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Advanced Performance

Management
Paper P5
Course Notes
For Exams from December 2015

ISBN: 9781472722638

P5 Advanced Performance Management


Study Programme
Page
Introduction to the paper and the course................................................................................................................. 4
1
2
3
4
5
6

Introduction to strategic management accounting........................................................................................ 15


Performance management and control ....................................................................................................... 29
Business structure, IT & other influences on management accounting ....................................................... 39
The changing business environment............................................................................................................ 53
Performance management information systems .......................................................................................... 67
Home study chapter: management information, processing & reports......................................................... 75

Checkpoint 1
7
8
9
10a

79

Performance hierarchy ................................................................................................................................. 81


Scope of strategic performance measures in the private sector .................................................................. 87
Divisional performance and transfer pricing issues .................................................................................... 103
Scope of strategic performance measures in not-for-profit organisations ................................................. 121

Checkpoint 2
10b
11
12
13
14
15
16

129

Non-financial performance indicators ......................................................................................................... 131


The role of quality in performance management systems.......................................................................... 135
Performance measurement: strategy, rewards and behaviour................................................................... 147
Alternative views of performance measurement and management............................................................ 157
Strategic performance issues in complex business structures................................................................... 171
Predicting and preventing corporate failure................................................................................................ 179
Current issues and trends in performance management ........................................................................... 187

Checkpoint 3
17
18
19
20

195

Answers to Lecture Examples .................................................................................................................... 197


Question and Answer bank ........................................................................................................................ 223
Mathematical tables and formulae.............................................................................................................. 263
Course Exams 1 and 2 Questions only ...................................................................................................... 267

INTRODUCTION

Introduction to Paper P5 Advanced Performance Management


Overall aim of the syllabus
To apply relevant knowledge, skills and exercise professional judgement in selecting and applying strategic
management accounting techniques in different business contexts and to contribute to the evaluation of the
performance of an organisation and its strategic development.

Performance management systems are the systems in an organisation by which the performance
of an organisation is measured , controlled and improved.

The syllabus
The broad syllabus headings are:
A
B
C
D
E
F

Strategic planning and control


External influences on organisational performance
Performance measurement systems and design
Strategic performance measurement
Performance evaluation and corporate failure
Current developments and emerging issues in performance management

Main capabilities
On successful completion of this paper, candidates should be able to:

Use strategic planning and control models to plan and monitor organisational performance

Assess and identify relevant macro economic, fiscal and market factors and key external influences on
organisational performance

Identify and evaluate the design features of effective performance management information and
monitoring systems

Apply appropriate strategic performance measurement techniques in evaluating and improving


organisational performance

Advise clients and senior management on strategic business performance evaluation and on recognising
vulnerability to corporate failure

Identify and assess the impact of current developments in management accounting and performance
management on measuring, evaluating and improving organisational performance

INTRODUCTION

Links with other papers


Business Analysis
(P3)

Advanced
Performance
Management (P5)

Performance
Management (F5)

Management
Accounting (F2)

This diagram shows where direct (solid line arrows) and indirect (dashed line arrows) links exist between this
paper and other papers that may precede it.
The Advanced Performance Management syllabus assumes knowledge acquired in paper F5 Performance
Management, and develops and applies this further and in greater depth.

INTRODUCTION

Taught Phase Aims


Achieving ACCA's Study Guide Outcomes
A

Strategic planning and control

A1 Introduction to strategic management accounting

Chapter 1

A2 Performance management and control of the organisation

Chapter 2

A3 Changes in business structure and management accounting

Chapter 3

A4 Effect of Information Technology (IT) on strategic management accounting

Chapter 3

A5 Other environmental & ethical issues

Chapter 3

External influences on organisational performance

B1 Internal changing business environment

Chapter 4

B2 Impact of external factors on strategy and performance

Chapter 4

Performance measurement systems and design

C1 Performance management information systems

Chapter 5

C2 Sources of management information

Chapter 6

C3 Recording and processing methods

Chapter 6

C4 Management reports

Chapter 6

Strategic performance measurement

D1 Performance hierarchy

Chapter 7

D2 Strategic performance measures in private sector

Chapter 8

D3 Divisional performance and transfer pricing issues

Chapter 9

D4 Scope of strategic performance measures in not-for-profit organisations

Chapter 10

D5 Non financial performance indicators

Chapter 10

D6 The role of quality

Chapter 11

D7 Performance measurement and strategic HRM issues

Chapter 12

D8 Performance measurement and reward systems

Chapter 12

D9 Other behavioural aspects of performance management

Chapter 12

INTRODUCTION

Performance evaluation and corporate failure

E1

Alternative views of performance measurement

Chapter 13

E2

Strategic performance issues in complex business structures

Chapter 14

E3

Predicting and preventing corporate failure

Chapter 15

Current developments and emerging issues in performance


management

F1

Current developments in management accounting techniques

Chapter 16

F2

Current issues and trends in performance management

Chapter 16

INTRODUCTION

The Examination Paper


Examiner: Alex Watt
The examination is a three hour paper with 15 minutes reading and planning time.
25% Numerical

75% Discussion

35% Knowledge

65% Application

Format of the Exam

Marks

Section A

1 compulsory question

50

Section B

2 questions, from a choice of 3 for the remaining marks

50
100

Time pressure warning


Section A

Section B

INTRODUCTION

Key to icons
The following icons appear in this set of study notes

Question practice
This is a question we recommend you attempt to reinforce your learning on a key topic

Real-life examples
For further details see your Checkpoint Guidance

Section reference in the Study Text


You could further consolidate your knowledge in this area with additional reading from the
Study Text.

Formula to learn

Formula given in exam

INTRODUCTION

10

SKILLS BANK

Key skills required to pass


Our analysis of the examiners comments on past exams, together with our experience of preparing students for this
exam, suggests that to pass Paper P5 you will need to develop a number of key skills.

5 Professional

1 Planning

presentation

2 Analysis of

requirements

4 Disciplined time

management

3 Data analysis

11

SKILLS BANK

Skill 1 Planning
1 Using your reading time
You are allowed 15 minutes reading time before the examination begins during which you should read the question
paper and highlight and make notes on the question paper itself. Although you will be able to use your calculator, you
will not be allowed to open the answer book or start writing your answer during this time.
You will spend most of your reading time on the 50 mark question in section A but it can make sense (in terms of
building your confidence) to start by spending 5 minutes focussing on the optional questions in Section B, and to
choose which of these questions you will attempt. You have a choice of two questions from three, and it is important
that you choose the questions that play to your strengths. You need to choose your questions based on a rational,
planned approach, not on immediate reaction or instinctive response.
The rest of your reading time can be spent planning your answer to question 1, further guidance on planning specific
questions is given below.

2 Analyse the scenarios in detail


It is essential to allow time for planning each question because the requirements will be based on a scenario that is
often quite lengthy.
The new examiner has emphasised how crucial it is to apply your analysis to the given scenario, so you MUST
focus carefully on the scenario before you start writing.
Recent examiners comments highlight that candidates are not putting enough effort into learning the theories
and frameworks contained in the syllabus for this exam. Although memorised frameworks and theories by
themselves will only score a maximum of 20-30% of the available marks, these theories and frameworks can also be
invaluable in helping you to analyse scenarios.

Skill 2 Analysis of the questions requirements


1 Understanding and applying the question verbs
You need to be aware of the meaning of the key verbs used by the examiner.
ACCA has a three-pronged approach to testing your ability, and these vary depending which level of exam you are
attempting. At professional level, especially those at options such as P5, you are likely to be asked to

Apply and analyse (Level 2)

Synthesise and evaluate (Level 3).

This means that you are most likely to be asked to use verbs such as explain, assess', or discuss. These verbs
require you to do more than create brief lists or bullet points and require you to provide evidence or construct
arguments.

2 Identifying and attempting ALL the requirements


Also look out for questions that contain a number of sub-requirements, for example by using two verbs.

12

SKILLS BANK

Skill 3 Data analysis


A key skill in this paper is to create information from data. You can expect to be presented with data, which could be
substantial amounts of data in question 1, and you will then be expected to go beyond description of the obvious. The
examiner is expecting you to analyse the data, and has outlined the following plan of attack.
ACCA Examiners Comments December 2010
1.

consider the big picture

2.

break down the data into smaller but meaningful chunks

3.

discuss the individual lines of the data table focusing on the data that explains the overall picture

The examiner has emphasized that candidates need to be selective in their choice of what calculations that
they do.

Skill 4 Time management


At the planning stage you should write on to your exam paper the amount of time that you will spend. This will be
determined by the mark allocation; 180 minutes (excluding reading time) equates to 1.8 minutes per mark.
Allocating 1.8 minutes per mark will be appropriate for the compulsory question because you will have used (most of)
your reading time to analyse and plan this question. So, if part (a) of Q1 is for 10 marks then you will aim to complete
this in approximately 10 x 1.8 = 18 minutes.
However, because you will not have planned your optional questions during the reading time, your time management
may need to be adapted by allowing 20% of the time allowed for planning. This means that the 1.8 minutes per mark
becomes 1.8 x 0.8 = 1.44 minutes per mark. So, if part (a) of an optional question is for 10 marks then you will aim to
complete this in approximately 10 x 1.44 = approximately 15 minutes.

Skill 5 Professional presentation


Starting each question on a new page is a really straightforward way to make the examiner think positively about you
and your script. It also affords you a second advantage space. Your may not think of all the relevant points that you
could make in answer, even if you have taken heed of all our suggestions on planning. Sometimes new ideas spring
into your mind unannounced. If you have started the next question on a further page, you will have plenty of space to
add any further points.
P5 provides you with the opportunity to earn four professional marks in section A of the exam. You will receive
professional marks for:
format (e.g. report title, introduction & conclusion)
structure (e.g. use of headings)
presentation (e.g. use of summary tables)
layout (e.g. use of appendices, underline key numbers)

13

SKILLS BANK

14

Introduction to strategic
management accounting
How have the syllabus learning outcomes been examined?
Syllabus learning outcomes

Example past paper questions

Explain the role of strategic management accounting


in strategic planning and control.
Discuss the role of corporate planning in clarifying
corporate objectives, making strategic decisions and
checking progress towards the objectives.

HEG December 2007 Part b 10 marks Film


Productions December 2010 Q1 a-c 20 marks
Q4 Section B December 2012

Compare planning and control at the strategic and


operational levels within a business entity.

Q2 Section B December 2012

Assess the use of strategic management accounting


in the context of multinational companies.

Cod Dec 2011 part a 7 marks

Discuss the scope for potential conflict between


strategic business plans and short-term localised
decisions.
Evaluate how SWOT analysis may assist in the
performance management process.
Evaluate the methods of benchmarking performance.

HFG June 2008 part b 7 marks


Callisto June 2012 17 marks

15

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Overview

Introduction to strategic
management accounting

Strategic management
accounting

Strategic planning

Corporate
Appraisal

Strategic Choice

Implementation & control


issues

16

Benchmarking

Conflict with short-term


decisions

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Strategic management accounting (SMA)

1.1

Strategic management accounting is a form of management accounting in which emphasis


is placed on information about factors external to the organisation as well as on nonfinancial and internally-generated information.

1.2

Traditional management accounting is more concerned with the achievement of internal


financial performance targets (e.g. budget).

1.3

The aim of strategic management accounting is to provide information that is relevant to the
process of strategic planning and control.

Lecture example 1(a)


Train operates a network of accounting training centres throughout Europe, America and Australia,
the business intends enter developing markets in order to drive growth and has now decided to
enter country X, which is 7,500 kilometres from Trains UK headquarters.
In its present form, the management accounting information provided by Trains Finance function is
largely internally focussed, covering areas such as cost and revenue variances. However the
board have suggested they will now require more externally focussed management information in
light of the move into country X
Advise the Board how Strategic Management Accounting could help to monitor the implementation
of Trains strategy.

Solution

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1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Corporate appraisal

2.1

The rational model of strategic planning divides into a number of different stages: strategic
analysis, strategic choice and implementation:

2.2

Advantages of a formal system of strategic planning

It helps identify risks.

It forces managers to think and can encourage creativity and initiative.

It forces management to takes decisions, highlighting the need to change and adapt,
not just 'stand still' and survive.

Management control can be better exercised if targets are explicit.

It enforces consistency at all levels. Long-, medium- and short-term objectives, plans
and controls can be made consistent with one another.
POSITION
AUDIT
(S&W)

MISSION &
OBJECTIVES

CORPORATE
APPRAISAL
(SWOT)

REVIEW AND
CONTROL

STRATEGIC
OPTION
GENERATION

STRATEGIC
EVALUATION
& CHOICE

STRATEGIC
IMPLEMENTATION

ENVIRONMENTAL
ANALYSIS
(O&T)

2.3

SWOT analysis is a critical assessment of the strengths and weaknesses,


opportunities and threats in relation to the internal and environmental factors affecting an
entity in order to establish its condition prior to the preparation of the long term plan.

2.4

Performance management can be defined as any activity designed to improve an


organisations performance and ensure that its goals are being met.

18

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Lecture example 1(b)

Based on an exam question worth 7 marks

As part of its formal process of rational planning TESCO has undertaken a SWOT analysis and
identified the following:
Strengths
Weaknesses
Opportunities

Threats

Large market share, very profitable, strong brand image, Club


card
Poor supplier relationships resulting from late payments, CSR image
Buy-out a smaller rival, online future growth, new store formats

Price wars, competition commission blocking growth

Explain how SWOT analysis could be used to assist the Performance Management process at
TESCO. (Use the headings as guide)

Solution
Identifying shortcomings (weaknesses)

Identifying critical success factors

Determining the information needs

Setting targets

19

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

2.5

Performance measurement: An organisation may have identified its strengths as: its
reliable products, its well respected brand name and competitive prices. In order for the
organisation to know whether its maintaining its position and achieving its aims it has to
measure how well it performing in these key areas. Therefore its key performance
measures should include a measure of product reliability, and a comparison of its prices
compared to competitors prices.

Benchmarking
2.6

Benchmarking is a business improvement technique which aims to analyse and bring about
best operational practice.

2.7

Although generic definitions will earn minimal credit in the exam you should recognise the
broad classifications: Internal & External, which can be further subdivided into Competitive
and Functional.

2.8

Marks may be available for discussing the benefits and difficulties of benchmarking,
however this must be placed within the context of the scenario:
Internal benchmarking information should be easy to gather and highly relevant since
internal systems will be broadly similar, however the strong internal focus may fail to bring
about dramatic improvements as it is likely that different operating units are already in
relatively close contact, sharing information regularly.
Possible points to identify within the scenario:

2.9

Are the business units similar or highly diversified, is internal benchmarking


information relevant?

Is our current internal reporting adequate, can we easily collect the required
information?

Is there evidence that the business already collaborate closely and therefore share
best practice?

Competitive benchmarking information collected from a direct competitor will be the most
valuable. However due to its commercially sensitive nature it may be impossible to collect in
sufficient detail to be useful. It may be possible to negotiate an exchange of information with
an organisation that it not a direct competitor, however this may have less commercial
application.
Possible points to identify within the scenario:

Is competitor information widely available, e.g. supermarket pricing information?

Does the scenario indicate that a competitor may be willing to exchange information?

Are the competitors objectives and activities so dissimilar that they render
benchmarking information hard to apply?

20

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

2.10 You may be required to undertake some benchmarking calculations, the scenario may
provide the following information:
Admin Costs
Customer Support
Human Resources
IT Management

Business Unit A
($000)
2,100
1,200
6,500

Business Unit B
($000)
2,150
1,180
6,200

Business Unit C
($000)
2,300
1,500
6,000

Number of Transactions
Number of Staff

30,000
8,000

23,500
7,800

31,000
8,300

The required calculations may not be complicated, you may be asked to evaluate the
organisations benchmarked position by dividing the HR & IT costs by the number of
staff and the Customer Support costs by the number of transactions, with marks
divided between calculations and commentary.
2.11 This is not a number crunching paper, you may therefore be required to comment on
calculations that have already been prepared (for example by a junior accountant).

Lecture example 1(c)


Subsequent is a fashion retailer, which distributes through a portfolio of 105 stores and via
catalogue and online channels.
In response to increasing difficult trading conditions, Subsequents board have requested a report
benchmarking the business against its main competitor Cavity. The preliminary calculations have
been completed by a junior analyst; you have been asked by the Finance Director to analyse these
figures
A sample of the report is provided below:

Revenue $m
Profit $m
No. of Stores
Change Year on Year
Revenue
Profit
No. of Stores
Revenue per Store

Cavity
2013
2,100
290
160

2014
1,900
190
180

Subsequent
2013
1,950
330
100

2014
2,000
250
105

$13.1

-9.5%
-34.5%
+12.5%
$10.6

$19.5

+2.6%
-24.2%
+5.0%
$19.0

Evaluate the performance of Subsequent using the data prepared by the analyst.

21

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Solution

(1 mark per point made up to 4 for analysing the computations)

2.12 Read the requirement carefully, you may not actually be asked to evaluate the benchmarked
performance of the organisation, you may for example be required to evaluate the
completeness of the benchmarking information, in this instance you would need to identify
what further benchmarking information would be useful or what further steps to take in
the benchmarking process.
2.13 Within this context you may make reference to the seven step benchmarking process
outlined below:
Description

Application to the Scenario

Step 1

Set objectives and determine the areas to benchmark

Has the scenario outlined the


objective of the exercise, i.e. to
reduce admin costs or increase
revenues?

Step 2

Establish key performance measures or performance


drivers which will be measured during the
benchmarking exercise.

Have all the calculations been


provided or does the question
require you to calculate, for
example revenue per store and
other KPIs? Are the KPIs
broad enough to be useful?

Step 3

Select organisations to compare performance against Are you comparing against


your nearest competitor or
another suitably similar
organisation? If not criticise
this.

Step 4

Measure own and others' performance, using the


measures identified in Step 2 above
22

Is it plausible to measure
competitors performance, is
the data widely available?

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Description

Application to the Scenario

Step 5

Compare performances, and identify gaps between


the performance of your own organisation and those of
the comparator organisations.

You may be asked to do


complete this stage in the
requirements: Analyse the
organisations benchmarked
position

Step 6

Design and implement improvement programme to


close the performance gaps identified. An important
element of this step will also be analysing how the
comparator organisations achieve superior
performance, then assessing whether similar
processes and techniques could be introduced into
your own organisation.

Is there narrative information


on the scenario that describes
how the competitor is able to
achieve higher revenues or
lower costs, its it practical to
implement these changes, how
quickly could this happen?

Step 7

Monitor improvements. Benchmarking shouldnt be


seen just as a one-off process; its value to an
organisation comes from the on-going improvements in
performance which result from the initial comparisons
(Steps 4 and 5 above).

A post project review may be


required, who should conduct it
and can you make reference to
people in the scenario?

Strategic choice and evaluation


POSITION
AUDIT

MISSION &
OBJECTIVES

CORPORATE
APPRAISAL

REVIEW AND
CONTROL

STRATEGIC
OPTION
GENERATION

STRATEGIC
EVALUATION
& CHOICE

STRATEGIC
IMPLEMENTATION

ENVIRONMENTAL
ANALYSIS

Lecture example 1(d)

Discussion and illustration question for this chapter

Consider the information needs of a large grocery retailer, such as Tesco plc and explain what
information would be required at the stages of the planning process outlined below.

23

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Solution
Stage of planning

What information is required?

Strategic option generation


what could we do?

Strategic evaluation & choice


which strategies are suitable (vs
SWOT), acceptable (to our
stakeholders) and feasible?

Implementation and control issues

Lecture example 1 (e)

Discussion and illustration question for this chapter

Strategic Planning (recap from P3) is often illustrated using the rational planning model:

POSITION
AUDIT

MISSION &
OBJECTIVES

CORPORATE
APPRAISAL

REVIEW AND
CONTROL

STRATEGIC
OPTION
GENERATION

STRATEGIC
EVALUATION
& CHOICE

STRATEGIC
IMPLEMENTATION

ENVIRONMENTAL
ANALYSIS

Consider the information needs of a large grocery retailer, such as Tesco plc and explain what
information would be required at the stages of the planning process outlined below.
24

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Solution
Stage of planning
required?

What information is

Strategic implementation

Review & control


the emphasis should be on

critical success factors (CSFs)


(i.e. what Tesco needs to do well to execute its
strategy)
and how these can be measured using

key performance indicators

(KPIs)

25

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Conflict with short-term decisions

5.1

Once strategic decisions have been taken they need to be implemented via a series of
lower-level operational plans which focus on a shorter time horizon.

5.2

If strategies are to be successfully implemented there must be a clear link between strategic
decisions and operational planning. This is often absent in businesses due to:
(a)

Unrealistic plans

over ambitious
under resourced

(b)

Poor communication

(c)

Inadequate performance measurement inappropriate


dysfunctional

26

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Chapter summary
Section

Topic

Summary

Strategic Management
Accounting (SMA)

SMA can be used to support the entire process of


planning and control, as considers factors external to
the organisation as well as non-financial and
internally-generated information.
SMA techniques are essential for effective
performance management and are covered in depth
in the rest of this paper.

Corporate Appraisal

SWOT analysis identifies strengths and weaknesses in


the context of opportunities and threats. It guides the
performance management of organisations.
Benchmarking schemes enable precise comparisons
to be drawn between firms. Benchmarking is best for
firms which have to 'catch up rather than innovate. It
can be difficult to establish which firm is operating the
best approach and against whom the comparisons
should be drawn.

Strategic choice &


evaluation

SMA can support the analysis of whether a strategy is


suitable, acceptable and feasible.

Implementations &
control issues

Controls (various approaches are covered in detail


later) should focus on critical success factors those
things that need to be done well if the strategy is going
to be successful.

Conflict with short-term


decisions

If strategies are to be successfully implemented there


must be a clear link between strategic decisions and
operational planning. This is often absent in businesses
due to:
(a) Unrealistic plans
(b) Poor communication
(c)

27

Inadequate performance measurement

1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

END OF CHAPTER
28

Performance
management and control

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Evaluate the strengths and


weaknesses of alternative
budgeting models and compare
such techniques as fixed and
flexible, rolling, activity-based,
zero-based and incremental.

DG Q2a-c Dec 2012 16 marks


BEC Q1 Dec 2009
Albacore Dec 2011 part a 8 marks

Assess how budgeting may


differ in not-for-profit
organisations from profitseeking organisations.
Evaluate the impact to an
organisation of a move beyond
budgeting.

RRR December 2009 30 marks


Robust laptops Q2 Dec 2010 10 marks

29

2: PERFORMANCE MANAGEMENT AND CONTROL

Overview

Performance management and


control

Beyond budgeting

Rolling
forecasts

ZBB

Incremental /
flexed

Budget systems

Value

Flexed

Learning curves

Rolling

ABB

30

2: PERFORMANCE MANAGEMENT AND CONTROL

The performance cycle and budgeting approaches

1.1

Budgeting is one key method to link strategy to operations. Budgets provide greater detail
about how plans will be implemented, and they communicate with and control lower level
employees.
Performance cycle stage

Benefits

Planning

Budget holders are forced to plan how to hit targets


that should ensure that the companys strategic
plan (e.g. overall sales, margins, quality levels) is
achieved.

Responsibility

Allocates responsibility to clearly specify which


managers control which costs (responsibility
accounting).

Integration

Ensures that the planned activities of one business


area does not conflict with another ( e.g. production
and sales).

Motivation

Involvement and participation of staff


Achievable targets

Evaluation

Trends can be spotted


Financial and non financial control
Variances investigated and corrected

Advantages and disadvantages of budgeting approaches


1.2

Budgets are all designed to achieve the same end better performance but there are
different approaches to budgeting.
Approach

Advantages

Disadvantages

Incremental budgeting

Easy. Can be flexed to actual


activity levels to provide more
meaningful control
information.
Highlights costs of unused
capacity
More up to date
Motivating

Encourages slack / unlikely to


improve performance
Does not consider alternatives

Flexible budgets
Rolling budgets
(always budgeting one
year ahead)
Zero based budgeting

ABB

Responds to environment
Close to business
Increased efficiency
Links to strategy/objectives
Identifies critical success
factors
31

Most costs fixed in modern


business
Time
Management effort
Time
Training
Participation required
Time
Effort

2: PERFORMANCE MANAGEMENT AND CONTROL

Learning curves

2.1

To assist in the production of more challenging budgets, a learning effect can be estimated.

Theory
2.2

As cumulative output doubles, the cumulative average time / unit falls to a given percentage
of the previous cumulative average time /unit (cumulative = all units produced so far).

2.3

The theory of learning curves will only hold if the following conditions apply:
(a)
(c)
(d)

There is a significant manual element in the task and the task must be repetitive.
Production must be at an early stage so that there is room for improvement.
There must be consistency in the workforce & the workforce must be motivated.

Learning effect
Cumulative
average time
per unit

Steady state
Cumulative output

Formula
2.4

Y= aXb
y = average cost per batch

a = the cost of the initial batch x = the total no. of batches

b = learning index (should be supplied in the exam but can be calculated as log r log 2 where r is the learning rate)

Lecture example 1

Technique demonstration

A firm's workforce experiences a 75% learning rate. The budgeted time for the first batch is 100
hours.
Required
Using the formula Y= aXb, calculate the time to produce:
(a)
(b)

The first 10 batches in total


The 10th batch only.

32

2: PERFORMANCE MANAGEMENT AND CONTROL

Solution

Steady state
2.5

Eventually, the time per unit will reach a steady state where no further improvement can be
made. At this point the time for the last unit produced can be used as a standard.

Lecture example 2

Exam standard for 5 marks

Company C is planning to introduce a new product product B. This new product requires
assembly by hand; a 75% learning curve will apply to each batch, until the 10th batch has been
completed. Thereafter a steady state will apply.
Costs for the first batch of 100 units of Product B are:
$
35
240
150

Direct materials
Production labour (20 hours @ $12/hour)
Factory overheads (variable cost)

Company C plans to produce and sell 1,200 units. The selling price will be $12 per unit.
Note: Learning curve formula: Y= aXb
Where b = learning index = 0.415 for 75% learning rate
Required
Prepare a suitable budgeted contribution and contribution to sales ratio against which actual
performance can be compared.

33

2: PERFORMANCE MANAGEMENT AND CONTROL

Solution

34

2: PERFORMANCE MANAGEMENT AND CONTROL

Experience effect

3.1

The 'experience curve' covers all costs that may reduce due to technological and
managerial learning effects, following an increase in production volumes:
(a)
(b)
(c)

Material costs may decrease with quantity discounts


Variable overheads follow the pattern of direct labour
Fixed overheads per unit will decrease as production volumes rise.

3.2

The experience curve is exploited through rapid growth and high market share.

Beyond budgeting (Hope and Fraser 2003)

Criticisms of budgets
4.1

Budgeting is considered to lack value in a constantly changing environment because it is:


(a)

Too slow & expensive

(b)

Ineffective at cost control

(c)

No focus on external environment

(d)

Encourages gaming

Key principles of beyond budgeting

1.Target setting
use benchmarking to set aspirational medium term goals to generate relative improvement
to drive imaginative strategies that lift performance above incremental change
must not be used as a performance target

5. Control
Use of trend analysis,
rolling forecasts, use of
performance indicators

4. Resource management
Fair transfer pricing
Fast track of capex requests

Continuous
Adaptive
Process

2. Strategy process
devolved with head office
offering critique and
suggestions, focus on value
creation to hit stretch targets

3. Relative performance appraisal


based on assessment vs external & internal benchmarks
good bonuses are possible in bad years, and poor
bonuses in good years
based on a scorecard vs competition and previous year
but not vs budget
bonuses are also partly based on group performance
35

2: PERFORMANCE MANAGEMENT AND CONTROL

Preparing budgets

5.1

Exam questions often require you to prepare or analyse a budget. The following example is
based on a past exam question.

Lecture example 3

Exam standard for 8 marks

X is a high growth non-alcoholic drinks company. Currently it uses a system of incremental


budgeting X has been receiving complaints from customers about late deliveries and poor quality
control. Xs managers have explained that they are working hard within the budget and capital
constraints imposed by the board and have expressed a desire to be less controlled.
Xs incremental budget for the current year is given below. You can assume that cost of sales and
distribution costs are variable and administrative costs are fixed.

Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit

Q1
$000
8,760
4,818
3,942
789
2,107
1,046

Q2
$000
8,979
4,939
4,040
808
2,107
1,125

Q3
$000
9,204
5,062
4,142
829
2,107
1,206

Q4
$000
9,434
5,189
4,245
849
2,107
1,289

Total
$000
36,377
20,008
16,369
3,275
8,428
4,666

The actual figures for quarter 1 (which has just completed) are:

Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit

$000
8,966
4,932
4,034
807
2,107
1,120

On the basis of the Q1 results, sales volume growth of 3% per quarter is now expected.
Required:
Recalculate the budget for X using rolling budgeting and assess the use of rolling budgets in this
context.

36

2: PERFORMANCE MANAGEMENT AND CONTROL

Solution

37

2: PERFORMANCE MANAGEMENT AND CONTROL

Chapter summary
Section

Topic

Summary

Performance cycle and


budgeting approaches

Budgets are designed to achieve better performance


through planning, communication, motivation,
performance evaluation and control. Traditional
budgeting approaches are criticised for their lack of
flexibility to environmental factors and their ability to
encourage inefficiency.

Learning curves

When new products or processes are planned,


budgets may need to incorporate the effects of
learning curves.

Experience effect

Experience is wider than learning and covers


reductions due to technology, managers and
increased volumes.

Beyond budgeting

'Beyond Budgeting' is a response to increase


managerial motivation and improve the customer
orientation of decisions.

Preparing budgets

Remember that budgets need to presented


professionally.

END OF CHAPTER
38

Business structures, IT &


other influences on
management accounting

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Identify & discuss the information needs of firms adopting a functional,


divisional or network form & implications for performance management.

Callisto June 2012

Assess the influence of business process re-engineering on systems


development & improvements in performance.
Discuss the concept of business integration and the linkage between
people, operations, strategy and technology. Analyse the role that
performance management systems play in business integration using
models such as the value chain & McKinseys 7Ss.
Identify & discuss the required changes in management accounting
systems due to empowering staff to manage sectors of a business.
Assess the changing accounting needs of modern service based firms
compared with the needs of traditional manufacturing industry
Discuss how IT systems provide the opportunity for instant access to
management accounting data in an acceptable format & potential impact
on performance, and facilitate the remote input of management accounting
data by non-finance specialists

HEG Dec 2007 5 marks part c


JHK June 2011 5 marks part c

Explain how information systems provide instant access to previously


unavailable data that can be used for benchmarking and help improve
performance
Assess the need for business to refine and develop their management
accounting and information systems

Film productions Dec 2010 9 marks


Q2 Section B December 2012
Q1 Section A June 2013

Assess the ways in which stakeholder groups operate & how they affect
an organisations strategic formulation & implementation (e.g. using
Mendelows matrix)

SSH Dec 08 4 marks

Discuss the ethical issues that may impact on strategy formulation &
performance

TMC December 2008 5 marks

Discuss how stakeholder groups may influence business performance

39

Parma Tech June 2011 6 marks

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

Overview
Business structures, IT & other
influences on management
accounting

Business integration

Influence of stakeholders and


ethical issues
Information needs of a
business

BPR

Operations

People

Strategy

Value chain
Information needs of

Functions

Divisions

Networks

40

Technology

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

1 Information needs of different business structures


Functional
1.1

Functional departments are based on segregation of skills and responsibilities and are
typically the first (and lowest) form of delegation.
Head office
Senior management

Production
1.2

Sales

Advertising

Distribution

Administration

This centralised structure has the advantage of being efficient, with less duplication of
effort than an divisional structure. However a centralised structure can become too slow at
decision-making as a business grows.

Divisional
1.3

As businesses grow they devolve power to lower level managers and create autonomous
divisions. These may be based on product ranges or market segments.
Head office
Senior management
Market 1
Production

Sales

Market 2

Market 3

Administration

Networks
1.4

A newer organisational form is a network. This is characterised by


(a)
(b)
(c)

1.5

Informal relationships
Outsourcing
Partnerships.

This structure has the advantage of being flexible, and allows each element of the network
to work together using their individual areas of expertise.

Information needs
1.6

Different structures will require different data to be obtained and information to be


generated.

41

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

Structure

Information required

Functional
typically used by small companies
Division
two way flow of information between
Head Office & divisions; greater
autonomy
Network
additional flow of information
between the network partners

Operational efficiency
assess by variances
Objectives of Head Office
Divisional performance measures e.g. ROI

Sharing of cost data


Service level agreements

Business integration

2.1

Whatever business structure is adopted there needs to be integration between the various
parts.
This integration is required to ensure
(a)
(b)
(c)

2.2

Coordinated activities and processes


Goal congruence
Value creation.

Integration is achieved by linking


(a)
(b)
(c)
(d)

People
Operations
Strategy
Technology.

42

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

2.3

Value chain analysis is one model that can help build an understanding of these linkages

Value chain
2.4

The value chain is 'The sequence of business activities by which, from the perspective of the
end user, value is added to the products or services produced by an organisation'.

2.5

Porter analysed the various activities of an organisation into a value chain. This is a model
of value activities and the relationships between them. Further detail can be found in the
additional notes to this chapter.

SUPPORT
ACTIVITIES

FIRM INFRASTRUCTURE
TECHNOLOGY DEVELOPMENT
IN
RG
MA

HUMAN RESOURCE MANAGEMENT


PROCUREMENT

MARKETING
& SALES

AFTERSALES
SERVICE

MA
R
GI
N

INBOUND OPERATIONS OUTBOUND


LOGISTICS
LOGISTICS

PRIMARY ACTIVITIES

Information needs in manufacturing versus services

3.1

Services differ from manufacturing in the following ways:

Simultaneous production and consumption occur at the same time


Heterogeneous the service varies from day to day or employee to employee

3.2

Intangible

no physical offering to assess customer value

Perishable

services only last for a period of time and cannot be stored

These differences mean that the information requirements of service businesses will be
broader than that of manufacturers. More qualitative information will be required concerning
customer satisfaction and employee morale.
Most of the expenses in service businesses are overheads, making activity based cost
information more valuable.

43

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

3.3

Several types of service businesses exist; each with different types of information
requirements, for example:
Type

Feature

Key information needs

Mass service

Standard service

Quality of processes

e.g. rail transport

High automation, high capital


costs and users
Customised
High level of staff

Cost of processes

Personalised
service

Quality of inputs

e.g. financial advice

Instant access to data

4.1

Developments in IT systems have made it far easier for users to instantly access data via:
(a)
(b)
(c)

Data sharing
Database analysis
Enterprise resource planning systems

Data sharing
Data sharing

Features

Groupware

Scheduler

- a term used to describe software


that provides functions that can be
used by collaborative work groups.

File sharing

Intranet

Sharing ideas

- internal networks, using internet


technology

Communicating initiatives

Extranet

Sharing selective sales data

- intranets that are accessible to


authorised external users

Database analysis
4.2

A database is a computerised file of data that can be accessed and used by many
applications. Data only needs to be input once which reduces time, error and storage space.

4.3

Data mining software looks for patterns and relationships in large pools of data; it seeks
previously unknown relationships.
44

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

Enterprise Resource Planning Systems (ERPS)


4.4

An ERPS uses a single database to communicate with multiple software applications to


provide different divisions of an organization with various business statistics and information.

4.5

Instant access to data should allow earlier corrective action by comparing updated forecasts
to budgets or internal benchmarks instead of waiting for month end accounts.

Developing management accounting information


systems

5.1

A Management information system (MIS) is 'a system to convert data from internal and
external sources into information and to communicate that information, in an appropriate
form, to managers at all levels in all functions to enable them to make timely and effective
decisions for planning, directing and controlling the activities for which they are responsible'.
(Lucey)

5.2

Three particular types of management information system deserve special mention.


Type of MIS

Features

Decision support Help make decisions on poorly defined problems (with high levels of
systems (DSS)
uncertainty).
Allows the manager to scan the environment, consider a number of
alternatives and evaluate them under a variety of potential
conditions.
Emphasis upon flexibility and user-friendliness.
Executive
information
systems (EIS)

Give executives a straightforward means of access to key internal


and external data. Often an element of an ERPS.

Expert systems

Draw on a computerised knowledge base (such as details of the


workings of tax legislation).

Provide summary-level data, captured from the organisation's main


systems (e.g exception reports), data manipulation facilities (drill
down facility) and user-friendly presentation of data (dashboards).

Can give factual answers to specific queries, as well as indicating to


the user what a decision ought to be in a particular situation.

45

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

Lecture example 1

Discussion/illustration question linked to chapter 1

Consider the information needs of a large grocery retailer, such as Tesco plc, and explain how IT
could enable the information it requires to be captured.

Solution

Stakeholders & ethical issues

6.1

Stakeholders have an interest in what the organisation does.


Group

Example

Internal

Employees

Connected

Shareholders, customers

External

Government, community, pressure groups

6.2

Stakeholders can influence the strategy adopted by an organisation and its performance;
this means that some powerful stakeholders, notably staff, require careful management;
this is covered later in the syllabus.

6.3

The need to consider stakeholder objectives is recognised in techniques such as the


performance prism and the balanced scorecard; again these are covered later.

Ethical issues
6.4

As a business attempts to improve its performance, its operations may adversely impact on
its environment / staff / society as a whole. You may be expected to analyse whether this
gives rise to any ethical issues.

46

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

Lecture example 2

Discussion question

Required
Suggest formal and informal methods by which corporate ethics can be controlled.

Solution
Formal
Interaction with society
Effect of operations
Behaviour of staff

47

Informal

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

48

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

Additional notes

49

3: BUSINESS STRUCTURES, IT & OTHER INFLUENCES ON MANAGEMENT ACCOUNTING

Value chain Further detail

Primary activities
7.1

Primary activities are directly related to production, sales, marketing, delivery and service.
Activity

Comment

Inbound logistics

Receiving, handling and storing inputs to the production system:


warehousing, transport, inventory control and so on.

Operations

Convert resource inputs into a final product. Resource inputs are


not only materials. People are a resource especially in service
industries. Note that this is not just applicable to manufacturing
firms, hence the careful choice of name. Service companies also
have operations.

Outbound logistics

Delivering the product to customers; this may include storage,


testing, bulk transport, packaging, delivery and so on.

Marketing and sales

Informing customers about the product, persuading them to buy


it, and enabling them to do so: advertising, promotion and so on.

After sales service

Installing products, repairing them, upgrading them, providing


spare parts and so forth.

Support activities
7.2

Support activities provide purchased inputs, human resources, technology and


infrastructural functions to support the primary activities. The first three tend to provide
specific elements of support to the primary activities.
Activity

Comment

Procurement

Acquire the resource inputs to the primary activities (e.g.


purchase of materials, subcomponents equipment).

Technology
development

Product design, improving processes and/or resource utilisation.

Human resource
management

Recruiting, training, developing and rewarding people.

Firm infrastructure

General management, planning, finance, quality control, public


and legal affairs: these activities normally support the chain as a
whole rather than individual activities. They are crucially important
to an organisation's strategic capability in all primary activities.

50