ACCA PAPER P5 ADVANCED PERFORMANCE MANAGEMENT PASSPORT

Accountancy Tuition Centre (International Holdings) Ltd 2009 (i)

ATC

INTERNATIONAL

ACCA

PAPER P5

ADVANCED PERFORMANCE MANAGEMENT

PASSPORT

Accountancy Tuition Centre (International Holdings) Ltd 2009 (ii)

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These are condensed notes focusing on key issues for those of you who lead busy, mobile lives or for those of you who want to revise in a more focused fashion.

CONTENTS

Accountancy Tuition Centre (International Holdings) Ltd 2009 (iii)

CONTENTS

Page

Introduction (iv)

Summary of key theory 0101

Articles 0201

Past question analysis 0301

Examiner comments 0401

Exam Technique 0501

These are condensed notes focusing on key issues and offering a limited

number of examples and exercises for those of you who lead busy, mobile

lives or for those of you who want to revise in a more focused fashion.

Be Warned: These notes only offer guidance on key issues. On their own they

are not enough to pass the examination.

INTRODUCTION

Accountancy Tuition Centre (International Holdings) Ltd 2009 (iv)

CORE TOPICS Tick when completed

Strategic management accounting

� Strategic planning �

� SMA in multinationals �

� Life cycle issues �

� SWOT analysis �

� Risk and uncertainty �

� Budgeting for control �

Changes in business structure

� Effectiveness of traditional techniques �

� Business Process Reengineering �

� Activity based management �

� Effect of IT on management accounting �

� Environmental factors �

� Stakeholders/ethical issues �

� Pricing �

� Performance measurement systems �

Tick when completed

Corporate strategy

� Performance hierarchy/ mission �

� Porter’s five forces �

� Boston consulting group matrix �

� Ansoff’s product market matrix �

� Performance measurement �

Further aspects of performance measurement

� Balanced scorecard �

� Performance pyramid �

� Service industries �

� Non profit organisations �

� Remuneration schemes �

� Potential problems with PM �

� Corporate failure �

INTRODUCTION

Accountancy Tuition Centre (International Holdings) Ltd 2009 (v)

Tick when completed

Divisional performance evaluation

� ROI/Residual income �

� Economic value added �

� Transfer pricing �

Current developments in performance evaluation

� Current developments �

� Value based management �

� Six sigma �

� Performance prism �

� Contemporary issues �

INTRODUCTION

Accountancy Tuition Centre (International Holdings) Ltd 2009 (vi)

Format of the examination

The examination is a three-hour paper constructed in two sections.

The Section A questions will contain a mix of computational and discursive elements.

Section B questions will comprise at least one question that is purely discursive and other(s) will incorporate both computational and discursive components.

Section A: Two compulsory questions worth 60 marks

(no single question will exceed 40 marks)

Section B: Choice of 2 from 3 questions (20 marks each)

SUMMARY OF KEY THEORY

Accountancy Tuition Centre (International Holdings) Ltd 2009 0101

INTRODUCTION TO STRATEGIC MANAGEMENT

ACCOUNTING

Strategic management is usually taken to mean a broader view of management accounting which may include:

� External as well as internal information

� Non financial as well as financial information.

� Information to help develop the organisation’s strategy, and information to monitor how well the organisation is performing against the strategy.

Corporate planning

This involves developing the strategy of the organisation. This is then used to develop a long term corporate plan. A modern approach to corporate planning may follow the following steps:

� Analyse the environment within which the organisation exists, and analyse the organisation’s own strengths and weaknesses- possibly using SWOT analysis.

� Deciding on the objectives of the organisation. These objectives may be organised into a hierarchy- the performance hierarchy.

� Identifying the gap between where the company is and where it wants to be?

� Developing strategies to narrow the gap.

Planning and control at the strategic and operational

level

Strategic planning involves setting plans and goals for an organisation over the long term. Operational planning involves managing the day to day operations of the business. The differences can be summarised as follows:

� Strategic planning is not routine. Operational planning will be.

� Strategic planning requires more judgement, and will be performed in situations of uncertainty. Operational plans involve more programmed decisions, such as ordering inventory.

� Strategic decisions will be based on external information. Operational planning will be based on mainly internal information.

Lifecycle issues and survival

Most product lifecycles are becoming much shorter than they were even 50 years ago. Management must consider product lifecycles in order to survive since:

� New products must be developed to replace existing ones- otherwise the company will become obsolete.



� Cash flow must be managed- so that products in the development phase are paid for by products in the maturity phase.

Strategic management accounting in Multi Nationals

Issues for strategic management accounting in multi

nationals

� Providing information about countries/markets for potential new investments

� Managing the additional risks involved in investing in foreign countries

� Additional complexities of performance measurement in multi national companies.

Additional risks involved in investing in foreign countries

� Cultural risk- not appreciating local customs/ values

� Economic risk- due to less stable economic climate in some countries

� Political risk- less friendly government attitudes towards multi nationals

� Technological risks

� Foreign exchange risk

� Control risk

Performance measurement issues

� Comparison of the performance of divisions in different countries will be made more complex by:

� Transfer pricing

� Different cost bases/ economic conditions

� Exchange rate fluctuations

� Different tax rates

SWOT Analysis

SWOT analysis may be used during the planning stage. The benefits of this are:

� Organisation will only undertake opportunities for which it has the required abilities.

� Focuses management on the external environment as well as the internal.

� May identify new opportunities.



Benchmarking

Definition

Organisations compare various aspects of their processes with best practice organisations in an attempt to improve their own performance.

Benefits

� Identifies opportunities for improvement

� Establishes best practice- for realistic performance measurement

� Should lead to long term improvement in profits

Difficulties

� Requires organisations who are willing to share information about their own processes

� Time consuming/ complexity of data

� Resistance within the organisation to change

� Time lag between investigation of best practice and implementation may mean that best practice is never achieved.

BUDGETING FOR CONTROL

Objectives of a system of budgeting:

� C- Coordination

� R- Responsibility

� U-Utilisation

� M-Motivation

� P-Planning

� E-Evaluation

� T-Telling

Alternative systems of budgeting

Fixed v Flexible v Flexed

� A fixed budget is prepared once, and remains unchanged when used for comparison with actual results.

� Under flexible budgeting, several budgets are prepared using the same budget assumptions, but based on different activity levels (sales/production units). At the end of the year, the budget with the activity level closest to the actual is used for comparison.



� A flexed budget system involves “flexing” the original budget at the end of the year to reflect the actual activity levels, based on the original budget assumptions.

Rolling Budgets

� Rather than preparing the budget once a year, the organisation continually updates the budget. Typically the budget will be prepared for the next twelve months. At the end of each month, another month’s budget is added. Intervening months’ budgets may also be changed, if factors outside the control of the company have made the original budgets inappropriate.

Activity based budgeting

� Budgets are based on activity based principles.

Incremental v Zero Based Budgeting

� Incremental budgeting is performed by taking the previous years actual or budgeted figures and adding adjustments for inflation and other factors that have changed.

� Disadvantage of incremental budgeting is that it accepts costs simply because they were there last year without questioning whether they are really necessary.

Zero based budgeting

� Managers identify the activities they wish to perform. (E.g. making particular products, training.)

� Managers produce a decision package for each activity, showing costs and revenues, as well as qualitative factors.

� Budget committee reviews decision packages and selects those it wishes to accept. These form the budget.

� Advantage is that budget process examines each cost, and relates it to the activities the company will perform, rather than just accepting costs because they were in previous year.

� Disadvantage- very time consuming.

Budgeting in not for profit organisations

Differences compared to non profit organisations

� “Output” cannot be measured in monetary terms.

� “Demand” for the service is not predictable e.g. number of homeless people needing shelter cannot be predicted in advance.



� No link between revenue (often based on donations) and costs (depends on demand for the service.) Organisation may not therefore have funds to satisfy all demand.

� Budgeting therefore focuses on costs.

Traditional budgeting in non profit organisations

� Budgets prepared on a “line item basis” whereby a budget amount for each major line of expenditure is prepared (Employment costs, depreciation etc.)

� Such budgets do not related expenditure to the organisation’s activities

� Budgets do not ensure funds are being used efficiently and effectively.

Planning, programming budgeting systems

� Effectively a zero based budgeting approach to budgeting in non profit organisations. Follows the following steps:

1. Identify the overall objectives of the organisation

2. Identify programs that could meet these

3. Establish the costs and benefits of each program

4. Decide how much funds to allocate to each program.

� Advantage of ppbs- costs are allocated to programs that best meet the objectives of the organisation.

� Potential problem- budgets may ignore organisational structure, since activities involve several departments.

Beyond Budgeting

Weaknesses with traditional budgetary control systems

1. Budgeting takes up too much managers’ time.

2. Budgets prepared 15 months before the end of the accounting period to which they relate become out of date.

3. Managers “gaming” activities means the budget process loses its validity. Gaming includes:

� Adding slack to budgets to make them easier to perform

� Never beating the budget significantly

� Always spending what’s in the budget.



4. In some organisations, funds are only available for projects in the budget. This may constrain managers who identify potential new projects after the budget process.

5. Too much focus on profits is not consistent with the overall goals of the organisation- to maximise the wealth of shareholders.

The “Beyond Budgeting” Model

1. Targets will be based on the organisations key performance indicators rather than being purely profit or cost based.

2. The use of rolling budgets to ensure that budgets are kept up to date.

3. The more flexible use of budgets as an evaluation tool- so that managers are not punished for factors outside of their control.

4. Devolve responsibility for planning away from the centre to the front line.

5. Allocation of resources for managers should be based on whether projects meet pre determined criteria (such as NPV) rather than on whether they are in the budget.

Behavioural Aspects of Budgeting

Responsibility accounting

� Responsibility is delegated to managers via the budget. They are then evaluated on how they perform in comparison with the budget.

Level of difficulty

� If budget is not achievable, it will de-motivate. If it is too easy, it will not challenge.

Top down v Bottom up

Bottom up means managers prepare their own budgets. These are then approved by a budget committee. Top down means that budgets are prepared centrally, and imposed on managers.

Bottom up has the following advantages:

� Managers are more motivated to take ownership of the budget

� Managers have better knowledge of situation “at the coal face”



Top down has the following advantages

� Non financial managers may not have the financial knowledge to prepare budgets

� Preparing the budgets centrally may minimise problems such as adding slack to budgets.

Controllability principle

� Managers should only be judged on things they control. They should not be blamed for adverse factors outside of their control- such as increases in the price of commodities on world markets.

CHANGES IN BUSINESS STRUCTURE AND

MANAGEMENT ACCOUNTING

Continuing effectiveness of traditional management

accounting techniques

Changes in the business environment

Globalisation has led to more competition in domestic markets

Computerised manufacturing systems provide the opportunity for competitive advantage

Shorter product lifecycles

Growth of service industry

Growth in multinationals as a result of business combinations

More decentralised decision making.

Limitations of traditional management accounting techniques

� Too focussed on financial factors. Ignores important non financial information such as quality.

� Too internally focussed- in dynamic world, management needs to be aware of external factors too.

� Management accountants focus too much on the production phase. Most costs are determined at the design stage of a product.

Limitations of variance analysis

� In just in time environments, long term contracts with suppliers mean there will be no price variance

� Many companies do not produce standard products, but customise for each customer- so there is no standard cost

� Super efficient manufacturing systems mean that there will be few usage variances.



Organisational form and implications for performance

management

Functional form

In a functional form, departments are formed according to their function- e.g. sales, production, finance etc.

� Top level management will require detailed management reports.

� The form does not reflect the processes by which value is created

� It is hard to identify where profits are made, as revenues and costs are not matched on a department by department basis.

� Budgets and consolidated figures are likely to be available only to top management.

Divisional form

The organisation is divided into product divisions, or geographic regions. Managers of the division are given autonomy.

� Top management will require only high level reports from the division.

� A performance measurement system should be used to assess the performance of divisional managers that ensures goal congruence. (Discussed in more detail on the section on divisional performance evaluation.)

� Divisional managers are “sheltered” from the market- that is, they do not face the same pressures as if they were running independent businesses.

Business Process Reengineering

Definition

The fundamental rethinking and redesigning of business processes to achieve dramatic improvement in critical measures of performance such as coast, quality, service and speed.

Influence of BPR on business performance

� Organisational structures tend to be flatter, encouraging more team work than traditional command structures.

� The teams are more customer focussed and able to react to the needs of customers more quickly.

� Costs have been saved by eliminating non value added activities.



Impact of BPR on systems development

� Management accounting systems are likely to focus more on business processes, rather than the old functional approach.

� Systems will attempt to identify where value is added.

Activity Based Management

Definition

Activity based management views the business as a set of linked activities that ultimately add value to the customer. It focuses on managing the business on the basis of these activities.

Discussion

Activity based management is more than just applying activity based costing principles to management. It also implies:

� Activity analysis- identifying the costs associated with the activities that are performed. Some activities may be eliminated on the basis that the cost exceeds the benefits.

� Cost driver analysis- identifying the driver of costs, and attempting to reduce the incidence of it (for example

reducing the number of machine set ups by having larger production runs)

� Continuous improvement- the elimination of non value added activities.

� Operational control- by better understanding the activities that are being performed, management can identify where cost savings are available.

� Performance evaluation- in activity based management, the focus of performance evaluation will be on the effectiveness and efficiency of the activities.

Required changes in management accounting systems as

a result of empowering staff to manage sectors of the

business

� The governance framework should be based on clear principles and boundaries

� Performance measurement system should be based on the goals of the organisation as a whole

� Performance evaluation should be based on relative performance (compared to peers) rather than absolute performance



EFFECT OF IT ON MODERN MANAGEMENT

ACCOUNTING SYSTEMS

Service industries compared to manufacturing

Performance measurement in the service sector may be more difficult than in the traditional manufacturing industries, due to:

� Intangibility- with a service, it is not always obvious what aspect of the service is valued by the customer.

� Simultaneity- consumption of a service takes place when the service is performed- therefore quality measurement must take place at this stage

� Perishability- services cannot be stored and must be provided when the client needs them

� Heterogeneity- unlike goods manufactured in mass production, each service varies in quality, making it difficult to measure the whole.

Service industries are likely to require much more qualitative data than manufacturing industries.

Instant Access to Data

Modern IT systems provide the opportunity for instant access to management accounting data throughout the organisation. The following are examples of how:

� Databases

� Intranets

� Reports

� Enterprise resource planning systems (ERP)

Potential impact on business performance

� Businesses can react more quickly to customer enquiries, thus providing a better service to customers.

� Management obtain control information more quickly, without having to wait for the publication of the monthly management accounts.

Remote input of management accounting data by non

financial staff

Modern information systems enable data to be input into the system by non financial staff. Examples are:

� Use of electronic point of sales (EPOS) systems in supermarkets- as the cashier scans the goods purchased, using the bar code scanner, the revenue, cash and inventory records in the accounting system are automatically updated.



� Electronic commerce- whereby customers place orders over the internet- some systems may require minimal processing by the staff of the organisation.

Instant Access to previously unavailable data

Used for benchmarking purposes

� The internet is a useful source of information about competitors- information such as prices, financial statements, press cuttings may all be obtained easily.

� Some organisations compile databases of benchmarking statistics that can be shared,

Used for control purposes

� Detailed information can be stored about customers in databases. Data mining may then be used to identify trends.

� Inventory control methods such as Radio Frequency Identification Tags (RFID) can enable companies to monitor inventory levels in real time, and react to sales trends.

� Exception reports can be produced by management information systems, alerting management to issues which need to be controlled- such as customers whose

balance exceeds a certain amount, or any unusual transactions.

ECONOMIC, FISCAL AND ENVIRONMENTAL

FACTORS

Impact of external factors on an organisation and its

strategy

External factors can be grouped into the categories represented by PESTEL:

� Political- for example bureaucratic regulations in socialist countries

� Economic

� Social – changing social attitudes- for example toward healthy lifestyles

� Technological- provides new opportunities

� Environmental

� Legal

The porter’s five forces model (see later) can also be used to analyse the competitive environment within which an organisation operates.



Pricing policies

Pricing policies should consider the 4 C’c of pricing:

� Costs – A company must cover its costs in the long run

� Competitors – It should consider the market price of competing firms

� Customers – A firm should take into amount how much its customers are prepared to pay

� Corporate objectives – The firm’s specified goal e.g. profit maximisation should be integrated with its pricing policy

Economist’s approach

Demand curve:

P = A – BQ

P = price Q = quantity demanded A = price at which demand would be nil B = slope of the demand curve (price changes over the change in quality demanded)

Marginal revenue -MR = A – 2BQ

MR = the change in revenue from selling one more unit 2BQ = note that the marginal revenue falls at twice the rate of the demand curve

� To maximise sales set MR = 0, solve Q and place Q in the demand curve equation to gain price.

� To maximise profits set MR = MC, solve for Q and place Q in the demand curve equation to gain price.

Accountant’s approaches

Full cost

Full total absorption cost is calculated and then an allowance for profit is added. Although costs are covered it takes no amount of customers or competition

Marginal cost pricing

Marginal variable cost is calculated and then an allowance for contribution is added. Not all costs are covered and as such should only be used in short term relevant cost decision making.

Return on investment pricing

Full total absorption cost is calculated and then the allowance for profit is based on the required return on the investment base. Its limitations are as for full cost pricing.



Strategic Approaches to pricing

Market penetration policy

In accordance with the product development life cycle (PDLC) this involves a policy of low prices when the product is in its growth phase to obtain market share.

Market skimming

Can be used with the PDLC and involves charging high prices during the introductory phase usually when the company has brought a new product to the market.

Going rate pricing

During the maturity phase of the PLDC a company may adopt this policy of charging the market rate.

Impact of governmental regulation on performance

measurement

Fiscal policy

� Use government spending or taxation policy.

� If government is running a budget deficit, an increase in taxes and/or reduction of government spending may be necessary. This may reduce demand for the company’s products.

� Populist governments may increase government spending or cut taxes. This may increase aggregate demand in the economy, and therefore increase demand for the company’s products.

� An increase in government spending if financed by borrowing, may lead to an increase in inflation, which may affect monetary policy.

Monetary Policy

� Involves governments aiming to influence the supply or demand for money in order to achieve policy objectives.

� If there is high inflation in the economy, the government may increase interest rates in order to reduce the supply of money, and therefore reduce inflation.

� High interest rates lead to an increase in the cost of financing for organisations.

� High interest rates may also reduce demand for companies’ products, as individuals will save more/ borrow less.



Government regulations

� Price limits for utility companies or former state monopolies

� Quality control

� Government regulations may reduce the profits of the companies. During performance measurement, this should be taken into account.

Other environmental and ethical issues

� Mendelow’s matrix suggests an approach to dealing with various stakeholder groups:

Keep informed

Key players

Ignore Keep satisfied

Level of interest

High

Low

High Low Stakeholder Power

Ethical Issues

Organisations play a role in the society in which they exist. They may have ethical policies which guide:

� How the organisation behaves- e.g. health and safety

� Expected behaviour of employees and directors

� The organisations beliefs on political issues where it may be in a position to influence governments.

Ethical behaviour may “cost” the business, in terms of lost business opportunities, or costs of implementation. However, it may have the following advantages:

� Improved image may lead to increased sales

� Avoidance of fines (e.g. for pollution)

� Organisation and its stakeholders may simply believe in “doing the right thing



PERFORMANCE MEASUREMENT SYSTEMS AND

DESIGN

This section focuses on the different types of information that may be required from the management accounting system, and the factors that influence this.

Strategic planning, management control and operational

control

Different types of information will be required for the different levels of management:

Strategic planning

� Mainly external

� High level

� Ad hoc

� Longer term, forecasts

Management control

� Mostly internal

� Covers medium term

� Structured and detailed

Operational control

� Exclusively internal

� Transaction based

� Short term- day by day

Management structure

� A divisionalised structure (whereby each division represents a separate business area) will require a system that provides detailed information to the manager of the division on all aspects of the division’s activities.

� In a functional structure, each manager will be provided with information relevant to the running of their function (e.g. sales, production.)

� In a divisionalised structure, top management will rely on high level performance measures to evaluate the divisional managers. In a functional structure, top managers will see the detailed picture and are likely to be the only level at which the overall activities of the organisation can be seen on a consolidated basis.



Objectives of management accounting and management

accounting information

� Planning – setting the objectives and strategy of the organisation

� Control – ensuring the organisation remains on course to meet its objectives

� Decision making – seeing the likely outcome of decisions.

� Accountability – ensuring that the resources of the organisation.

Contingency Theory of management accounting

There is not one management accounting system that is appropriate for all organisations.

The nature of the most appropriate management accounting system depends on contingent factors:

� The external environment (e.g. changing v stable)

� Competitive strategy

� Technology- production process used.

� Firm and industry specific variables.(size of firms, manufacturing v service etc)

� Knowledge and observability factors- relates to the nature of control systems.

Anticipated human behaviour

The design of a management accounting system should consider the impact it will have on the behaviour of those who use it.

� Behavioural controls may be appropriate for employees doing repetitive tasks such as manual labourers. (E.g. close supervision).

� Behavioural constraints such as authority limits on bank accounts may be appropriate for employees with more responsible roles.

� Where the work is not routine, and staff cannot be closely watched (e.g. because they work at clients’ offices), the organisation may rely on cultural controls.

Responsibility Accounting

In organisations that use responsibility accounting, the organisation should provide details to each manager of the costs and revenues under their control- budgeted and actual. There is likely to be emphasis on financial measures.



CORPORATE STRATEGY

Mission statement

� A statement that describes the basic function of an organisation.

� May focus the attention of managers and staff on the main purpose of what they are doing.

� May define the organisations values and culture.

� Assists management in setting the objectives and strategy of an organisation.

� Many mission statements are in practice little more than marketing documents full of meaningless phrases.

Corporate objectives

� Corporate objectives apply to the whole organisation.

� Objectives are specific embodiments of the mission

� May be set in quantitative terms- e.g. increase profits by x% per annum.

Selecting strategic objectives

� Strategic objectives describe how the organisation will achieve its objectives.

� Selection may involve identifying the organisation’s competitive advantages (e.g. using SWOT analysis), and the basis on which it will compete (e.g. using Porter’s generic strategies- see below.)

� Strategic objectives should then be “cascaded” down the organisation, whereby objectives should be set for operational managers, based on the organisation’s strategic objectives.

Planning Gap

Gap analysis involves comparing the predicted results of an organisation over the planning period with the desired results, formulated in the previous stage.

Profits

Present Years

Current forecast

Planning gap

Objective



Strategies to narrow the gap

� Improvements in internal efficiency e.g. increased productivity

� Expanding the business by producing new products or entering new markets.

Strategic planning models

Porters five forces model

The competitive nature of an industry can be characterised by 5 forces:

� threat of new entrants

� bargaining power of buyers

� bargaining power of customers

� threat of substitutes

� competitive rivalry

In order to form a competitive strategy, companies should choose one of the following generic strategies:

� Price leadership � Differentiation � Market focus

Boston consulting group matrix

The matrix helps management to categorise the company’s products, based on two criteria:

� the nature of the market- high growth or mature

� the company’s share of the market



Ansoff’s product market matrix

The matrix offers four strategic methods to achieve growth

Existing

Products

New Products

Existing

markets

Market

Penetration

Product

Development

New Markets Market

Development

Diversification

PERFORMANCE MEASUREMENT

Financial performance evaluation

Benefits to shareholders

Main objective of an organisation, from the perspective of the owners, is to maximise wealth. Financial performance evaluation is therefore normally performed from the perspective of the shareholders.

Objectives of survival and growth

� Unless the organisation survives, everything else is irrelevant. Performance evaluation should include liquidity (e.g. current ratio), gearing ratios and cash flow to ensure survival.

� Growth indicates that the organisation is succeeding in a dynamic environment. Growth leads to increase in the market value of the company. Growth can be measured as growth in revenues, growth in profits.

Ratios

Ratios should be used sparingly in the exam, as more marks are likely to be awarded for meaningful comments than for calculating ratios. The following is a summary of the more commonly used ratios:

Return on capital employed (ROCE)

� Equity

taxbeforeProfit × 100

� debt termlong plusEquity

taxandinterest beforeProfit × 100



Profit margins

� Gross profit margin = Revenue

profit Gross× 100

� Net profit margin = Revenue

profitNet × 100

Liquidity

� Current ratio = sliabilitieCurrent

assetsCurrent × 100

Gearing

� Gearing ratio = debt plusEquity

Debt× 100

Earnings before interest, tax amortisation and depreciation

� Sometimes used as a measure of “underlying performance of an organisation

� May be justified on the basis that it is a proxy for cash flow from operations

� May be appropriate for divisional managers who do not make investment or financing decisions

Conflict between Short Run and long run financial

performance

� Short run improvements in financial performance may be at the expense of longer term- e.g. cutting back on R&D spending.

� Performance measurement should encourage a longer term view- possibly by using a mix of financial and non financial performance indicators. (See below)

� In the long run, the value of a company is equal to the net present value of its future income streams, discounted at the companies cost of capital.

Relationship between profits and share values

� Price earnings ratio = shareper

shareper price

Earnings

Market

� Traditionally, P.E. ratio was used as a valuation tool- the value of a company could be ascertained by multiplying its profits by an industry average P.E. ratio. If the share price is higher than this, the shares are overvalued.

� Modern valuation methods focus on expected earnings or expected future cash flows.



� Sometimes investors expectations are overly optimistic- such as during the dot com boom of the 1990s, when shares in internet companies enjoyed excessive values, even though in many cases the companies had yet to make profits.

� Expectations are forward looking, unlike traditional financial performance measures, which focus on the past.

Non-financial performance indication (NFPIs)

� Use of NFPIs in addition to financial measures has several advantages:

� They focus on the drivers of future business performance (e.g. quality)

� Using only financial measures may lead to short term behaviour

� May be less easily manipulated

� May be complied more quickly.

Key performance indicators

� Key performance indicators measure how the organisation performs in relation to its critical success factors.

Operational performance indicators

� Having set operational performance indicators, managers should set performance indicators at all levels of the business- both financial and non financial- that are consistent with the key performance indicators.

FURTHER APSECTS OF PERFORMANCE

MEASUREMENT

Balanced scorecard approach

This is an attempt to combine financial indicators and non-financial indicators to cover all relevant areas of performance such as:

� Financial perspective – designed to make the company survive and prosper by reference to profitability, cash flow, market share

� Customer perspective – designed to give responsive supply and quality and is concerned with on-time delivery, % of returns and customer satisfaction.

� Internal business perspective – designed to give manufacturing excellence and productivity and is concerned with reduced cycle times and engineering efficiency



� Innovation and learning perspective – designed to reduce the time to market and improve technological leadership by looking at the number of new product introductions and the time to develop the next set of products.

The performance pyramid (Lynch & Cross)

The performance pyramid is a framework for performance measurement that aims to ensure all departments in the organisation are working towards the same objectives- the strategy of the organisation.

Corporate vision

Marketing performance

Financial performance

Customer satisfaction

Flexibility

Productivity

Quality

Delivery

Cycle time

Waste

OPERATIONS

BUSINESS UNITS

BUSINESS OPERATING SYSTEMS

DEPARTMENTS

MEA S UR E S

OB J E C T I VE S

External effectiveness

Internal efficiency

� Objectives are set at top, and based on these, objectives are set for all other levels in the organisation.

� Performance measures are set at all levels of the organisation that aim to measure how the organisation is working towards the objectives.



� There is a horizontal aspect to the pyramid- for example, at the business operating systems level, better flexibility feeds into better customer satisfaction and productivity.

Fitzgerald and Moon

The following characteristics that distinguish services from manufacturing businesses:

� Simultaneity- the consumption of the service takes place at the time of performance

� Perishability- services cannot be stored

� Heterogeneity- each time a service is performed, it will be different.

� Intangibility- what consumers value in a service can be difficult to determine.

In their building blocks model, Fitzgerald and Moon defined six “dimensions” through which the performance of a service industry can monitor its performance:

� Profitability

� Competitiveness

� Quality

� Resource utilisation

� Flexibility

� Innovation

Non profit organisations

Performance measurement in non profit organisations is complicated by the fact that:

� There are many stakeholders- possibly with differing objectives. Which objectives are the priority ones?

� The organisations have limited resources within which to try to achieve their aims.

� Performance measurement in the non profit sector focuses on the “three ees:

� Economy (e.g. total costs per hospital bed)

� Efficiency (e.g. patients treated per doctor)

� Effectiveness- how good is the hospital (e.g. how many patients do not return within three months.)



Potential problems of performance measurement systems

A poorly performed performance measurement system can lead to the following problems:

� Tunnel vision- managers focus only on things which are measured, and ignore important factors that are not measured.

� Goal incongruence- where the targets given to a manager may conflict with the organisations overall objectives

� Myopia- (short sightedness)- where short term goals are achieved at the expense of long term performance

� Misrepresentation- where the performance indicators are presented in a way that distorts the underlying message. (For example "only 3 of our customers were dissatisfied- this may sound good- but what if they were the three largest customers?)

� Measure fixation- where managers take action to achieve the measured target without actually achieving the underlying goal behind the objective- for example, doctors cutting waiting lists by not allowing patients to make appointments.

Ways to reduce the problems

� Participation of staff in the design of the scheme

� Encourage long tem view (e.g. through use of share option schemes)

� Regular auditing of the system by experts

� Audit data to identify manipulation.

CORPORATE FAILURE

Causes of corporate failure (Argenti)

� Bad management � Poor accounting information � Over trading � High gearing � Undertaking big projects � Failure to respond to change

Quantitative signs of corporate failure

� Declining profit margins � Decreasing sales volume � A rapid increase in gearing � A fall in liquidity ratios



Qualitative signs of corporate failure

� Restrictions on dividend policy � Financial engineering � High management turnover/ loss of key personnel � Falling market share

Altman z-score model

� Altman’s model is a quantitative model, which attempts to predict bankruptcy, based on various ratios.

� Empirical evidence has shown that the model is good at predicting corporate failure within 12 months of a failure- but not so good at predicting corporate failure longer two years or more before the failure occurs.

� Has the advantage of being objective- as it is based on calculations.

� Can’t be used for unquoted companies, because on of the factors includes the market price of the company’s equity.

Argenti’s A-score model

� Model requires user to assign a score to various attributes of the company’s corporate governance, accounting, management and financial performance. A high score is adverse.

� Weakness of the model is that it requires judgement in applying it.

Corporate recovery strategies

� Replacing poor management with strong.

� Introduction of tight financial controls

� Sale of non core businesses to generate cash

� Successful core business required

� Restructuring of debt.

DIVISIONAL PERFORMANCE EVALUATION

Return on investment (ROI)

� ROI is essentially the same measure as ROCE and ARR

� It is important only to only include costs, revenues and elements of the assets base controlled by the manager when performing a managerial evaluation.

debt termLong employed Capital

taxationandinterest beforeProfit

+ × 100%

� This has the benefit of providing a relative evaluation for comparative purposes or



� May be used for investment appraisal where the manager can compare an investment’s ROI with the target ROI. If the division’s ROI is the same as the company’s ROI then this will produce goal congruent behaviour. If not however, then dysfunctional behaviour may happen (e.g. division’s ROI is 5%, company’s required rate 20%, project under appraisal 10%. The manager would accept the project but should reject it).

Residual income (RI)

� To overcome this problem, RI calculations may be used. The calculation is profit – imputed interest (capital employed multiplied by cost of capital)

� If positive the project is accepted, if negative the project is rejected and as such is an absolute measure like NPV. Discounted RI indeed reconciles to NPV.

Problems associated with both ROI and RI

� Both measures use accounting profits and are short term i.e. if positive RI or target ROI’s are not met in the first period then the project may be rejected even though a positive NPV may be observed over the whole life of the project. The risk of short-termism may be reduced through:

� the use of annuity based depreciation to smooth reported performance over the life of the project

� relegating the divisional managing director to profit centre status and make the capital investment decision at group level based on NPV. However this could be de-motivating.

� Adjust the manager’s target ROI or RI downwards in the earlier years of the project. This will not be de-motivating.

Economic value added (EVA)

� Economic value is similar in principle to residual income, and is designed to show if the profits generated by a division (or even a whole company) exceed the cost of financing the assets used to generate the profit.

� EVA is calculated as: Net Operating Profit after tax – Finance Charge



Net operating profit after tax

Profit after tax X + Interest charge (net of income tax) X + Research & Development expenditure written off during the year X + Non cash expenses (good will written off, etc) X + Accounting depreciation X - Economic depreciation (X) - Amortisation of cumulative R&D adjustments (X) ––– = NOPAT X ––– Finance Charge

Finance charge = Capital employed at the start of the year x the weighted average cost of capital.

Capital employed

Equity per statement of financial position at start of year X Debt per statement of financial position at start of year X Add: Non capitalised leases (Operating leases) X Add: Cumulative research and development expenses recognised in income statements X Less: Amortisation of research and development expenses (X) Add: Accumulated Accounting depreciation X Less: Accumulated economic depreciation (X) ––– Capital employed for finance charge X ––– TRANSFER PRICING

Objectives of a good transfer pricing system:

� Autonomy

� Goal congruence

� Fair to both buyer and seller for performance evaluation purposes.



Opportunity cost approach to transfer pricing

From the perspective of the selling division, minimum transfer price is the higher of:

� External market price (less any savings due to internal transfer)

� Variable cost + opportunity cost of supplying the goods.

From the perspective of the buying division, the maximum transfer price acceptable is the lower of:

� External market price

� Net revenue of the division. Net revenue means ultimate selling price, less costs incurred in the buying division. If the transfer price exceeds this, the buying division will make a loss.

An alternative way of looking at the second criteria is: Variable cost + shadow price.

If a price exists which meets the criteria above, it will automatically satisfy the objectives of a good transfer pricing system.

Practical Approaches to transfer pricing

Cost plus approach

� Easy to calculate

� Covers all costs of selling division

� Setting mark up is arbitrary

� Inefficiencies in selling division are passed on to buying division.

� May lead to incongruent decisions.

Market price

� Easy to obtain

� Fair

� May lead to incongruent decisions (e.g. where selling division has spare capacity, and buying division buys externally)



Dual Pricing

� Where no transfer price can be found which is acceptable to both parties, but the head office wants both divisions to trade internally, dual pricing may be used. A higher price is credited to the buying division, and a lower price debited to the buying division- the head office absorbs the difference.

Transfer Pricing in Multinational companies

Reduce taxation

Multi nationals may try to shift profits from high tax countries to low tax countries by:

� Charging a high price when goods are sold by the country located in the high tax country

� Charging a low price when goods are being sold by the country located in the low tax country

� Using management charges to reduce profits further in high tax countries.

Reduce import tariffs

� If countries impose steep import tariffs, based on the price of the goods imported, a low price will be charged by the exporting division of the multinational, thus reducing the import duty.

Tax authorities in many countries are aware of these practices, and attempt to curtail them by requiring all transactions to be performed at the same price that would occur in an “arms length” transaction.

CURRENT DEVELOPMENTS IN MANAGEMENT

ACCOUNTING

The changing role of the management accountant (Burns

and Scapens)

Factors that changed the role of the management accountant

� Technology – management accountant may rely on data input to the system by other users.

� Decentralised management structures – managers often prepare their own reports without using the formal management accounts

� Competition – means organisations can no longer focus only on financial performance and require non financial performance indicators too.

Implications for the management accountant

� Management accountant is a “hybrid” accountant, not just a number cruncher

� Will be involved in multi disciplinary teams



� Having a better view of the external commercial view

� Deal with non financial as well as financial information.

Total quality management

A continuous improvement in activities involving everyone in the organisation-managers and workers, in an effort toward improving performance at every level.

A philosophy which recognises that costs of quality may be less than costs of failure.

Costs of quality

Measured as the difference between the actual cost of sale and the equivalent cost without quality failures.

Various types of cost exist in a Total Quality Management environment:

Cost of conformance- these are the costs of achieving pre-determined quality standards

� Cost of preventing defective products or services being produced e.g. investing in new processes

� Cost of appraisal-costs associated with ensuring our system ensures output meets required quality standards e.g. inspection costs

Cost of non-conformance these are the costs of failing to deliver the required standard of quality

� Cost of internal failure- costs associated with inadequate quality prior to transfer of ownership to customer e.g. rework costs, scrapping

� Cost of external failure -costs associated with inadequate quality discovered after the transfer of ownership to customer e.g. warranty claims, loss of reputation, liability claims.

Just in time

Just in time is a philosophy of organising work flows to allow high quality, flexible production whilst minimising waste and inventory levels.

� Production is timed to meet customer demand, rather than producing for inventory.

� All the processes in the factory try to work at the same speed to minimise the wasteful build up of work in progress throughout the factory.



Target Costing

Target costing is a method used to ensure required profit margins are achieved. In traditional cost accounting, the unit cost of a product is assumed to be given, and profit is the residual, after deducting the cost of the product from the revenue. Target costing involves identifying the desired cost per unit in order to achieve a required level of profit.

$ Selling price per unit X Required profit per unit (X) –– Target cost per unit X –– � The required profit is calculated based on required return

on investment required to develop the product.

� Target costing may be employed during the design stage of a product, when designs can be changed to incorporate cost savings. Steps are then taken to reduce the gap between the actual cost and the target cost.

Kaizen Costing

Kaizen means continuous improvement. Kaizen costing is a dynamic approach to target costing, where the initial target cost is only the starting point. Every year, the target cost will

be reduced further in an attempt to find new ways of improvement. The cost savings come from

� Elimination of waste

� Elimination of non value added activities

� Improvements in the product cycle time.

Environmental management accounting

Definition

� Environmental management accounting is the generation and analysis of both financial and non financial information in order to support internal environmental management processes.

Rationale

� Traditional management accounting techniques underestimate or ignore the costs of bad environmental behaviour.

Environmental costs

� Conventional costs having environmental relevance- raw materials and energy

� Costs that are hidden within overheads

� Contingent costs- such as future clean up costs



� Image and relationship costs

Environmental management accounting techniques

� Life cycle costing to include environmental costs such as packaging.

� Input output analysis-whereby the physical products that go into the production process must be accounted for in the physical outputs- to determine how much of the output is waste.

� Activity based costing, including the environmental costs.

Value based management

� Value based management is an approach to performance management that attempts to focus the attention of management onto the objective of maximising the wealth of the shareholders.

� Many traditional approaches to performance management are based on profits- but maximising profits does not maximise wealth. Maximising net present value does.

� For senior management, performance will be evaluated by using Economic value added (see section above on divisional performance evaluation).

� In developing measures for lower levels, managers should identify the drivers of growth.

Six Sigma

Six sigma is a quality improvement program, similar in concept to total quality management.

� It aims to reduce defects to the statistical six sigma level (3.4 defects per million).

� Six sigma focuses on the business processes, and variations in them. (For example, the time to make a product may vary from day to day.)

� By analysing past data, the causes of variations are identified. The program attempt to find new ways of doing things, to reduce the variations.

Advantages of six sigma

� Many organisations have reported huge cost savings as a result of implementing six sigma programs.

� Improvements are based on statistical analysis, rather than on management’s gut feelings.

� Redundant processes may be identified.



Disadvantages of six sigma

� Focus on existing systems can stifle creativity

� Time consuming and expensive to perform

� Requires supportive culture from the organisation.

The Performance Prism

The performance prism is an approach to performance management that tries to take into account a wider group of stakeholders than traditional performance management systems.

The 6 facets of the prism represent:

� Stakeholder satisfaction (top facet) - who are the key stakeholders and what do they want?

� Strategies (side facet) – how do we meet the wants and needs of the key stakeholders?

� Processes (side facet) – what critical processes do we require if we are to execute these strategies?

� Capabilities (side facet) – what capabilities do we need to operate and enhance these processes?

� Shareholder contribution (bottom facet) - what contributions do we require from our stakeholders if we are to maintain and develop these capabilities?

ARTICLES


TECHNICAL ARTICLES

These can be found on the ACCA web site, www. ACCAglobal.com. The following articles are highly recommended:

� The risks of uncertainty, by Michael Pogue, April 2009

� Accounting and organisational cultures, by Graham Morgan, November 2008.

� Business Failure, by Michael Pogue, July 2008

� Economic value added, by Shane Johnson, October 2007

� Defining managers’ information requirements by Jim Stone, August 2006

� Business strategy and performance models, by Shane Johnson, April 2006

� The pyramids and pitfalls of performance measurement, by Shane Johnson, Sept 2005

� Performance measures to support competitive advantage, by Graham Morgan, August 2005

� Beyond budgeting, by Shane Johnson, March 2005

� Management control- a pre requisite for survival, by Shane Johnson, October 2004

� Big brother, by George Bakehouse, August 2004

� Environmental management accounting, by Shane Johnson, June 2004

� Just in time operations and backflush accounting* by Shane Johnson, May 2004

* Backflush accounting is not in the syllabus for paper P5, but knowledge of just in time operations is.

PAST QUESTION ANALYSIS


SUMMARY OF PAST EXAMS

Topic June

2009

December

2008

June

2008

December

2007

Pilot

Paper

Introduction to strategic management accounting:

Strategic planning √ √ √

Multinationals √

Life cycle issues √

Swot analysis

Benchmarking √

Risk and uncertainty √ √

Budgeting for control: √ √

Changes in business structure

Continuing effectiveness of traditional

Business Process Reengineering

Activity Based Management √ √

Effect of information technology √ √



Topic June

2009

December

2008

June

2008

December

2007

Pilot

Paper

Environmental factors:

PESTEL analysis √ √

Stakeholders/ Ethical issues √ √

Pricing √

Performance measurement systems and design:

Anthony’s model

Contingency theory

Agency theory and hard accounting √

Strategic Performance measurement:

Performance Hierarchy/ Mission

Porter’s five forces √

Boston consulting group matrix

Ansoff’s product market matrix

Financial performance evaluation √ √ √

Non financial performance evaluation √ √

Net present value calculation √



Topic June

2009

December

2008

June

2008

December

2007

Pilot

Paper

Further aspects of performance measurement

Balanced Scorecard √

Performance Pyramid √

Service industries √

Non profit organisations √ √ √

Remuneration schemes

Potential problems with PM systems

Corporate failure √

Divisional Performance evaluation:

ROI/Residual Income √ √

Economic Value Added (EVA) √ √

Transfer pricing √ √ √



Topic June

2009

December

2008

June

2008

December

2007

Pilot

Paper

Current developments in performance evaluation

Current developments in management accounting techniques

Value based management

Total quality management √ √

Six sigma √

Performance Prism

Contemporary issues

EXAMINER’S COMMENTS


JUNE 2009 – EXAMINER’S REPORT

General Comments

Firstly I would like to offer my congratulations to all of those candidates who achieved a pass at this diet and my commiserations to those who did not.

The examination paper comprised two sections, A and B. Section A consisted of two compulsory questions for 35 and 25 marks respectively. Section B consisted of three optional questions for 20 marks each from which candidates were required to answer two questions.

The consensus of opinion from the marking team is that the paper was well balanced between computational and discursive elements, providing candidates with the opportunity to obtain relatively high marks. It was pleasing to see that well-prepared candidates passed the examination comfortably. However the examination revealed a very large number of candidates who fell well short of achieving a pass. Indeed, there were relatively few marginal candidates at this diet. The overall results suggest that far fewer candidates than expected were adequately prepared for this examination.

Sadly, many candidates did not answer all of the question subsections and in not doing so imposed limitations on the marks available to them.

Candidates should avoid the temptation to undertake “question spotting”. The P5 examination paper continues to examine the full syllabus and as such will continue to reveal those candidates who are poorly prepared. That said there was still much in this examination that was consistent with previous examination papers (Questions 1, 2 and 4) which should have given the more able and prepared candidates a sound foundation for success.

Candidates need to be aware whether they have the knowledge to answer discursive questions. If they do not then it is essential that they realise that the quantity of work produced is not a substitute for quality. This was particularly evident from candidates’ answers to Question 3.

Workings were generally shown but were at times difficult to follow. Many candidates continue to display their answers poorly, with a lack of clear labelling to indicate which questions are being attempted. Each question should be started on a new page and candidates must give more thought to the layout and organisation of their answers. This is especially the case given the potential to earn professional marks in this or any other of the professional level examination papers.



Question One

In general, the answers to this question were poor. Whilst there were a significant number of candidates who achieved very high marks, there were a large number who did not provide answers of a pass standard. In part (a) a large number of candidates confined their comments to “higher than” or “lower than” or “better than or worse than budget” using only absolute figures for the purposes of comparison. Many candidates made insufficient use of the numerical data contained in the question. Whilst many used percentage calculations, few calculated meaningful ratios. Indeed, there were some candidates who arrived at a bed occupancy rate in excess of 100%!

Furthermore, many candidates prepared their report to the management of the Glasburgh Trust using no statistics whatsoever. All too often calculations were undertaken and then not explained or explained in such terms that they did not address the requirements of the question. In their answers to part (b) a large number of candidates did not evaluate the balanced scorecard used by the Glasburgh Trust or provide recommendations which would improve its usefulness as a performance management tool. A significant minority of candidates wrote all they knew about the balanced scorecard including inappropriate profitability measures, and mentioned products, delivery times and other measures not relevant to the scenario. Some candidates chose to discuss the

“performance pyramid” of Lynch and Cross or the work of Fitzgerald and Moon either in addition to or in place of the balanced scorecard of the Glasburgh Trust.

Question Two

There were significant variations in the quality of candidates’ answers to this question. Answers to part (a) revealed that the majority of candidates were unable to calculate correctly the discount rate. A large number of candidates also included the development costs in the tax calculations of F4U. In general, answers to part (b) were poor. A significant number of candidates appeared to attempt to “guess” the answer and a sizeable number made no attempt to answer part (b) which was potentially worth six marks. There were a large number of very good answers to part (c) which achieved high marks. However, in answering part (c) many candidates offered a discussion of a variety of non-financial performance measures instead of discussing ways in which reliance solely on financial performance measures can detract from the effectiveness of the performance management system within an organisation, as required by the question. There were many correct answers to part (d) with candidates achieving maximum marks. However, a significant number of candidates demonstrated a lack of knowledge of maximax, maximin and minimax regret decision rules. What is more, a significant number of candidates made no attempt to answer



this subsection of the question which was potentially worth seven marks.

Question Three

This question was the least popular of the optional questions which, in general, candidates found rather challenging. There were some very good answers to parts (a)(i) and (a)(ii) which achieved very high marks.

However, there were a large number of answers which demonstrated a misunderstanding of the nature of the relationships which were the focus of the requirements of these parts of the question. In particular, there were many confused efforts to explain expectancy theory. There were also a significant number of candidates who completely ignored the scenario contained in the question. In part (b) candidates were unable to explain “hard accountability” in the context of the three specific areas within the Universal University.

Question Four

There were significant variations in the quality of candidates’ answers to this question. Many candidates who observed the relationship between price and quantity demanded in the scenario and applied MR = MC to calculate correctly the profit-maximising fee per double room, achieved maximum marks in part (a)(i). Three common errors in part (a)(i) were as follows:

� using 1,800 rooms instead of 1,440 � being unable to calculate P0 as 760, and � using a marginal cost figure of 100 instead of 200.

As a consequence of achieving maximum marks in part (a)(i) many candidates were able to achieve maximum marks in part (a)(ii). Where candidates had not reached the correct solution in part (a)(i) credit was given accordingly to answers to part (a)(ii) which, in general, was satisfactory.

There were few correct solutions to part (b) with only a minority of candidates undertaking the required calculations to reflect the revised marginal cost. There were a large number of answers to part (c) which earned maximum marks. However, there were some answers where candidates simply ignored the scenario of the McIntyre Resort and were therefore unable to gain any of the four available marks



Question Five

In general, answers to part (a) were of a good standard with the majority of candidates being able to identify and explain the six-sigma DMAIC methodology and thereby achieving high marks. It was obvious that a significant number of candidates were not familiar with the methodology and attempted to guess the answer to this part of the question and in so doing achieved very few marks whilst at the same time losing valuable examination time.

There were a large number of good answers to part (b) in which candidates demonstrated their abilities to apply the six-sigma DMAIC methodology and consequently achieved high marks. However, many candidates who had been able to explain the methodology were unable to apply it to the scenario of The There 4 U Company and often did little more than provide a list of problems, often repeating what was contained in the question, with little or no attempt to analyse and address the issues therein.

DECEMBER 2008 – EXAMINER'S REPORT


The examination paper comprised two sections, A and B. Section A consisted of two compulsory questions for 35 and 25marks respectively. Section B consisted of three optional questions for 20 marks each from which candidates were required to answer two questions.

The paper was seen to have a well balanced computational and discursive elements providing candidates with the opportunity to obtain relatively high marks. However, the examination revealed a significant number of candidates who were inadequately prepared for this examination and many candidates did not answer all of the question subsections and in not doing so imposed limitations on the marks available to them. Nevertheless, the overall results for this diet are better than those in respect of the previous diet.

One major problem was candidates “memorising” model answers to past paper questions and attempting to “shoehorn” these answers into questions without even attempting to adapt these answers to the question context. Question 2(d) provided cases of this practice. The question clearly asked for performance measures to assess the quality of service of a software provider, yet there were answers such as ‘the quality



of meals, waiting time at reception, staff uniforms and cleanliness, as well as specific mention of hotels. This practice was also evident from candidates’ answers to Question 4(b) with many different organisations mentioned and only the minority of candidates actually referring to BAG.

Also evident was the inability of many candidates to interpret the numbers and ratios and translate them into “good” and “bad”, even things such as a “lost items percentage” being higher than the target was seen as constituting good performance simply because the number was higher! This suggests that candidates are taking a rote-learning approach which is inappropriate for this level of examination.

Question 1

It was pleasing to see a large number of good answers to question 1. Many candidates achieved maximum marks in part (a)(i). A minority of candidates reversed the 1/0 notation but nevertheless demonstrated an understanding of the need to rank the depots of TSC according to the 12 measures provided in the Appendix to the question and were rewarded favourably.

It was also pleasing to observe that the majority of answers to part (a)(ii) were satisfactory as most candidates provided acceptable comments on the relative performance of each depot. That said, many candidates limited their evaluation of

the performance of the four depots to ranking them “first”, “second”, “third” and “fourth” (or last) and thereby ignoring which depots had in fact achieved (or had not achieved) the “target values” which were at the heart of the performance measurement system of TSC.

In genera, answers to part (a)(iii) were satisfactory, and indeed, some were excellent. Poorer answers were offered by candidates who did not relate answers sufficiently to the examples contained in the scenario and/or chose to state that there was insufficient information contained within the question to enable them to provide a relevant assessment of TSC using the required criteria.

The quality of answers to part (a)(iv) varied significantly. Many candidates achieved maximum marks whilst poorer answers referred solely to the need for more financial performance measures within TSC. In general, candidates provided satisfactory comments relating to the simplistic nature of the performance measurement system within TSC but few answers indicated the need to focus on the determinants of success rather than the results.

Again, Part (b) produced a significant variation in the quality of answers provided by candidates. Many candidates achieved maximum marks whilst others evaluated potential “benefits” without referring to any “problems”. Sadly, a significant number of candidates chose not to provide an



answer to part (b) and which was worth a potential six marks.

Question 2

This question provided the best “relative” mark achieved by candidates. In general Part (a) was well answered, although some candidates showed a lack of basic analysis. Many candidates provided either quantitative ratios or comment but not both, and a number of candidates ignored the requirement to “highlight additional information”. Regrettably, many candidates provided an answer that was so brief that they obviously ignored the fact that was a potential fourteen marks available.

In general, answers to part (b) were satisfactory. However, poorer answers were confined to comments concerning the bonus of the operational manger of Bonlandia with little or no regard for the effect of the views of the operational manager on the business of SSH.

It was pleasing to observe that part (c) produced some very good answers, especially given the importance of “quality software” in the modern business environment.

In part (d) candidates’ answers varied significantly. Better answers suggested performance “measures” (as required), whereas poorer answers referred to performance “criteria” such as “cleanliness”, “appearance” and “responsiveness”.

The worst answers, (as always in this type of question requirement), simply provided a bullet-note list of criteria extracted from the “balanced scorecard”, “performance pyramid”, or the work of Fitzgerald and Moon. That said, the poorer answers were also presented in the form of one word “bullet points”

Question 3

This was the best answered of the three optional questions. Part (a) was answered very well or very badly insofar as candidates either did or did not understand the term “planning gap”. This was worth a potential five marks.

Answers to part (b) were, in general, satisfactory as the majority of candidates made sound use of the information contained in the question and referred to the issues of cultural problems, lack of experience of acquisitions and the impact of government action.

Again, in general, most candidates’ answers to part (c) were satisfactory. Usually issues relating to non-biodegradable nappies were cited however, few candidates drew attention on “washable nappies” as an eco-friendly alternative.

A significant number of candidates provided very good answers to part (d). However, many candidates needed to suggest a greater range of government actions in order to have achieved higher marks. Many candidates failed to



provide an answer here which was worth a potential five marks

Question 4

Answers were generally poor due to the fact that the majority of candidates who could answer part (a) to a satisfactory standard could not answer part (b) in a similar manner

Candidates’ answers to part (a) demonstrated that they either did or didn’t understand the fundamental principles of “Transfer Pricing”. In part 4(a) (i) a large number of candidates did not set out fully the principles on which Division B and Division C would make pricing decisions. In part 4(a) (ii) many candidates only summarised the position for Division C and omitted comment on Division B.

Answers to part (b) varied most significantly. A significant number of candidates scored maximum marks. However, most alarming is the fact that a large number of candidates did not have an awareness of “quality costs” (which was a syllabus area examined in the previous diet), chose to guess as to their “identification” and examples there of and scored few or even no marks as a consequence. I cannot help but wonder if this is a classic example of “question spotting” with this topic being ignored by candidates because it featured on the previous P5 examination paper.

Question 5

In general, the answers to this question were very poor. In their answers to part (a) a minority of candidates were able to calculate correctly the ABC costs for direct materials and direct labour for each product. A much smaller number of candidates were able to calculate correctly the material and labour related overheads in respect of the products.

Rather alarmingly a significant number of candidates did not understand how to calculate the contribution to sales ratio for the two products as required by part (b).

In their answers to part (c) the vast majority of candidates discussed the adoption of activity-based costing (ABC) as opposed to Activity-based management (ABM) and in doing so not only failed to achieve some relatively easy marks but also sacrificed precious examination time. again, many candidates did not provide any answer here which was for six marks.



JUNE 2008 – EXAMINER’S REPORT


The overall results for this paper suggest that fewer candidates than usual performed well for this examination with the spread of marks indicating that a smaller percentage of candidates achieved over 60 marks.

Many candidates did not answer all of the question subsections and in not doing so imposed limitations on the marks available to them.

The consensus of opinion from the marking team was that the paper provided the opportunity to obtain relatively high marks. However, the examination revealed a large number of candidates who performed poorly. The overall results for this diet were not pleasing.

Question 1

There were very few good answers to question 1.The vast majority of candidates were unable to provide answers to all of the question’s subsections. 4 professional marks were allocated to this question in respect of the appropriateness of format, style and structure of their report but a large number of candidates were unable to gain these marks. The requirement of part (a)(i) revealed a very large number of candidates who could not provide a commentary on, and/or a detailed calculation of economic value added (EVA), which together were potentially worth 7 marks. Moreover, few candidates were able to calculate correctly the sensitivity analysis calculations required by part (a) (ii) of the question. In dealing with requirement (a) (iii) many candidates simply summarised the key arguments of writers such as Fitzgerald and Moon but failed to apply these to the scenario thereby producing answers that would be of little value to readers of this part of the report. In part (b) most candidates were able to identify problems that the directors of HFG might experience in their wish to benchmark the performance of HFC with SFC. However, in general, candidates had problems in suggesting appropriate recommendations as to how those problems might be successfully addressed.



Question 2

There were some very good answers to parts (a), (b) and (c) of this question and it was pleasing to see the majority of candidates producing satisfactory answers. Weaker answers tended to ignore the scenario contained within the question or simply did not address the requirements of each part of the question.

Some answers were very long though most were satisfactory. However candidates should be mindful that it is the “quality” of an answer and not the “quantity” of an answer which is awarded credit.

Question 3

This was the most popular of the option questions with many candidates producing good answers to both parts of the question. Part (a) was generally well answered. Poorer answers to part (a) were often reduced to bullet points with little or no development. Whilst Part (a) was generally well answered, there was a significant variation in the quality of answers to part (b).Poorer answers invariably ignored the scenario contained in the question.

Question 4

The majority of candidates provided a satisfactory answer to parts (a) (i) and (ii) of this question. Whilst many candidates also provided a good answer to part (b) (i), a large number of candidates made no attempt whatsoever to provide an answer to part (b) (ii) which was potentially worth 4 marks. Many candidates who did attempt part (b) (ii) did not undertake a DCF analysis regarding the introduction of “Nellie the Elephant” even though the need for one was clearly signalled by the inclusion of multiple years, end of year cash flows and the provision of the cost of capital. There was a significant variation in the quality of answers to part (b) (iii). Again, poorer answers tended to ignore the scenario contained in the question.

Question 5

This was the least popular choice from among the option questions. However, when attempted, the question produced some excellent answers which earned very high marks. In general answers to part (a) were satisfactory. Poorer answers demonstrated confusion regarding the different categories of quality costs. There was a significant variation in the quality of answers to part (b) with a number of candidates achieving maximum marks for a correct solution. However, there was also a number of unsatisfactory answers which invariably comprised poorly laid out, incorrect calculations.



DECEMBER 2007 – EXAMINER’S REPORT



It was pleasing to see a significant number of candidates providing good answers to every question they attempted and consequently achieving high marks. Sadly, the examination also revealed a large number of candidates who seemed inadequately prepared for the examination. Nevertheless it was pleasing to observe that only a relatively small number of candidates scored very low marks. In general, the overall performance of candidates was good.

Many candidates who clearly had knowledge of the areas of the syllabus which featured within the examination questions were unable to achieve a pass at this diet as a consequence of poor examination technique which frequently manifested itself via poor presentation and/or time management or not observing the specific requirements of each question.

Well-prepared candidates invariably provided concise workings which arrived at the correct solutions to the computational parts of the examination paper. However, a significant number of candidates produced workings, notably in their answers to part (a) of Question 1, which were and difficult to follow. The need for candidates to give more thought to the layout and organisation of their answers is of paramount importance. This is especially the case now that “professional marks” might be awarded for well- presented answers.

Rather surprisingly, a number of candidates ignored the advice given in previous examiner’s reports that each question should be started on a new page in their answer booklet(s) and that there should be clear labelling to indicate which questions are being attempted.

It was pleasing to observe that the vast majority of candidates attempted all four questions. However, there was some evidence of poor time management, particularly affecting Question 1 which a significant number of candidates attempted as their final question.

The poor performance of many candidates was exacerbated by a clear failure to carefully read the content and requirements of questions. This contributed to some poor performances in both the computational and discursive parts of questions.



Question 1

A large number of candidates produced good answers to each part of question 1 and consequently achieving a high mark. However, it was noticeable that there were significant variations in the quality of candidates’ answers to this question. Most candidates managed to score well in part (a), although a number of candidates ignored the requirement to include an appendix to the report showing detailed workings of how each of the six figures marked with an asterisk in note 1 had been calculated. Indeed, many candidates simply reproduced the performance data provided in note (1) of the question.

In general, answers to part (b) were good although a number of candidates provided poor examples of additional information that would be of assistance in assessing the financial and operating performance of GBC and TTC.

The quality of answers to part (c) varied significantly. A large number of candidates achieved very high marks. However, it was disappointing to observe the significant number of candidates who made no attempt whatsoever to provide an answer to part (c) which potentially was worth six marks. It was noticeable that virtually all candidates who attempted this part of the question received some credit.

Question 2

It was noticeable that a large number of candidates did not attempt all parts of this question. Answers to part (a) (i) were either very good or very poor. Answers to part (a) (ii) were often too superficial.

A number of candidates provided a correct solution to part (b) (i) and therefore achieved maximum marks. It was (again) very disappointing to observe the significant number of candidates who made no attempt whatsoever to provide an answer to this part of the question which potentially was worth eight marks.

Also frustrating was the significant number of candidates who provided “advantages” of using EVATM in the measurement of financial performance when Part (b) (ii) required a brief discussion of “disadvantages”.

Question 3

There were a large number of correct solutions to part (a) of the question. However, it was disappointing to observe an equally large number of incorrect solutions.

In their answers to part (b) most candidates were able to explain three critical success factors and a significant number of candidates discussed five (CSFs) as required. Answers to part (c) varied significantly. The better answers produced by candidates were not only high in quality but were also



concise. Poorer answers, which were often quite lengthy, resulted from the “scattergun” approach adopted by candidates.

Question 4

This proved to be the least popular choice among the optional questions contained in Section B of this examination paper. In general, those candidates who chose to answer this question provided satisfactory answers. Many candidates provided a correct solution to part (a) and achieved maximum marks. Regrettably, many candidates ignored the information on batches and therefore arrived at incorrect solutions. Answers to part (b) were invariably of a satisfactory nature and many candidates provided very good answers to part (c).

Question 5

Part (a) was generally well answered with a significant number of candidates achieving maximum marks. However, many candidates who could describe Porter’s five forces model were unable to apply it to the scenario contained within the question. Answers to part (b) were generally not as good as those to part(a). A significant number of candidates did not observe the requirement to discuss performance indicators which might indicate that JOL Co might fail as a corporate entity, but discussed the use of performance indicators in a more general sense.

JUNE 2007 – EXAMINER’S COMMENTS

Note: Comments made for the June 2007 and earlier exams were based on the old 3.3 syllabus. However, Shane Johnson, the examiner for P5 was also the examiner for 3.3, so the comments do show the things that he likes and dislikes.

General Comments

The exam paper comprised two sections, A and B. Section A consisted of two compulsory questions for 45 and 15 marks respectively. Section B consisted of three optional questions for 20 marks each, from which candidates were required to answer two.

It was pleasing to see a large number of candidates providing very good answers to every question they attempted and consequently achieving high marks. Sadly, the exam also revealed a large number of candidates who were inadequately prepared. Nevertheless, it was pleasing to observe that only a relatively small number of candidates scored very low marks. In general, the overall performance of candidates was better than in recent diets.

Many candidates who clearly had knowledge of the syllabus areas featured in the exam questions were unable to achieve a pass at this diet as a consequence of poor technique. This was frequently shown by poor presentation and/or time



management, or by not observing the specific requirements of each question.

Well-prepared candidates invariably provided concise workings which arrived at the correct solutions to the computational parts of the exam paper. However, a significant number of candidates produced workings which were difficult to follow, and displayed their answers poorly. Therefore, it is vital that candidates give more thought to the layout and organisation of their answers. This was particularly the case with regard to Question 1. Valuable time was spent in the production of pages of workings to arrive at solutions to calculations – such as those required in Parts (a) of Questions 1, 2, and 4 – when that time might have been better employed elsewhere.

Frustratingly, a number of candidates also ignored the advice given in previous examiner’s reports that each question should be started on a new page in their answer booklet(s), and that there should be clear labelling to indicate which questions are being attempted.

Most candidates attempted all four questions although there was some evidence of poor time management, particularly affecting Questions 1 and 2, which a large number of candidates attempted as their final question. The poor performance of many candidates was once again exacerbated by a clear failure to carefully read the content

and requirements of questions. This contributed to some poor performances in the computational and discursive parts of each question.

Question 1

A large number of candidates produced good answers to each part of Question 1 and consequently achieved a high mark. However, it was noticeable that there were significant variations in the quality of candidates’ answers to this question. Most candidates managed to score well in Part (a), where a significant proportion of candidates achieved maximum marks. In Parts (b) and (c), many candidates did not contextualise and make use of the data provided in the question. The answers of such candidates were confined to a superficial comparison between HLP and MAS. When asked to comment on performance, many candidates stated their observations in terms of “higher than” or “lower than” (for example, five is more than four, or six is less than seven). Other answers considered absolute numbers rather than relative numbers and therefore did not address the main issues required in Parts (b) and (c).

Candidates’ answers to Part (d) varied significantly. While it was pleasing to observe that a large number of candidates commented on the “ethical” dimension of the managing director’s statement, it was disappointing that a large number of candidates ignored it. Many answers were written as if the



managing partner’s statement would involve simply increasing the charge to clients. Many candidates were at least able to identify that the suggestion might cause quality and consultant morale problems, but few included any discussion of the possible importance of non-chargeable tasks (such as training), and very few showed any appreciation that higher utilisation rates could reduce the requirement for subcontractors. Given that there were six marks on offer, it was also disappointing to observe that many answers provided were confined to one or two very brief comments.

Given the continual mantra for the accounting specialist to “add value”, such requests for “comments” really need to bring out some relationship (or possible relationship) suggested by the data rather than to simply replicate the numbers as words. That said, it was encouraging to see that many candidates could argue the significance of quality in the determination of commercial success.

Question 2

In general, this question was poorly answered. Many candidates applied a process of uplifting annual future cash flows to take into account inflation, and although this method can be used to produce correct NPV calculations, it is more time consuming than the alternative annuity-based approach. There was some evidence that the necessary time spent due

to this affected the performance of a number of candidates in later questions. The entire marking team expressed their disappointment with the fact that a large number of candidates were unable to perform the calculations which were required in Parts (b) and (c) of the question. The quality of answers to Parts (b) and (c) varied significantly. It was apparent that, in general, candidates struggled with the application of sensitivity analysis to the different aspects of the project under consideration. Furthermore, it was noticeable that a large number of candidates made no attempt whatsoever at Parts (b) (i) and (ii), and Part (c), suggesting that they had not studied sensitivity analysis. In general, answers to Part (d) were satisfactory; most candidates were able to identify three relevant factors. Weaker answers simply suggested three other investment appraisal techniques.

Question 3

This question produced some very good answers. However, a significant number of candidates did not address the specific requirements of Part (a) and simply provided detailed accounts of how each director should run their department. Other poorer answers ignored the requirement relating to “criteria” and simply listed performance measures, which frequently were not quantitative in nature. Part (b) of this question was less well answered than Part (a). Many candidates did not recognise that there were two sub



requirements to this part and failed to address one or the other completely. A common failing was attempting to make the answer more complex than was needed. Use of BCG and/or Ansoff rarely scored more marks than more straightforward answers. In their answers to Part (b), many candidates did not answer the question which was asked. Also, there was little, if any, critical thinking demonstrated in a significant number of answers. Candidates are reminded that this exam is set at a Masters level, where candidates are rewarded for the application of knowledge in the main. Answers which ignore the scenario contained within a question, and merely “describe”, will therefore struggle to achieve a pass standard.

Question 4

Answers to Part (a) were either very good or very poor. It was noticeable that a significant number of candidates did not recognise that there were 12 possible outcomes of annual contribution for HFL, which led them to produce poor answers. There appeared to be many instances of confusion regarding the calculation of expected values. However, this is a significant topic within the syllabus with which candidates should be familiar – especially as expected values form the basis of real-life managerial decisions. Where provided, answers to Part (b) were, as might be expected, very good or very poor. Answers to Part (c) were generally poor with a

minority of candidates focusing on rational reasons why HFL might purchase 100% of the output of OML.

Question 5

The standard of answers to Parts (a) and (b) varied considerably. In Part (a), many candidates chose to describe the balanced scorecard and made no reference to either advantages or limitations relating to its use. Rather worryingly, a significant number of candidates stated that the balanced scorecard was easy to explain to both management and employees, and that this therefore was an advantage arising from its use.

In Part (b) (i), a memorandum format was required and a mark was available for complying with the requirement and yet it was surprising how many candidates ignored this fact. Many candidates did not attempt to construct a balanced scorecard and made very little use of the data provided within the question. Also, surprisingly few candidates considered the cash flow measure specifically required. On the other hand, many candidates were able to provide goals, measures, and statistics for other aspects of the financial perspective and the other three perspectives. Answers to Part (b) (ii) contained relatively few focused examples of other performance measures for the customer perspective of the balanced scorecard.

EXAM TECHNIQUE


EXAM TECHNIQUE

Overall

1. Plan your approach to the exam before you get there i.e. decide if you would attempt Section A first, while you are feeling fresh, or whether you prefer to start with a shorter Section B question to get you into the exam. (The former is probably the best approach, but if you suffer from exam nerves, the latter may be more appropriate. This is personal choice.)

2. Read through the paper during the reading and planning time, and decide which order to do the questions in.

3. Using the golden rule of 1.8 minutes per mark, plan your exam time. Write down on the front of the question paper what time you will start each question, and what time you will finish. Don’t overrun.

4. Spend some time thinking about your approach to each question before writing. A written plan is not necessary (and you may not have time to do this anyway) but a few minutes thinking is worth a lot.

5. Never get bogged down in calculations at the expense of the written sections of a question. In P5, the examiner does not reward calculations as generously as

he rewards discussion- so make sure you leave time for the discussion.

6. Always use information given in scenarios- the examiner puts the information there for a reason.

Approach to the long section A questions

1. Read the requirements of all parts of the question. (This is to ensure that an answer is not written for part (a) which would actually be more appropriate to part (d).

2. Read the scenario once. At this stage, not much will be absorbed, but it gives an idea of the scope of the question.

3. Read the scenario again- underline key facts. Reference paragraphs to the various parts of the question, and link paragraphs which include info which should be used together.

4. Think about your approach to each part. What calculations will be required for the numerical parts? Where will the information come from? Is there a short cut? Is all the information available? (There probably won’t be time for a written plan.) For discussion questions, work on the basis of one mark per point made. What points will you make? Are there any clues in the question?

EXAM TECHNIQUE


All of the above can be done during the 15 minutes reading and planning time.

5. Start your answer. Try to allocate your time evenly- however, in P5, it’s probably unrealistic to simply apply the 1.8 minutes per mark rule- the numbers do take a little longer, and the discussion is shorter. One approach would be to do as much of the discussion as is possible without calculations first, then allocate whatever time is left to the rest. So apply the 1.8 minute rule to the whole question, but not to the sub parts.

The keywords

Part of the secret of doing well in these exams is actually understanding what the question is asking. Here are a few key words and their meaning to help you.

� “Describe” = “set out the characteristics of”. Use brief sentences but give more depth than if the instruction was “state” (see below).

� “Explain” = make plain, clarify, elucidate. For example, defining a term does not explain it, but providing an illustration may do so.

� “State” =e express in words. Use one short sentence (bullet point) to make each answer point.

� “Discuss” = give balanced views on and conclude (where appropriate).

� “List” = make a list of like things.

� “Justify” = give reasoning.

� “Identify” e.g. from the scenario. This requirement is often implied rather than expressly stated. For example, “Describe the risks ….” requires that the risks be identified before they can be described.

� “Comment” = make observations, appraise and/or examine (critically).

� “Suggest” = propose or put forward.

� In addition to these words here are few extra hints to help you refine your technique;

Documents

ACCA PAPER P5 ADVANCED PERFORMANCE MANAGEMENT PASSPORT