Performance Management

ACCA
Performance Instructor
Management Rizwan Maniya
Email - Rizwan@vifhe.com Instructor - Rizwan Maniya WhatsApp Number +923212436266
Performance Management

About My Self
1. Teaching ACCA from last 13 years
2. Subjects specialist if ACCA PM, FM & APM
3. Currently teaching at KnS School of Business Studies
4. Have produced various Global and Nationwide position holder in PM, FM, APM

Paper Introduction
Advance of Paper MA
Transition for F2
1. Expectation
2. Question types
3. Exam timing
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Performance Management

Paper Structure Section Wise

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

Budget & Control Yes Yes Yes

Performance Measurement
Yes Yes Yes

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

PM Passing Rates - Last 4 attempts

Sep 2019 41
Dec 2019 38
March 2020 35
Sep 2020 39

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Performance Management

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

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

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Performance Management

1. Candidates do not read the scenario actively

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

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Performance Management

Email - Rizwan@vifhe.com Instructor - Rizwan Maniya WhatsApp Number +923212436266

Performance Management
Budgets
Types Definition Pros Cons
Fixed Budget • Broad Objectives • Cannot be compared like
Single Activity level
• Controlling fixed cost with like

Flexible Budget No. of different activity levels

Incremental Budget • Previous period budget &

• Increment needs to be • Previous period problems
actual
justified • Uneconomic activities
• Inflation
• In-efficient form of budget
• Known changes

Zero Based Budget • Base of zero • Staff involvement • Ranking process

• Assumption – First time • Efficient allocation • Time consuming activity
• Inefficient operation • Construct decision packages

Rolling Budget • Costly and time consuming

Updated by adding a further • Uncertainty in reduced
activity
period and deducting the • Control will be based on
• Less control over the actual
earliest period. recent plan.
result.

Activity Based Draws attention to activities

Activity framework and Considerable amount of time
Provide useful basis for cost
Budget utilizing cost driver data and effort
control
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Performance Management

Learning Curves
Define
• First time the production time will be highest
• Repetition of job will reduces the time
• Learning process will stop eventually
Calculations
Double approach Previous average x LR
Log approach y= ax^b

Limitations
• Labour intensive environment
• Stable conditions
• Work is repetitive and labour turnover is low

Budgets affected
Labour Budget Overhead Budget Production Budget
Material Usage Budget Material Purchase Budget Cash Budget
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Performance Management

Spread sheets
Define
• Used to build models in which data is presented by rows and columns
• These spread sheets are used for analyzing and manipulating the data
Advantages Disadvantages
Simplify and saves time Error can be done

Over dependent risk

Different budget options
Qualitative factors
Sensitivity analysis
Security issues

Corrupt a model
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Performance Management

Variances Favourable Adverse

• CHEAPER MATERIAL IS • CHEAPER MATERIAL IS

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

• Cheaper material is used less and • Cheaper material is used more

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

• WHEN MORE PROFITABLE • WHEN MORE PROFITABLE

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

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Performance Management

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

Material Yield Variance

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

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Performance Management

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

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

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

Planning usage variance Operational Usage variance

Original Standard price per kg x Original Standard price per kg x
Material
Usage (original standard quantity (revised standard quantity allowed –
allowed – revised standard actual quantity)
quantity allowed)
NOTE the Shortcut - Planning Variance - O vs R
Operational Variance - R vs A
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Performance Management Labour rate variance Labour efficiency variance
(Original Standard rate per hour - Actual Standard rate per hour x (Original
rate per hour) x ctual hours paid Standard hours allowed - actual hours
worked)Where standard hours allowed =
standard hours per unit x actual units
Variances Planning - Planning Errors Operational - Real Performance
Formula
Planning rate variance Operational rate variance
(Original standard rate – Revised (Revised standard rate – Actual
Labour Rate standard rate) x actual hours rate) x actual hours

Planning efficiency variance Operational Usage variance

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

NOTE the Shortcut - Planning Variance - O vs R

Operational Variance - R vs A
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Performance Management

Sales price variance Sales volume variance

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

Standard profit /contribution Standard profit

per unit (Revised standard /contribution per unit
Sales Volume
sales units – Original standard (Actual sales units –
sales units) Revised sales units)
NOTE the Shortcut - Planning Variance - R vs O
Operational Variance - A vs R

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

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Performance Management

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Performance Management

Profit maximization Cost minimization

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

DETERMINE OPTIMUM POINT

BY INSPECTION METHOD ISO CONTRIBUTION / COST LINE

Additional contribution earned if one extra unit of scarce resource becomes available
Shadow price at its original cost.

Slack
13/11/2020
Amount by which the resources is under-utilized

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2Performance Management
0
CALCULATION
Weighted average C/S Ratio
Weighted average
Weighted average break even
Average C.P.U Average S.P
Weighted average margin of Total contribution for all products Total sale revenue for all products
safety
Total no of units Total no of units

Target profit
GRAPHS
Multi Product Break even
1. Sales revenue line
2. Fixed cost line
3. Total cost line

Multi Product Contribution

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

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Performance Management

1. Price or demand function

2. Profit maximisation
• Alegebriac Approach - MC = MR
• Tabular Aprroach

Price skimming: Charging high prices at initial Price penetration: Charging low prices at the
phase of the product life cycle. initial phase of the product life cycle.
Conditions Conditions
a. Product life cycle is short a. Target is of higher market share
b. Inelastic demand b. Elastic demand
c. Production is limited at early stage c. Discourage competition
d. When there are barriers for competitors d. Quickly want to move to growth & maturity
stages
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Performance Management

Relevant IRRelevant
Incremental cost / Income Sunk Cost

Opportunity cost Committed Costs

Notional costs

Re-apportionment of
existing fixed costs

One Off Contract Make or Buy

Decision
Shut Down Decision Further Processing
Decision
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Performance Management

Risk - With probability

Uncertainty - Without probability

Decision makers Risk seeker, Risk Averse, Risk neutral, Sore loser

Techniques
Expected value Long term average

Decision Rule
Maxi max Maxi min Mini max regret rule

Maximum from maximum Maximum from minimum Minimum from maximum regrets

Sensitivity analysis Identify critical variable

Simulation Deal with multiple variable

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

Decision tree
situations having several possible alternatives with uncertain outcomes
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Performance Management

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Performance Management

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

Key performance indicators

Measure whether CSF will be achieved or not

Financial indicators Non- Financial indicators

Strike a balance

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Performance Management

Profitability ratios

Return on capital
employed
Asset turnover

Gross profit margin

Operating profit margin

Net profit margin

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Performance Management

Liquidity ratios

Current ratio

Acid test ratio

Inventory days

Receivables days

Payable days
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Performance Management

Risk related ratios

Financial gearing

Operational gearing

Interest cover

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Performance Management

Financial perspective Customer perspective

B
It measures how the company can create value for It measures how the business is dealing with its
A
its shareholders. customers and what customer values from the
L Examples business.
A 1. Return on capital employed Examples
N 2. Asset turnover 1. % of sales return
C 3. Current ratio 2. % of claims made
E 4. Profit growth 3. Number of repeat customers
4. % of on time delivery
S
Internal perspective
C Innovation and learning
It measures the efficiency of the business and
O It measures how the business is developing itself
identifies what processes are important to satisfy
R for the future and how it will improve and create
shareholders.
E future value.
Examples
Examples
1. % of internal rejections
C 1. New products developed
2. Error rates
A 2. % successful products.
3. Employee retention rate
R 3. % of income from new products.
4. System downtime 4. Time from identifying a new product idea to its
D 5. Average completion time per job market launch.

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Performance Management
B
U Dimensions(CSF)
I
L
1. Financial performances: It is measured by Financial ratios.
D 2. Competitiveness: It is measured by market share, Sales growth.
I 2. Quality: It tells the reliability and responsiveness.
N
G 3. Resource utilization: It focuses on efficient utilization of resources such as productivity
4. Flexibility: It emphasis on coping with customer demands at the right time such as delivery time.
B
L 5. Innovation: It assesses the ability to innovate such as no of new products launched.
O
C Standards(KPI) Rewards (Rewards for achieving standards)
K Important things to consider
Important issues to consider
M
1. Ownership 1. Clarity
O 2. Achievable 2. Motivation
D
3. Equity
E 3. Controllability
L
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Performance Management

It represents the revenue per unit from the supplying division and cost per unit for
receiving division.
Objectives of transfer pricing system
Goal Performance
Autonomy
congruence measurement
Types of transfer pricing

✓ General rule (Theoretical transfer price)

(Marginal cost + opportunity cost)
✓ Market prices
✓ Adjusted Market Price
✓ Cost based approach
Marginal cost Total cost Total cost plus
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Performance Management

Revenue Profit Investment

Cost center
center center center

Return on Residual
investment Common problems income

Manipulation Aging of asset

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Performance Management

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

different investments

Formula

Advantages Disadvantages
Relative measure Correlation
Easily understood Dysfunctional
behavior
No need for COC
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Performance Management

Investment can earn over the minimum rate of return

Formula
Advantages Disadvantages
Correlation No comparing

Dysfunctional
Does not relate
behavior

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Performance Management

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Performance Management

Activity based costing

Method of allocating overhead costs to products and services

Cost pool Cost driver

Steps

✓ Identify cost pools and their allocated cost

✓ Identify logical cost drivers for each cost pools
✓ Calculate overhead absorption rate for each cost pools
✓ Absorb overheads into the individual products by using the rates
calculated in step 3.
Advantages Disadvantages
1. Fair allocation 1. Insignificant overheads
2. Significant overheads 2. Production related
3. Cost control 3. Detailed accounting records
4. All Overheads not production 4. Cost may exceed benefit
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Performance Management

Ways to close
Steps
Market price • Cheaper material
Desired profit
Maket Price - Desired Profit
• Reduce material losses
Target cost
Current cost
• Cheaper labour
Cost gap Current cost – Target cost • Labour training
• Reduce overhead by ABC
• Move to machine intensive
Difficult in services
Advantages • Economies of scale
industry
• Price • Value analysis
Characteristics Qualitative
• Working method Information
Simultaneity
• Customer Heterogeneity
requirement Intangible
• Cost reduction Perishability

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Performance Management

Definition Entire life Revenue Entire life cost True profitability

Stages Advantages
Development
Introduction Pricing decision
Growth Eight to ninety
Maturity Right decision
Decline Target cost
Short life cycle

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Performance Management

Long term - Eliminate Limiting factor

Theory of Constraints
Short term – Through Put Accounting
Concept of Through Put
• Sales – All material cost • No or low inventory • Operating expense/Production
cost only (Direct Labour - Variable
Production Overheads - Fixed
Production Overheads)

Through Put accounting ratio Multi Product Decision making

Throughput accounting ratio = Throughput per limiting factor hour 1. Calculate throughput per unit
Operating expense per limiting factor hour
2. Through Put per limiting factor hour
Through put per limiting factor hour = Throughput per unit /TPAR whatever required by question
Limiting factor hour per unit 3. Ranking can be done by both Through
Put per limiting factor hour /TPAR
Operating expenses per limiting factor hour = Total operating expenses 4. Devise optimum production plan
Total limiting factor hours
Ways to improve TPAR
Decrease material cost per unit Decrease time to make each unit
Decrease the operating expense Increase selling price per unit
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1Performance Management
3
/
1 Internal Cost External Cost
1
/ •Improved systems and checks in order to avoid •Usage of energy and water
2 penalties •Forest degradation
0
2
•Waste disposal cost •Health care costs
0 •Product take back cost •Carbon emission cost
•Regulatory cost such as taxes
•Back end cost such as decommission cost, disposal of
inventory
ACCOUNTING FOR ENVIRONMENTAL COST
Input/outflow analysis
This technique records material inflows and balances this with outflows on the basis that, what comes in, must go out.

Flow cost accounting

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

Environmental Activity-based costing

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