ACCA Paper P5 – Advanced Performance management

Course slides

For exams in
June 2008
Syllabus

A Strategic planning and control

Economic, fiscal, market and environmental
B
factors
C Performance measurement systems and design

D Strategic performance measurement

E Performance evaluation and corporate failure
Current developments and emerging issues in
F
performance management

Slide 2
Examiner & Format of the Exam

Examiner:
Examiner:Shane
ShaneJohnson
Johnson

Format of the Exam Marks

Section A Two compulsory questions 60-70
Section B Two questions from a choice of three up to 30-40
20 marks each
Total 100

Slide 3
The December 2007 exam

Topics examined in the December 2007 exam

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

Slide 4
The BPP Learning Media classroom slides

What do these slides cover?

– A selection of key areas of the syllabus

Using the slides

– Use the slides as a point of reference
– Add detail by talking around the slides (eg using material
from the corresponding Study Text chapter)
– Consider adding slides yourself to suit your course
– Recommend students attempt appropriate questions from
the Practice & Revision Kit

Slide 5
Chapter 1 Study Text Chapter 1

Introduction to
strategic
management
accounting
Management Information Hierarchy

• Anthony’s Hierarchy
STRATEGIC
PLANNING

MANAGEMENT
CONTROL

OPERATIONAL
CONTROL

Slide 7
Roles of management accountant

• Information
• Control

• Targets
• Rewards

Slide 8
Strategic Planning
• Strategy
– A course of action to achieve a specific outcome

• Strategic Planning
– The formulation, evaluation and selection of
strategies for the purpose of developing a long-term
course of action.

Slide 9
Strategic Planning

• Scope
• Characteristics
• Information

Slide 10
Management Control

• Scope
• Characteristics
• Examples

Slide 11
Operational Control

• Scope
• Information

Slide 12
Rational model

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

Slide 13
Key features of planning model
• Strategy to achieve objectives
• Formal process
• Led from top
• “Drilled-down” through organisation

Slide 14
 The rational model

POSITION STRATEGIC
AUDIT CONTROL

MISSION & CORPORATE STRATEGIC STRATEGIC STRATEGIC

OBJECTIVES APPRAISAL OPTIONS CHOICE IMPLEMENT’

ENVIRONMENT
ANALYSIS

Slide 15
The rational model

Advantages Problems

• Guides activities • Assumes formality

• Provides a standard • Separate from operations
• Communicates • Bureaucratic
• Legitimacy • Inflexible
• Identifies risks • Lack commitment

Slide 16
Environmental Analysis
• PEST
• Porter’s 5 forces
– Understand inherent attractiveness of industry
– Understand impact of individual forces

Slide 17
Corporate Appraisal

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

Slide 18
Position Audit

INTERNAL Identify
ANALYSIS
• Strengths
MISSION & CORPORATE • Weaknesses
OBJECTIVES APPRAISAL

ENVIRONMENT
ANALYSIS

Slide 19
SWOT Analysis

INTERNAL : RELATIVE TO COMPETITION

STRENGTHS WEAKNESSES
exploit rectify

OPPORTUNITIES THREATS
seize nullify

EXTERNAL: PRESENT TO ALL INDUSTRY MEMBERS

Slide 20
Gap analysis – fixed period

OBJECTIVE
SALES
GAP

FORECAST

TIME

Slide 21
Gap Strategies

• Efficiency

• Expansion

• Diversification

Slide 22
Product life cycle (PLC)

Sales
Volume

Sales

Profit

Time

Introduction Growth Maturity Decline

Slide 23
Lecture Example 1
• What advantages and disadvantages do large
companies such as Marks & Spencer face when
relying on the rational model to derive new
strategy ?

Slide 24
Lecture Example 1
Advantages
• Focus on key strategic issues and risks
• Coordinates and integrates diverse business activities
within the organisation
• Improves communication with stakeholders
• Encourages goal congruence
• Avoids damaging short termist behaviour

Slide 25
Lecture Example 1 cont..
The drawbacks of rational planning include
• Too infrequent to allow the business to operate flexibly
and dynamically
• Deters creative, innovative and radical strategy making
• Loss of entrepreneurial thought processes
• Could cause firm to pursue wrong policies if planning
assumptions of plan are wrong
• Can be complicated and difficult to implement because
there is only limited staff involvement in the planning
process

Slide 26
Freewheeling opportunism
“..should not bother with strategic planning..”
Advantages Disadvantages
• Short term • Control difficult
opportunities • Long term
grasped opportunities
• Reactive missed
• Purely profit
• Encourages
driven
initiative
• Not Proactive
• Creative

Slide 27
Benchmarking
How
• Understand your own business processes
• Establish who/what to benchmark
• Collect and analyse data
• Implement improvements

Slide 28
Benchmarking

Who
• Internal – between SBU’s
• Functional – best in any industry
• Competitive – direct competitors
• Strategic – competitors’ strategies

Slide 29
Benchmarking – why ?

Advantages Problems
• Position audit • No best solution
• Identify CSF’s • Reactive
• Information dependant
• Identify potential
advantage

Slide 30
Risk & Uncertainty

Accounting for risk Quantify risk

• ROCE • Rule of thumb
• Payback • Probability
• NPV • Sensitivity
• Cost-benefit • Standard deviation

Slide 31
Question practice – end of Chapter 1

You
You should
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Q1 Q2 Q3 Q4

Slide 32
Chapter 2 Study Text Chapter 2

Alternative
approaches to
budgeting for
control
Budget Cycle

Determine Budget

Control Planning

Operate

Slide 34
Budgeting and budgetary control - Summary

• Budgeting is part of planning & control

• Managers should only be assessed on those items they
can control
• Feedback control is reactive, feedforward proactive
• The level of budget set and the amount of participation
will impact motivation

Slide 35
Budgeting and budgetary control - Summary

• Flexible budgets are ideal for planning, flexed for

control
• Incremental budgets build in slack and inefficiency,
ZBB uses efficient allocation of resources
• Rolling budgets are useful in time of uncertainty
• ABB looks at managing the causes of costs
• Beyond budgeting focuses on cashflow forecasts and
KPI’s

Slide 36
Fixed/Flexible/Flexed Budgets
• Fixed
– original budget based on single level of activity

• Flexible
– to cope with different levels of activity
– useful at planning stage

• Flexed
– necessary as a control device
– based on actual activity level

Slide 37
Alternative budget models
• Incremental v Zero Based Budgeting
– more efficient allocation of resources
– budgetary slack discouraged
– resistance
– time/effort

• Periodic v Rolling (continuous) Budgets

– producing more realistic budgets

• ABB
• Beyond Budgeting

Slide 38
Beyond Budgeting

Move away from traditional budgeting

Adaptive
Adaptive
management Employee
Employee
management
process empowerment
empowerment
process

Slide 39
Behavioural aspects of budgeting

• Impact of budgeting system on human

behaviour:
– unites employees against management
– possible negative results
– protective groups
– finding fault
– victimised
– express superiority

Slide 40
Question practice – end of Chapter 2

You
You should
should now
now be
be able
able to
to attempt
attempt the
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following key
key
questions
questions from
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Q5 Q6 Q7 Q9 Q10

Slide 41
Chapter 3 Study Text Chapter 3

Changes in business
structure and
management
accounting
Traditional v Modern Manufacturing

• Traditional • Modern
– focus was on – produce in shorter
manufacturing in long production
production runs runs/producing on
– any idle-time was demand
adverse – inventory is
– little product diversity unacceptable & will
– Buffer inventory accept some idle-time
– Production is priority – complex/diverse product
ranges
– Focus: COST
– Customer is priority
– Focus: FLEXIBILITY

Slide 43
Quality management
Traditional TQM
• Not value adding • Get it right first time
• Resource intensive • Constant improvement
• Tolerance of waste within • Design for quality
limits • Quality costs defined:
– Appraisal
– Internal failure
– External failure
– Prevention
• Abandon variances

Slide 44
Elements of TQM
• Work teams given responsibility for their area
• Clear identification of ‘customer’
• Clear identification of ‘supplier’
• Quality circles
• Any bonus paid on quality improvements

Slide 45
Implications of TQM

• Cross functional teams – new control systems

• Multiple measures for teams
• Resources required to implement
improvements
• Management Accounting should be a quality
circle (supplier/customer to/of other areas)

Slide 46
Functional organisation

Company

Accounts Production Sales Purchasing

Slide 47
Departments & Divisions

Department – functional specialism

Division – semi-autonomous business unit
Advantages Disadvantages
• Lower staff input • Co-ordination
• Product comparisons • Loss of control
• Uses local knowledge • Conflict
• Junior staff morale

Slide 48
Divisionalisation approaches

• Functional departments
• Geographic division
• Product/brand division
• Customer/market

Slide 49
Centralisation v Decentralisation
Pro-centralisation Pro-decentralisation
• Central decisions • Management overload
• Wider view • Junior managers morale
• Resource allocation • Local decisions
• Cheaper management • Faster decisions
• Crisis decisions • Develop junior managers
• Separate spheres of
responsibility

Slide 50
Multi-Divisional

C om pany

P ro d u c t 1 P ro d u c t 2 P ro d u c t 3

F in a n c e M a r k e t in g P u r c h a s in g

Slide 51
Network organisations
Outsourcing
Functions
Line 1 2 3
Authority

A
Clients
B

Slide 52
Porter’s Value Chain
• Identifies specific points where a firm can organise and
perform its activities most effectively to gain
competitive advantage
• Benefits along the value chain can be achieved due to
integration, automation and better information
exchanges

Slide 53
Value Chain

Firm Infrastructure Support Activities

Technology Development
Human Resource Management

Procurement

Inbound Operations Outbound Marketing Service

Logistics Logistics & Sales

Slide 54
Business Process Re-engineering
• Start from scratch
• Re-define business processes
• Add value to customers

•FUNDAMENTAL
•RADICAL/DRAMATIC

Slide 55
Steps in BPR

• Identify Business Objectives

• Identify specific processes to be redesigned
• Evaluate existing processes
• Identify Potential IT applications
• Design and build new processes and systems
• Implement

Slide 56
Activity Based Costing (ABC) and ABM Examined Dec 2007

Production set No. of production

up costs set ups OAR

Machine oil & No. of machine

hours
OAR
Machine repairs

Supervisor’s No. of labour

salary hours
OAR

ACTIVITIES COST DRIVERS

Slide 57
Question practice – end of Chapter 3

You
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should now
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be able
able to
to attempt
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Q11 Q12 Q13 Q14 Q15

Slide 58
Chapter 4 Study Text Chapter 4

Effect of
information
technology on
modern
management
accounting
Information needs and IT within organisations
Traditional usage Strategic usage

Internal processes focus External customer focus

Cost reduction Value creation

Localised benefits
Shared benefits

Solving customer problems

Solving internal problems
Business led
Technology led
Incremental development
Total system development
Exploitation of information
Exploitation limited by system

Slide 60
Intranets
• Internal network
• Hold centralised, digitised information
• Accessible by all

Slide 61
EDI
• Electronic Data Interchange
– Computer to computer interchange
– Standardised, agreed exchanges
– Used between business partners

Slide 62
Extranets
• Allow external, authorised users access to
internal information
• Use internet technology
• Help to link the supply chain

Slide 63
Databases
• Systems which hold collections of records and
files, designed in such a way as to facilitate
access to the whole user community

Slide 64
Database Structure
Database
User 1 User 2 Administrator

Database Management System

Store

Slide 65
Data Warehouse

A separate database that stores current and

historical data of potential interest to managers
throughout the company
(Laudon and Laudon)

Slide 66
Components of a Data Warehouse

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

Slide 67
Other Systems

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

Slide 68
Question practice – end of Chapter 4

You
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Q17 Q18

Slide 69
Chapter 5 Study Text Chapter 5

Impact of world
economic and
market trends
Lecture Example

Despite having a wide range of business interests

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

Slide 71
Lecture Example
Virgin Rail
• Government legislation (integrated transport
policies, safety measures, etc.)
• The franchiser’s power and attitude
• Competition
• Level of service
• Pricing

Slide 72
Lecture example cont…
• Performance
• Customer comments
• Media comment and adverse publicity
• Technology (availability of new rolling stock)
• Network Rail policies, programmes and plans

Slide 73
Cost plus pricing

Full Cost Marginal Cost Relevant cost

plus Plus approach
Marginal
All costs costs plus Minimum
plus mark up price
mark up considering
opportunity
cost

Slide 74
Pricing Strategies
• Premium pricing
• Price discrimination
– By age
– By time
– By place
• Product bundling
• Psychological pricing
• Multiple products/loss leaders
• Discounts

Slide 75
Porter’s 5 Forces Examined Dec 2007

POTENTIAL
ENTRANTS

INDUSTRY
SUPPLIERS BUYERS
COMPETITORS

SUBSTITUTE
INDUSTRIES

Slide 76
BCG Matrix
High
Relative Market Share Low

High

Market
or
Industry Star Question Mark
Growth
Rate

Low Cash Cow Dog

Slide 77
Ansoff’s Matrix

PRODUCT
Present New
Present Withdrawal
Product
Consolidation
Development
Penetration
MARKET
Diversification
Market
Development • Related
New • Unrelated

Slide 78
Question practice – end of Chapter 5

You
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should now
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be able
able to
to attempt
attempt the
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key
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questions from
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Q19

Slide 79
Chapter 6 Study Text Chapter 6

Impact of national
fiscal and monetary
policy on
performance
What should a company consider when assessing performance?

• Culture
• Economics
• Competitive forces
• Politics
• Technology
• Funding
• Legal factors

Slide 81
Organisational culture
• Values
• Attitudes
• Norms
• Expectations

“the way we do things round here” Handy

Slide 82
Levels of Culture

• Basic – which guides behaviour within the

organisation
• Overt – expressed in the organisation and
members
• Visible – style of office and dress rules etc

Slide 83
Question practice – end of Chapter 6

You
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Q20

Slide 84
Chapter 7 Study Text Chapter 7

Other
environmental and
ethical issues
Stakeholders:

• Customers – connected
• Suppliers – connected
• Competition – external
• Employees – internal
• Local Community – external

Slide 86
Stakeholder mapping Matrix
Low Interest High

Low
Minimal Effort Keep Informed
(-) (-)
Power
Keep Satisfied Key Players
High (-) (+)

(+)/(-) support/oppose new strategy

Slide 87
Position in Matrix: (Open to discussion)
• Customers – High power, high interest
• Suppliers – Low power, high interest
• Competition – Low power, high interest
• Employees – Low power, high interest
• Local Community – Low power, high interest

Slide 88
Views on Stakeholders
Strong View Weak View
• All stakeholders have • Management should
legitimate claim on focus on enhancement of
management shareholder wealth
• Management should • Management should only
consider other
adopt a balanced
stakeholders if assisting
approach the core objective

Slide 89
Ethics and the organisation

Sources of pressure Scope

• UK government • Treatment of
stakeholders
• EU
• Consumers • Green issues

• Employees • Support for the

disadvantaged
• Pressure groups
• Dealing with unethical
entities
Slide 90
Corporate Ethics

Two approaches Considerations

• Organisation exists • Who are stakeholders?
to maximise • Implications?
shareholder wealth • Rights?
• Organisation
should benefit all • Considered rights?
stakeholders • Honest dealings?
• Compensation?
• Consequences?

Slide 91
Professional Ethics
• Objectivity
• Professional competence
• Professional behaviour
• Technical standards
• Integrity
• Confidentiality

Slide 92
Ethical codes

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

Slide 93
Question practice – end of Chapter 7

You
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Q21

Slide 94
Chapter 8 Study Text Chapter 8

Management
accounting and
information systems
Characteristics of management information

Strategic Planning

Tactical Mgt and control

Operational control

Slide 96
Information at different levels
• In the exam you must be able to identify the key
features of information at different levels in the
organisation

• The differences relate to:

– The nature of the role/tasks
– The nature of the decision making
– The format, source and level of detail

Slide 97
Lecture example

Strategic •New outlets

•E-commerce strategy

Tactical •Pricing
•Promotion strategies

Operational •Staff rota

•Inventory replenishment

Slide 98
Management Information Systems (MIS)
• In relation to the information issues raised in
Chapter 1, organisations must develop a range
of appropriate MIS

• The design and selection of the MIS system

needs to take into account the information needs
of the organisation

Slide 99
Question practice – end of Chapter 8

You
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Q22

Slide 100
Chapter 9 Study Text Chapter 9

Sources of
management
information
Information

…is data that has been processed in a way to be

meaningful and useful to its recipients.

Information is data with added business value.

Information systems collect, process and

provide information for use within the
organisation.
Slide 102
Sources of organisational information

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

Slide 103
Sources of organisational information

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

Slide 104
The Internet
• The Internet – an international network of
networks, both commercially and publicly
owned

• E-commerce – the process of buying and selling

using computer mediated communications

Slide 105
Question practice – end of Chapter 9

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Q23 Q24

Slide 106
Chapter 10 Study Text Chapter 10

Recording and
processing methods
and management
reports
Lecture example – Security # 1
Suggest ways in which computer facilities and
equipment can be physically protected.

Slide 108
Answer
a) Secure location
(i) locked doors, access cards, security guards, reception
personnel, keypad access
b) Personnel controls
(i) ID cards – including photograph
(ii) sign in/out procedure
• IT
(i) alarm systems
• Portable equipment
(i) register to include booking out procedures,
barcoding/postcode marking
• Checking
(i) equipment audits

Slide 109
Lecture example – Security # 2
• How might unauthorised access to a computer
system be prevented and, if it cannot be
prevented (and 100% prevention is unlikely),
how the offenders might be discovered and
apprehended?

Slide 110
Answer
a) Hardware
(i) card access to rooms,
(ii) firewall computers,
(iii) CCTV
• Software
(i) passwords,
(ii) virus checkers
(iii) computer access logs
(iv) file access logs
• Organisational arrangements
(i) internal audit
(ii) division of duties

Slide 111
Viruses
• A virus is a piece of software which may damage
the software and data held on the computer.
• Writing, distributing or planting viruses is an
offence under the Computer Misuse Act.
• Cheap, commercial, anti-virus software is available
from many sources.
• Many organisations also install firewalls on
computers connected to the internet.

Slide 112
Question practice – end of Chapter 10

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Q25

Slide 113
Chapter 11 Study Text Chapter 11

Performance
hierarchy
The performance hierarchy

Vague Timeless
• Vision
• Mission
• Goals
• Objectives Specific Timebound

Slide 115
Mission / mission statements

• Provides rationale as to why an organisation

exists
• States long term direction
• Effective when all members work towards
rather than against its main principles

Slide 116
An effective mission should contain:

• Campbell et al
– Purpose
– Strategy
– Policies & Behaviour Standards
– Values & Beliefs

Slide 117
Mission Statement Examples

Purpose Profit, service, to be the best

Strategy Quality, cheap, global

Open door policy

Behaviour standards

Animal testing, staff welfare,

Values & beliefs environment

Slide 118
Mission statements

Advantages Criticisms

• Nature • Vague/meaningless
• Common culture • Not representative
• Focus • Implementation needed
• Goal congruence

Slide 119
The role of objectives
• S - specific

• M - measurable

• A - agreed

• R - realistic

• T - time bound

Slide 120
Objective setting

Mission
Vertical consistency

Horizontal Consistency

Slide 121
Gap analysis

Objective
Objective
eg profit GAP

Forecast

Time

Slide 122
Ansoff’s Matrix
PRODUCT
Present New
Present Withdrawal
Product
Consolidation
Development
Penetration
MARKET
Diversification
Market
Development • Related
New • Unrelated

Slide 123
Question practice – end of Chapter 11

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Q26

Slide 124
Chapter 12 Study Text Chapter 12

Scope of strategic
performance
measures in the
private sector
Introduction
• Aim of private company is to maximise
shareholder wealth
• Analysis can be performed across 4 areas:
 Profitability
 Liquidity
 Gearing
 Shareholders’ ratios

Slide 126
Financial analysis Examined Dec 2007

• Profitability and return

• Debt and gearing Must compare
• Liquidity Different firms
• Shareholders ratios and time periods
P/E, div cover, div
yield, EPS, div cover
ROCE, margins, asset turnover
Debt/equity, interest cover
Receivables/payables/inventory
days, current ratio, acid test
Slide 127
Basis for comparison
• Over time
• Against other companies
– Same sector?
– Different sector?
• Industry averages
• Against other measures

Slide 128
Limitations/strengths of ratios
• Limitations • Strengths
– Need a comparator – Easier to understand than
– Must be clearly defined absolutes
– Inflation effects – Changes over time can be
– Differing bases seen
– – Gives context
Historical
– Can help create targets
– Summary of results

Slide 129
Profit as a measure

Advantages Disadvantages
• Simple • Easily manipulated
• Relates to • Short term
shareholder wealth enhancement
• Absolute measure

Slide 130
ROCE/ROI

Profit before interest and tax x 100%

Average capital employed.

Advantages Disadvantages
• Relative measure • Reliance on profit
• Easily understood • Which investment
base to use?
• Relates to asset
consumption

Slide 131
RI Examined Dec 2007

Controllable divisional profit – notional interest charge

(Head Office Investment x ROI)

Advantages Disadvantages
• Fewer dysfunctional • Profit based absolute
decisions measure
• Can account for risk • Investment base?
• Determining ROI?
• Inter-divisional
comparisons difficult

Slide 132
NPV calculations
Must be
• Future
Cashflows • Incremental
• Cash

Exclude inflation Include inflation

• Use current/real cashflows • Use money/nominal
cashflows
• Discount at real rate, r
• Discount at money rate, m

1+m = (1+r) x (1+i)

Slide 133
Sensitivity analysis Examined Dec 2007

How much can NPV change before NPV is negative?

Sensitivity = NPV total

PV cashflow

NPV total = 1,148

PV of resale value = 4,000 * DF @12%

=4,000 * 0.636

=2,544

Slide 134
Sensitivity
= 1,148
2,544

= 45%

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

Slide 135
Question practice – end of Chapter 12

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Slide 136
Chapter 13 Study Text Chapter 13

Strategic
performance issues
in complex business
structures
Porter’s 5 Forces Examined Dec 2007

Threat of
New
Entrants

Bargaining Bargaining
Competitive
Power of Power of
Rivalry
Suppliers Customers

Substitute
Industries

Slide 138
Lecture Example
• Using the model identify the forces and their
strength for a clothing manufacturer

Slide 139
Lecture Example
• Buyers – retail stores, strong
• Suppliers – staff (labour), manufacturers (fabric
and equipment) weak
• Substitutes – Other manufacturers, strong
• New Entrants – Easy to set up on basic level
(China currently entering market), strong
• Competition – Brands, strong

Slide 140
Lecture Example
• Buyers – Value adding activities, keeping up
with trends
• Suppliers – Single supplier deals regularly
reviewed
• Substitutes – Build reputation (no subs for
clothing!)
• New Entrants – Build reputation
• Competition – Branding or niche products

Slide 141
BCG Matrix

High Relative Market Share Low

High

Market
or
Industry Star Question Mark
Growth
Rate

Low Cash Cow Dog

Slide 142
Uses of The BCG

• Internal balance
• Assess trends
• Evaluate competitors
• Evaluate risk

Slide 143
Ansoff’s Matrix

PRODUCT
Present New
Present
Market Product
Penetration Development
MARKET
Diversification
Market
Development • Related
New • Unrelated

Slide 144
Question practice – end of Chapter 13

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Slide 145
Chapter 14 Study Text Chapter 14

Divisional
performance and
transfer pricing
issues
EVA Examined Dec 2007

Calculate NOPAT – interest rate (WACC) x net assets

(or capital charge)
NOPAT
• Take reported profit after tax
• Adjust for non-cash items
• Add back net interest cost
• Economic depreciation is a cost
Net Assets – usually replacement cost
• Shareholder funds plus long term debt

Slide 147
Example
Profit after tax = 160, depreciation = 30, tax rate = 30%,
interest = 20, WACC = 15%,
replacement cost of net assets = 1,100

20X8
NOPAT = 160 + 30 + 20 x 0.7
= 204
Net Assets = 1,100
EVA = 204 – 15% x 1,100
= 39

Slide 148
EVA
Advantages  Disadvantages X
• Measures value added to • Lots of adjustments to
Shareholders profit
• Cash based • Historic measure
• Easy to communicate • Relies on estimate of
interest rate
• Difficult to make
comparisons

Slide 149
Aims of Transfer Pricing System
• Controllability
– one product one price and easily agreed, simplicity

• Goal congruence
– divisional decisions benefit whole company

• Autonomy
– motivation

• Performance evaluation
– ensure reward goes where it’s due
Remember: Does the company want the transfer to take
place?

Slide 150
A transfer pricing situation – The Brewery Group

Beer
Beer

Rooms

Slide 151
Avoiding dysfunctional behaviour
• Set price to earn a return in one division and
incur cost in another
• Enable profit centres are measured
commercially
• Allow profit centre managers to agree on
transfer

Slide 152
Methods of setting transfer price
• Market price
– Use external market price where there is an external
market
– Adjusted market price to reflect savings

• Cost Based Approach

– Actual v Standard
– Standard full cost plus %
– Standard variable cost plus %

Slide 153
Selling Division transfers at MC
• When is this desirable?
– If there is no external market for Division S
– If there is an external market for S and it has spare
capacity

• Who benefits?
– If there is spare capacity then the whole group should
benefit

• Reaction of the Selling Division?

– S will be unhappy with a TP at MC

Slide 154
Methods of setting transfer price
• Dual pricing
– Use variable cost and transfer share of profits at end of
year to supplying division
– If external market exists
• charge receiving division variable or marginal cost
• supplying gets market price

• Two Part Tariff

– Variable cost for transfer plus fixed costs at year end

• Opportunity Cost Based Approach

Slide 155
Opportunity Cost Based Approach
MinimumTP (accepted by transferring division)
• If external market for intermediate product
– if S is at full capacity, then it may have to forego
income from the external market and the
opportunity cost will be lost contribution
– if S has spare capacity - it will not be forgoing any
income and hence the transfer price will be at MC
• No external market
– no opportunity cost - transfer at MC

Slide 156
Opportunity Cost Based Approach

Maximum TP (accepted by receiving division)

• Lower of
– External Market Price and
– Net revenue in receiving division

• Where net revenue =

– final selling price LESS own divisional costs

Slide 157
Transfer pricing in practice
• Negotiation
• Head Office intervention
• Head Office cost allocations

Slide 158
International Transfer Pricing
• Global company with many subsidiaries around
the world
• Taxation consideration
• Possibly manipulate pricing system to earn high
profits in a low tax country
• But tax authority impose ‘Arm’s length’ price

Slide 159
Question practice – end of Chapter 14

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Slide 160
Chapter 15 Study Text Chapter 15

Scope of strategic
performance
measures in
not-for-profit
organisations
Not-for-profit organisations
• Prime goal for assessed by economic
measures
– Profit making may be part of this activity however

• Examples
– Charities, Councils, Forces, Colleges, NHS

Slide 162
Public Sector bodies
• Citizens Charter
– Set and published standards
– Quality via privatisation
– League tables
– Complaints procedures
– User to consumer

Slide 163
Lecture Example
• Highlight problems that may occur when using
league tables
– Tunnel Vision
– Lack of true comparability
– Creative accounting
– Self fulfilling prophecy

Slide 164
VFM
example – washing up liquid
Economy – more clean plates per $
Efficiency – more clean plates per squirt
Effectiveness – plates as clean as they should be

Slide 165
Question practice – end of Chapter 15

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Slide 166
Chapter 16 Study Text Chapter 16

Behavioural
aspects of
performance
measurement
Performance measurement and behaviour

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

Slide 168
 Management styles and motivation

• Hopwood’s management styles

– Budget-constrained
– Profit-conscious
– Non-accounting

• Motivation
– challenging but achievable
– goal congruence

Slide 169
Question practice – end of Chapter 16

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Slide 170
Chapter 17 Study Text Chapter 17

Alternative views
of performance
measurement
Balanced Scorecard

Customer
Customer Internal
Internal

Innovation
Innovation && Financial
Financial
Learning
Learning

Slide 172
Advantages of Balanced Scorecard
• Considers all strategic measures
• Holistic view
• Avoids short term arguments
• Considers business activity linkages
• Forces organisation to look externally
• Useful for risk assessment

Slide 173
Balanced Scorecard

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

Slide 174
The Performance Pyramid

Lynch & Cross

Corporate Vision

Market Financial

Customer Productivity
Flexibility
Satisfaction

Quality Delivery Cycle time Waste

Operations

Slide 175
Performance pyramid
• Derives from the idea that the organisation
operates at different (management) levels
• Each of these levels has different concerns
• But they should support each other in achieving
business objectives

LINKAGES

Slide 176
Problems of PM in Service Businesses

• S imultaneity
• H eterogeneity
• I ntangibility
• P erishability

Slide 177
Fitzgerald and Moon’s Building Blocks

Dimensions
Dimensions
base
basemeasure
measureonon
Dimensions
Dimensions
Profit
these
theseareas
areas
Profit
Competitiveness
Competitiveness
Quality
Quality
Resourceutilisation
utilisation
Resource
Flexibility
Standards/Targets
Standards/Targets
Flexibility
Innovation
Innovation ensure
ensureequity/fairness
equity/fairness
Standards
Standards Rewards
Rewards
Ownership
Ownership Clarity
Clarity
Achievability
Achievability Motivation
Motivation
Rewards
Rewards
Equity
Equity Controllability
Controllability need
needto
tobe
beclear
clear

Slide 178
Question practice – end of Chapter 17

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Slide 179
Chapter 18 Study Text Chapter 18

Non- financial
performance
indicators
Problems with Financial Performance Indicators

• Only monetary terms

• Focus on past
• Not full picture
• Short term focus

Solution = NFPIs

Slide 181
Value of NFPIs

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

Slide 182
Problems of NFPIs
• Information overload
• Detail vs. big picture
• Out of date

Must be linked to financial measures

Balanced Scorecard

Slide 183
Lecture Example 1
• In the role of coffee shop manager, suggest
some NFPI for your business
– Returning customers
– Comments
– Occupancy
– Knowledge of staff
– New product take up
– Stock outs

Slide 184
Question practice – end of Chapter 18

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Slide 185
Chapter 19 Study Text Chapter 19

Predicting and
preventing
corporate failure
Predicting business failure Examined Dec 2007

• Declining industries
– End game
– Product revitalisation

• Declining companies
– Slatter’s ten symptoms

• Measures
– Liquidity
– Z score
– Argenti’s A score

Slide 187
Strategies for improvement
• Identify the causes of decline and strategies to
deal with them
• Strategic drift
– Counteracting

• Review leadership

Slide 188
Question practice – end of Chapter 19

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Slide 189
Chapter 20 Study Text Chapter 20

Current
developments in
management
accounting
techniques
Changing role of the Management Accountant. Burns and Scapens

• Provision of information that is;

– Forward looking
– External
– Assists meeting of objectives

• Links to strategic core

– Planning and control

• Changes arose due to

– Technology
– Management structure
– Competition

Slide 191
Modern Japanese techniques

• TQM

• JIT

• Target costing

• Kaizen costing

• Continuous improvement

Slide 192
Just In Time

Supplier
SupplierBase
Base

JIT
JITpurchasing
purchasing Manufacturing Resources
Planning (MRP 2)
Raw
Rawmaterial
material Advanced Manufacturing
&&components
components Technology

Work-in Total Quality Management

Work-inProgress
Progress
Computer Integrated
Manufacturing
Finished
FinishedGoods
Goods

Demand
DemandPull
Pull
Customers
Customers
Slide 193
Target costing

To reduce the life-cycle costs of new products

through cost reduction:
• Pre-production planning
• R&D

Slide 194
Implementing target costing
a) Define product spec & sales volume
b) Target selling price
c) Required profit
d) Target selling price X
less: target profit (X)
Target cost X
e) Estimated cost
f) Estimated cost – target cost = cost gap
g) Reduce costs or negotiate with customer

Slide 195
Question practice – end of Chapter 20

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Slide 196
Chapter 21 Study Text Chapter 21

Current issues and

trends in
performance
management
Value-based management

• Value mind set

• Value drivers

– Any variable that affects the value of the company

• Management processes

Slide 198
Recently developed performance management frameworks

• Six Sigma • Performance Prism

– Define – Stakeholders satisfaction
– Measure – Strategies
– Analyse – Processes
– Improve – Capabilities
– Control – Stakeholder contribution

Slide 199
Question practice – end of Chapter 21

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Slide 200