 Study Text Chapter 21 Current issues and trends in performance management

Value-based management
Value mind set Value drivers Any variable that affects the value of the company Management processes

Recently developed performance management frameworks
Six Sigma Define Measure Analyse Improve Control Performance Prism Stakeholders satisfaction Strategies Processes Capabilities Stakeholder contribution

You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit. Q63 Q64 Q65 Q66

ACCA Paper P5 – Advanced Performance management

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