APM Revision Notes Nov 2023

ACCA
Strategic Professional
Advanced
Performance
Management
Revision Notes
December 2023 Exam
Roy Goh
MFin, FCCA, CA, ACTA
crashroy@hotmail.com
1
Content
APM DECEMBER 2023 EXAM FOCUS------------------------------------------ 3
RECENT EXAM ANALYSIS ----------------------------------------------------- 8
FORMULAE SHEET --------------------------------------------------------- 12
1. ABSORPTION COSTING ---------------------------------------------- 16
2. ACTIVITY-BASED COSTING ------------------------------------------ 17
3. ACTIVITY-BASED MANAGEMENT ------------------------------------ 18
4. MARGINAL COSTING ------------------------------------------------- 19
5. TARGET COSTING ----------------------------------------------------- 20
6. LIFE CYCLE COSTING ------------------------------------------------- 21
7. VALUE ANALYSIS ----------------------------------------------------- 23
8. BUSINESS PROCESS RE-ENGINEERING ---------------------------- 24
9. KAIZEN COSTING ----------------------------------------------------- 25
10.LEAN MANUFACTURING AND JUST-IN-TIME ---------------------- 26
11. TOTAL QUALITY MANAGEMENT ------------------------------------ 28
12. QUALITY COST------------------------------------------------------- 31
13. VALUE CHAIN ANALYSIS ------------------------------------------- 32
14. MCKINSEY’S 7S ------------------------------------------------------ 34
15. BENCHMARKING----------------------------------------------------- 37
16. PERFORMANCE MANAGEMENT INFORMATION SYSTEM --------- 39
17. ENVIRONMENTAL MANAGEMENT ACCOUNTING ----------------- 44
18. VISION AND STRATEGY -------------------------------------------- 46
19. STRATEGY PLANNING MODELS ------------------------------------ 49
20. DECISION-MAKING WITH CERTAINTY ---------------------------- 58
21. DECISION-MAKING WITH UNCERTAINTY ------------------------ 60
22. BUDGETING ---------------------------------------------------------- 66
23. FORECASTING AND VARIANCES ----------------------------------- 72
24. PERFORMANCE EVALUATION -------------------------------------- 78
2
APM DECEMBER 2023 EXAM FOCUS
1. Performance Measurement and Appraisal for FPO, Service Provider,
Manufacturer or a NFPO. Identify objectives in the Mission Statement (MS).
Link the MS to Critical Success Factor (CSF) and Key Performance Indicators
(KPI). Suggest, justify and/or recalculate KPIs using Balanced Scorecard (BSC),
Performance Pyramid (PP) or Building Block Model (BBM) to meet MS when
PEST factors change. Discuss NFPO performance using VFM 3E. Do not apply
VFM 3E for FPO.
2. Use both Financial Performance Indicators (FPI) (such as EVA, NPV, IRR,
EPS, Share Price, RI, ROI, ROCE and its weaknesses leading to dysfunctional
behaviour) and Non-Financial Performance Indicators (NFPI) including
statistics on quality and efficiency to give a comprehensive performance
measurement and suggest improvements. Be familiar with ratios including
Inventory days, AP days, AR days, operational gearing.
3. The use of Information System (IS) to integrate and drastically improve

current traditional processes i.e. Business Progress Redesign (BPR). Be familiar
with ERPS + NFPI = SEMS, MIS and EIS for performance dashboard. Suggest
and calculate new KPIs. New IS will allow change from existing AC to ABC. Use
new RFID system for improvement of efficiency. Use ABM to eliminate NVAA and
NVAC, apply Target Costing to close cost gap. The case may describe complex
business with large amounts of random data available, link them to calculate new
KPIs according to the CSF or MS. Know the opportunities and challenges of Big
Data, Artificial Intelligence (AI) and Data Analytics to manage business to
meet the MS. Evaluate the change from functional departments to teams with
IS. Change traditional Incremental Budgeting to Rolling Budget, ZBB and ABB
link to Hopwood style of budgeting.
4. Use BCG, SWOT or Porter 5 Forces to analyse the competitive and strategic
position of the company and products so as to suggest appropriate changes to
existing strategies and processes to meet strategic objectives. Use Lifecycle
Costing and Target Costing. Benchmark divisional performance using league
tables.
5. Quality improvement programs using TQM, moving to JIT purchasing and

production, Kaizen and Six Sigma on DMAIC for an existing process. Be
familiar with Quality Cost, Prevention Cost, Appraisal Cost, Internal Failure Cost
and External Failure Cost. 5S in lean manufacturing.
6. Fairness of current reward system on salary and bonus in Staff Appraisal.

Identify dysfunctional behaviour. Use Controllable KPIs (operational
variances), Responsibility Accounting i.e. Cost Centre, Profit Centre,
Investment Centre, apportioned Head Office Costs. Know the difference between
relevant profit and controllable profit. Dysfunctional behaviour in using ROCE as FPI
and ways to improve staff motivation and appraisal process.
7. Transfer Pricing (TP) and Responsibility Accounting i.e. Cost Centre,

Profit Centre and Investment Centre. Evaluate PEST factors in International TP.
8. Environmental Management Accounting (EMA) and the use of in Activity

Based Costing (ABC) and Lifecycle Costing (LCC) for environmental cost.
Finally, GOOD LUCK and after your exam, please email me at

crashroy@hotmail.com on the topics that were examined. Thank you!
3
FORMAT OF THE EXAM PAPER
Advanced Performance Management (APM) will be three hours and 15 minutes
computer-based exam with two sections and all questions are compulsory
containing a total of 80 technical marks and 20 Professional Skills marks.
Section A – one compulsory question (40m + 10m) 50 marks

Section B – two compulsory questions (20m + 5m) 25 marks each
Section A
Section A of the exam will always be a 50-mark case study based on an
organisation in a particular business context. The 50 marks will comprise of 40
technical marks and 10 professional skills marks. All the professional skills will be
examined in Section A.
It is likely to include the organisation’s mission statement and strategic objectives

and candidates will be expected to be able to assess the methods by which the
organisation is controlling, managing, and measuring performance in order to
achieve its objectives. This assessment could include an evaluation of the
organisation’s performance report, its information systems, new strategies or
projects and its performance management and measurement systems. Candidates
should understand that they will be expected to undertake calculations, draw
comparison against relevant information where appropriate and be prepared to
offer alternative recommendations as needed.
Management accountants are required to look across a range of issues which will
affect organisational performance, the achievement of objectives and impact on
operations and so candidates should expect to see Section A of the exam focus on a
range of issues from across syllabus sections A, B and C. These will vary depending
on the business context the case study in Section A is based on.
Section A questions will ask candidates to produce a response in a specific format,

for example a report to the Board of Directors
Section B
Candidates will be required to answer a further two 25-mark questions in Section B
of the exam, which will normally comprise of scenario-based questions. The 25
marks will comprise of 20 technical marks and 5 professional skills marks. Section B
questions will examine a combination of professional skills appropriate to the
question. Each question will examine a minimum of two professional skills from
Analysis and Evaluation, Scepticism and Commercial Acumen.
One of the Section B questions will come mainly from syllabus section D, however
the other Section B question can come from any other syllabus section.
Section B questions will also require candidates to address a range of issues

influencing performance of organisations in specific business situations
Date of Exam: 6 December 2023 Wednesday
4
Each Strategic Professional Options examination will comprise of 80 technical marks
and 20 professional skills marks. The professional skills marks will be split across
the examination with 10 professional skills marks available in Section A and 5
professional skills marks available in each of the Section B questions.
The decision to introduce this change continues ACCA’s focus on ensuring that the
professional accountants of the future have the right blend of technical and
professional skills, coupled with an ethical mindset. By incorporating more
professional skills marks into the Strategic Professional Options examinations, ACCA
will be able to blend these professional skills and qualities with the technical
mastery required for the different specialisms of audit, financial management,
performance management and taxation.
Professional skills
There are four key professional skills which will be assessed in the Strategic
Professional Options examinations:
▪ Communication
▪ Analysis and evaluation
▪ Scepticism
▪ Commercial acumen
Each of the four professional skills has a number of leadership capabilities

associated with it. The Strategic Professional Options examinations will use these
capabilities to allocate marks in each examination question as appropriate
The professional skills and capabilities are:
COMMUNICATION
■ Inform
■ Persuade
■ Clarify and simplify
In summary, this means candidates have to express themselves clearly and

convincingly through the appropriate medium, while being sensitive to the needs of
the intended audience. This means responding in a professional manner and
adhering to any specific instructions made.
ANALYSIS AND EVALUATION

■ Investigate
■ Consider
■ Assess and apply
■ Appraise
In summary, this means candidates firstly have to thoroughly investigate and

research information from a variety of sources and logically process it with a view
to prioritising activities and arriving at an appropriate conclusion or
recommendation. This analysis should form part of a comprehensive evaluation of a
matter where candidates have to carefully assess situations, proposals, and
arguments in a balanced and cogent way, using professional and ethical judgement
to predict future outcomes and consequences as a basis for sound decision-making.
5
SCEPTICISM
■ Explore
■ Question
■ Challenge and critically assess
In summary, this means candidates have to explore, question and challenge

information and views presented to them, identifying if all information is available
or whether there may be underlying bias, to fully understand business issues and
establish facts objectively, based on ethical and professional values.
COMMERCIAL ACUMEN
■ Demonstrate awareness
■ Recognise key issues and use judgement
■ Show insight
In summary, this means candidates have to show awareness of the wider business
environment and external factors affecting the business and use commercially
sound judgement and insight to resolve issues, exploit opportunities and offer valid
advice and realistic recommendations.
What to expect in the APM Exam?
Q1 will include 10 professional marks allocated to report format, style and structure of
answer 1m on communication and the remaining 9m on analysis and evaluation,
scepticism and commercial acumen. However, ACCA do not indicate the allocation of
9 marks among these professional skills. Students are advised to keep an open mind
and read the question carefully.
Communication
Section A questions in APM always ask for a report requested by an organisation’s
senior management to address key matters facing the organisation.
This report should have appropriate report headings, sub-headings and an

introduction which explains the content of the report to follow. The candidate
response in the body of the report should look professional, use appropriate
language and be clear and effective. It is vital that the report content is relevant to
the requirements, including adhering to any specific instructions given in the
examination question.
Analysis and evaluation

All APM questions will include this professional skill as it is fundamental to
performance management. It is common for APM questions to focus on the
evaluation of a report, method, model, system, or technique, of which part may be
the analysis of some data or information. It is key to remember that in APM any
analysis or evaluation is contextual and must take into account the situation in
which the organisation in the question operates.
Analysis can be demonstrated by appropriate use of the data/information to

determine suitable calculations to support your evaluation. The ability to draw
appropriate conclusions from the data/information analysed should be
demonstrated, so that appropriate responses can be designed, and advice given.
Identifying where data appears to be omitted or where further analysis is needed to
make a recommendation is also important, as that means a full evaluation cannot
be performed due to the lack of that data. It is key that decision-makers are made
aware of this.
6
An evaluation is a balanced appraisal to determine the impact of a course of action,
for example, changing an organisation’s reward system. Part of that is to
demonstrate reasoned judgement to consider all relevant factors applicable, decide
what to prioritise and then come to a suitable and justified conclusion.
Scepticism
Having a questioning approach is key for this skill. That questioning needs to lead
to effective challenges of information, of evidence provided and assumptions
stated. This includes the ability to identify contradictory evidence and remaining
sceptical about information that has been provided in the scenario. APM often bases
questions on theoretical performance management models, which include
assumptions and therefore may not perfectly fit an organisation’s situation and
candidates need to be prepared to raise such issues.
APM often has stakeholders in question scenarios making statements about their
beliefs and perceptions of a matter and candidates can be required to challenge
those statements. These challenges, however, cannot simply be in the abstract.
Reasons for issues and problems are needed before challenges can be upheld and
deemed appropriate. All of this means that candidates need to apply professional
judgement to draw conclusions and make properly informed decisions which are
appropriate to the business.
Commercial acumen
All APM questions are set in commercially realistic scenarios. These can range from
private to public sector organisations and also to not-for-profit organisations and
regulated industries. This requires candidates to understand what does and does
not work in such an organisational context, therefore any advice or
recommendations have to be practical and plausible in the given situation.
To demonstrate this skill effectively candidates will need to use the question
scenario information to draw evidence that relates to the organisational context but
also take any other practical considerations into account. Organisations do not
operate in a vacuum so candidates need to look at external constraints and
opportunities where relevant and also consider the validity/reasonableness of any
assumption that the organisation may be working under, given the external
environment. Awareness of internal constraints within an organisation should also
be accounted for.
To ensure that candidates take a considered forward-looking approach recognition

is needed of the possible consequences of past and future actions so that the right
choices can be exercised.
7
RECENT EXAM ANALYSIS
Examiner: Alex Watt
Sep-19 Dec-19 Mar-20 Jul-20

Q1 Arkaig Achilty
50m Assess performance report Performance measurement using Evaluate performance Report, Performance measurement and
Calculate EVA and its advantages ROI and RI using controllable and suggest 4 KPIs, cal ROCE, Inv management of new technique to meet
Information for Performance uncontrollable costs. Use BCG to days, drivers for change in role of mission statement. Suggest changes to
hierarchy strategic, tactical, recommend 2 KPI. Usefulness of accountants – Burns and Scapens KPI and justify reason to change.
operational quality information to the company’s with new ERPS with data Evaluate if KPI is sufficient. New IS and
Value chain analysis and KPIs executives and its communications. warehouse, 3V in Big Data its problems
Q2 Veyatie Totaig
25m Difficulties in interpreting NFPI on Calculate and evaluate if Performance targets in VBM, Decision making using EV and one-off
customer satisfaction score in performance measures are identify value drivers.
percentage % over two years appropriate and sufficient for the
Problems of BSC industry. Evaluate Competitive Calculate EVA, NOPAT, CE b/d
Benchmarking used in the company. and WACC.
How BPR can improve processes.
Q3 Daldom Coruisk
25m Mendelow Stakeholder analysis Corporate failure using Argenti A Moving to JIT purchasing and Compare company’s performance
interest and power on 3 given score with score of 28 on a bank. production, poor quality DM, management system with a model
stakeholders Identify symptoms of failure. delivery and remuneration. framework. Align reward system with
Risk appetite to make decisions Problems of qualitative models. MS
Calculate EV for risk neutral and Cost of quality report and impact
comment from move to JIT.
8
Examiner: Alex Watt
Sep-20 Dec-20 Mar-21 Jun-21

Q1 Deeland Police Fiag
50m Ratios: ROCE, RI, Inv TO days, CSF and KPI for NFPO, VFM and Performance Reporting, Mission Music service provider, Budgeting on
CR, Div per share. BSC customer NFPI to measure NFPO. Use of Statement, PEST, planning & Incremental, Rolling, ZBB, ABB, Kaizen
and learning growth perspective league table operational variances, HRM Costing, Interaction between budgeting
impact on employee behaviour, and costing, IS on RFID,
report format.
Evaluate KPI, General use of NFPI, Big

Data, Benefits of integrating customers
loyalty cards and online purchase data
with company’s social media
Q2 Clonyard Harray
25m McKinsey 7S on soft elements for Airline Industry. Disadv of Mendelow stakeholder analysis, Performance Pyramid, Financial and
effective change. ERPS to Inv benchmarking. Co press release Risk appetite and decision Non-financial performance indicators
management system NFPI compared against performance making (FPI & NFPI),
data, evaluate if NFPI are misleading
Q3 Roan
25m Mendelow Stakeholder analysis, Calculate CPU in AC and ABC. Use BSC 4 perspectives, problems Risk and uncertainty in fashion
problems of performance ABM to manage business with implementing BSC with business, Risk appetite of different
measurement and management existing Information System stakeholders, suitability of ERPS
of JV
Education department, VFM for NFPO,

problems in using league table
Gaddon
Corporate failure, G score, indicators,
leading factors
9
Examiner: Alex Watt

Q1 Freuchie Calavie
50m Online fashion retailer evaluate BSC, PEST factors, suggest KPI, PEST factors on budgeting, NFPO, Calculate ROI, RI and comment on their
current performance report on performance evaluation with bonus VFM, BSC on financial appropriateness to measure
narrative, FPI, NFPI, Operational scheme, discuss strategic, tactical perspective performance. BCG matrix, suggest KPI
gearing, problems of and operational information system for each SBU. Comment on MIS for
performance measurement effective communication.
(tunnel vision, myopia, sub-
optimisation, gaming), what gets
measured gets done
Q2
25m Travel agency using Building Performance Pyramid, problems of BCG Matrix on 4 division(theme Use Performance Pyramid to comment
Block Model on dimensions to performance measurement including park, restaurant, hotel and bus on performance report including
improve performance on its 3 myopia, ossification, gaming tour), suggest KPI and calculate problems such as tunnel vision, etc. Use
divisions, Benefits of an realtime EVA, problems of BCG matrix of JIT to improve performance.
unified database system
Q3 Pattack Breac
25m Parcel delivery company on BPR ROCE, ROI and RI, discuss Hopwood Responsibility accounting Use BBM reward block to comment on
to improve process, Cost Benefit management style on budgeting between retailer and performance appraisal
Analysis, appraisal system on manufacturer, VBM for
proposed bonus scheme performance measurement
Sgoltaire
Environmental management BBM on dimensions and Comment on “wastage awareness” using
accounting using input/output and standards (not rewards), suitable CSF and KPI. Calculate EVA.
lifecycle accounting financial impact on cloud
computing
Vaa
Argenti A score, discuss why Transfer Pricing
qualitative data alone is insufficient
to determine corporate failure
10
Examiner: Alex Watt

Q1 Belivat Affric Chairn
50m Manufacturer using Incremental Rolling, Incremental, ZBB to Performance Report, what gets Six Sigma, Kaizen, JIT and fit between 3
budget change to ZBB and different divisions. Evaluate ABB. measured gets done, standard systems, Cost Benefit Analysis of IS,
Kaizen. Does Kaizen fit ZBB? Evaluate ERPS. deviation, mean.
CBA of RFID at warehouse.
Q2 Eck ERK Gare

25m Manufacturer using kE and kD, Performance pyramid (PP) to solve Data analytics, performance BSC, VFM, League Table
proposed EBITDA and EVA as problems in manufacturing management of service provider
KPI. EVA as proposed reward company. Evaluate PP to improve
scheme to improve performance. internal efficiency.
Q3 Scye Morlich Avich

25m Architect firm using FPI wish to Benchmarking using 4 KPIs to Environmental Management Performance measurement KPI, VBM,
use VBM including EVA. Project compare with competitor Shiel. Accounting, quality cost, lifecycle calculate EVA
appraisal using NPV and MIRR. BPR to improve current process for costing
customized orders
Evaluate BBM impact on KPI. Calculate and compare AC and

Evaluate reward scheme using BBM. ABC. Compare ABM and VBM.
Porter’s 5 Forces on competitive,

supplier power, suggest and justify
KPIs. Risk appetite for different
stakeholders (VC and mgt) in
decision making for new project
11
Present value table
Present value of 1 i.e. (1 + r)-n
Where r = discount rate
n = number of periods until payment
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
________________________________________________________________________________
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 2
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 3
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 4
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 5
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 6
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 7
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 8
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 9
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 10
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 11
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 12
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 13
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 14
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 15
________________________________________________________________________________
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
________________________________________________________________________________
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 2
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 3
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 4
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 5
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 6
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 7
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 8
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 9
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 10
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 11
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 12
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 13
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 14
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 15
12
Annuity table
Present value of an annuity of 1 i.e. 1 – (1 + r)-n
r
Where r = discount rate
n = number of periods
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
________________________________________________________________________________
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 2
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 3
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 4
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 5
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 6
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 7
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 8
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 9
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 10
11 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 11
12 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 12
13 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.103 13
14 13.00 12.11 11.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367 14
15 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8.559 8.061 7.606 15
________________________________________________________________________________
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
________________________________________________________________________________
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 2
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 3
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 4
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 5
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 6
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 7
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 8
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 9
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 10
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 11
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 12
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 13
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 14
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 15
13
Management Reports
With performance management systems and data analytics, the management

accountant will be able to produce performance reports that contains:
1. summarised information presented for the board and in detail if needed;

2. the mission statement and objectives of the organisation;
3. the needs of the users of the report such as for decision-making; and
4. avoiding the problem of information overload
It is common mistakes and misconceptions in the use of only numerical data used
for performance measurement. An ideal report should contain both financial and
non-financial, internal and external as well as long-term and short-term measures.
Therefore, the role of the management accountant will be crucial in providing key
performance information for integrated reporting to stakeholders
Report
To: [Board of Directors or CEO or CFO or Risk Management Committee]
From: [Accountant or Management Accountant]
Date: [Date of the exam]
Subject: [Performance Measurement or Management or KPI or Balance

Scorecard and Targets for the company. This is usually the main
requirement of the question. One line is sufficient]
Introduction
[Quick summary of the requirements in 3 – 4 sentences]
(i) Form a title from the requirement
[Your answers should be written in clear paragraphs with one line spacing in
between. Plan your answer and do not simply repeat from your memory of past
papers but apply to the case scenario in the exam. Repeat key words, names and
objectives in the mission statement so that you are seen as applying to the case.]
(ii) Form a title from the requirement
(iii) Form a title from the requirement
(iv) Form a title from the requirement
(v) Form a title from the requirement
Conclusion or Recommendation (if required)
14
The following factors commonly appear in the APM examination, please take note:
1. “Current, Existing, Traditional” means no good because it is insufficient, out-

dated, lack Non-Financial Performance Indicators (NFPI), no benchmarking, no
trend analysis, too detailed, no summarised numbers (in $’000), no percentages
(%), no cashflows, etc depending on the question.
Therefore, you need to suggest improvements!
2. Over-trading means the company is “buying” sales with low profit margins
which is unsustainable. Over-trading is hinted in the case by:
• High sales volume

• High sales revenue
• High COS
• Low profit margin
3. When the case scenario shows that the current system “fit” with the
organisational structure or the CEO, Managers and Employees are “delighted,
happy or pleased”, it means the current system is acceptable. Therefore, there
is no need to change that area.
4. When the:
• Economy is in recession = Co. must be risk averse
• Economy is growing = Co. must be risk seeking
• Economy has uncertainty = Co. must be risk neutral and investigate further
5. In a service industry, traditional financial measures such as ROCE (which is

asset base) are not appropriate. Therefore, we should use customer satisfaction
score, customer survey results and the Building Block Model to measure the
performance.
6. Value for money (VFM) is refers to the 3Es (Economy, Efficiency and
Effectiveness) when the business is Not-For-Profit Organisation (NFPO) but
when the business is a Profit-Seeking Organisation (PSO), it is not suitable to
apply the 3Es. The appropriate measures would be customer satisfaction,
quality and reliability of service or product, sales, profits and suitable
profitability measures.
7. Traditional methods such as:
Absorption Costing (AC) is preferred if it gives similar results as Activities Based

Costing (ABC),
Incremental Budgets and Annual Fixed Budgets are still suitable if the industry
is stable, low growth and past results are representative of future results.
8. Gross profit is controllable and is fair to use to assess the performance of the
manager, also suggest operational variances as a suitable measure.
9. When the examiner describes the company has many products, suppliers,
processes, it would mean that the company is complex and a simple
management accounting system is insufficient.
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1. Absorption Costing
The linking of all production costs to the cost unit to prepare a full cost per unit.
Cost + Profit = Selling Price
Cost can be determined in many ways such as:
• Production cost + Non Production Cost = Total Cost
• Direct Cost + Indirect Cost = Total Cost
• Prime Cost + Overhead = Total Cost
• Fixed Cost + variable Cost = Total Cost
• Price (or rate) x Quantity = Total Cost
The steps using absorption costing are:
1 Overhead costs are collected in various cost centres

Allocation: Specific overhead costs directly relating to individual cost
centres, for example, supervision, indirect materials.
Apportionment: General or common overhead costs like rent, heating,

electricity are incurred as a whole item by the company and therefore have to
be distributed to cost centres on some sharing bases like floor area, machine
hours, number of staff etc
2 Overhead Absorption is achieved by means of a predetermined Overhead

Absorption Rate.
a. Overhead Absorption Rate = Budgeted Overheads
Budgeted Activity
* Activity levels generally used by examiners are number of units,
labour hours or machine hours, which means overheads are
charged to units on these bases:
Number of Units: Single product environment
Labour Hours: Manual manufacturing operations
Machine Hours: Mechanical manufacturing operations
b. Absorbed overheads = OAR x Actual Activity
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2. Activity-Based Costing
The treatment of direct costs (prime costs) are the same in Ac and ABC. The main
difference is AC absorbs overheads on DLH and MH intensiveness while ABC
absorbs overheads on activities such as planning, scheduling, number of orders,
floor area, etc.
The steps involved in ABC are:

1. Identify an organisation’s activities.
2. Collect the cost of each activity into what is called cost pool (equivalent to
cost centre under traditional costing).
3. Identify the factors which determine the size of the costs of an activity. These
are called cost drivers.
Activity Possible Cost Drivers
Ordering number of orders
Material handling number of production run
Production scheduling number of production run
Despatching number of despatches
4. Assign the cost of activities to products according to the product’s demand for
activities.
Cost Pool is an activity that consumes resources and for which overhead costs are
identified and allocated. For each cost pool there should be a cost driver.
Cost Driver is any factor which causes a change in the cost of an activity.
Steps to remember in ABC calculations:
1. Record direct costs (direct materials and direct labour) for each product in
separate columns.
2. Calculate cost driver rates, and apply them into each product as follows, we
assume product A only in this case as an instance.
Set up cost driver rate = Set up cost______
Number of Set ups or production runs
This will be the relevant overhead cost share of set up or quality related overheads
for product A.
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3. Activity-Based Management
Activity based management (ABM) is used to describe the cost management

applications of ABC. To implement an ABM system, the following stages applies:
1. identifying the major activities in an organisation
2. assigning costs to cost pools / cost centres for each activity
3. determining the cost driver for each major activity
ABM views the business as a set of linked activities that ultimately add value to the
customer. It focuses on managing the business on the basis of the activities that
make up the organisation and assumes that such activities consume costs.
Therefore by managing activities, costs will be managed in the long term.
Put simply, Activity Based Management builds on the principles of Activity Based
Costing and Activity Based Budgeting to improve the profitability of an organisation.
It does this by identifying which activities can be performed more efficiently, which
activities can be eliminated entirely, how changing the design of a product can
lower costs and improving relationships with customers and suppliers.
Traditional budget and control reports analyse costs by types of expenses at each
cost centre. In contrast, ABM analyses costs by activities and provides management
with information on why costs are incurred and the cost drivers.
Activity-based management (ABM) focuses on managing the business on the basis

of the activities that make up the organisation. It is based on the premise that
activities consume costs. Therefore, by managing activities, costs will be managed
in the long term.
The goal of ABM is to enable customer needs to be satisfied while making fewer
demands on organisation resources. Prior to the introduction of ABM most
organisations have been unaware of the cost of undertaking the activities with the
highest cost to be highlighted so that they can be prioritised for detailed studies to
ascertain whether they can be eliminated or performed more efficiently.
To identify and prioritise the potential for cost reduction using ABM, many
organisations have found it useful to classify activities as either value added or non-
value added.
A value added activity is an activity that customers perceive as adding usefulness

to the product or service they purchase whereas a non-value added activity is an
activity where there is an opportunity for cost reduction without reducing the
product’s service potential to the customer.
Taking action to reduce or eliminate non-value added activities is given top priority
because by doing so the organisation permanently reduces the cost it incurs
without reducing the value of the product to the customer.
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4. Marginal Costing
In Absorption Costing (AC), fixed overheads are allocated to products and included
in inventory valuations. In Marginal Costing (MC), only variable production costs
are assigned to the product, fixed production overhead are regarded as period costs
and is charged to the profit and loss account. BOTH Absorption and Marginal
Costing treat non-production overheads (may it be fixed or variable) as period
costs.
1. Production = Sales i.e. OS = CS
AC profit = MC profit
2. Production exceeds Sales i.e. OS < CS
AC profit > MC profit
This is because under AC, CS would be higher, thus, higher CS higher profit.
3. Sales exceeds Production i.e. OS > CS
AC profit < MC profit
This is because previous FOH in OS are charged to COS thus resulting in lower
AC profits.
Absorption Costing Marginal Costing
Sales x Sales x
Less Cost of Sales (COS) Less Variable Costs (VC)
Opening Stock (OS) x OS x
Add Production Cost Add Production Cost
(DM+DL+Full OH) x (DM+DL+VOH) x
Less Closing Stock (CS) (x) (x) Less CS (x) (x)
Gross Profit (GP) x
Less Non-Production VC (x)
Over/(Under) Absorption x Contribution x
Less Non-Production Costs Less Fixed Costs

Administrative x Production FC x
Selling & distribution x (x) Non-Production FC x (x)
Net Profit x Net Profit x
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5. Target Costing
Target costing steps:

1. Determine possible selling price – with reference to the market/customer and
taking into consideration the specification of the product.
2. Establish the required profit margin – this is based upon the overall required
return of the business and the level of perceived risk of the product
3. Calculate the target cost – ie the cost that the company must produce at in
order to be able to achieve the required profit level (Selling price – profit
margin)
4. Close the gap – reduce the cost from the original expected cost to the target
cost.
Target Selling Price (to achieve desired market share as Co is price taker) $100
Target Profit (return required by Co) 20% $ 20
Target Cost $ 80
Actual Cost $ 96
Cost Gap (Actual Cost – Target Cost) $ 16
Closing the Cost Gap

The designed specification for each product and the production methods should be
examined for potential areas of cost reduction that will not compromise the quality
of the products. It is always easier to “design out” the cost in the design and
development phase than to “cut cost” when the product has been introduced into
the market.
For example:
1. Reduced component count
● Reducing the number of components
● Using standard components wherever possible
● Using different materials.
2. Reduce production complexity
● Acquiring new, more efficient technology
● Cutting out non-value added activities.
3. Revise production process
4. Revise specification
Gap Analysis
Gap Analysis is concerned with the gap between the forecast position from
continuing with current activities and the position that the organisation desires. It is
not the gap between the current position and the forecast position. Gap analysis
looks at:
● What will happen if we carry on as we are in the future and:
● What the shareholders will expect in the future.
There will usually be a gap between these two.
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6. Life Cycle Costing
The term life-cycle costing is used to describe a system that tracks and
accumulates the actual costs and revenues attributable to each product from
inception to abandonment.
Product life-cycle phases
Committed Cost
Cost committed
100%
80%
Product manufacturing
60% and sales phase
40% Product planning Post sales

and design service and
phase abandonment
20% phase
Cost incurred
0%
Product life-cycle phase
In life-cycle costing the profitability of each product can therefore be determined

right from design stage through development to market launch, production and
sales, and finally to its eventual withdrawal from the market.
Life-cycle cost per unit = Total life-cycle for products____

Total expected life-cycle volumes
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The component elements of a product’s cost over its life cycle could therefore
include the following:
1. Research and development costs
● Design
● Testing
● Production process and equipment.
2. The cost of purchasing and any technical data required.
3. Training costs (including initial operator training and skills updating).
4. Manufacturing or production costs.
5. Marketing costs
● Customer service
● Field maintenance
● Brand promotion.
6. Distribution cost (including transportation and handling costs).
Maturity & Saturation

Growth
Introductory Decline & abandon
Sales Line
Years
Profit Line
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7. Value Analysis
Also known as value engineering, value analysis examines factors affecting the cost
of a product or service to achieve the specified quality and reliability at the target
cost.
● Aim is to identify any unnecessary cost elements within the components of

goods and services
● Requires a critical examination of each feature of a product, questioning its use

and eliminating any unjustifiable features
The aim of value analysis is to achieve the assigned target cost by:
a. identifying improved product designs that reduce the product’s cost without
sacrificing functionality and/or
b. eliminating unnecessary functions that increase the product’s costs and for
which customers are not prepared to pay extra.
Value analysis requires the use of functional analysis. This involves decomposing
the product into its many elements or attributes. A value for each element is
determined which reflects the amount the customer is prepared to pay. The cost of
each function of a product is compared with the benefits perceived by the
customers. If the cost of the function exceeds the benefit to the customer, then the
function is either eliminated, modified to reduce cost, or enhanced in terms of its
perceived value so that its value exceeds the cost.
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8. Business Process Re-engineering
Business process re-engineering (BPR) involves examining business processes and

making substantial changes to how the organisation currently operates.
It involves the redesign of how work is done through activities. A business process
consists of a collection of activities that are linked together in a co-ordinated
manner to achieve a specific objective.
Aim of BPR is to improve the key business processes by:
1. simplification
2. cost reduction
3. improved quality
4. enhanced customer satisfaction
Often, BPR involves radical changes in processes by abandoning current practices

and reinventing completely new methods of performing business processes. It
focuses on major changes rather than marginal improvements.
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9. Kaizen Costing
Kaizen costing is widely used in Japanese companies to reduce and manage cost. It
is the Japanese term for making improvements to a process through small
incremental amounts rather than through large innovations. Kaizen costing focuses
on the production process and cost reductions from increasing the efficiency of the
production process.
The key features are:

● The emphasis is on cost reduction
● Each year the standard cost of an item should be reduced
● The emphasis is on reduction not control
● Non-value adding activities should be identified and eliminated
● Waste should be eliminated
● Cycle times should be improved.
Kaizen (continuous improvement) is the underlying framework of continuous

improvement. There are three requirements for a successful implementation of
Kaizen.
1. Work organisation and operating practices must expose new improvement

opportunities,
2. every employee should be inspired to want overall improvement and
3. employees should be trained in practical problem solving techniques

enabling them to make the improvement.
Distinguish between target costing and kaizen costing.
The major difference between target and kaizen costing is applied during the design
stage whereas kaizen costing is applied during the manufacturing stage of the
product life cycle. With target costing, the focus is on the product and cost
reductions are achieved primarily through product design. In contrast, kaizen
costing focuses on the production processes and the cost reductions are derived
primarily through the increased efficiency of the production process. The aim of
kaizen costing is to reduce the cost of components and products by a pre-specified
amount. A major feature is that workers are given the responsibility to improve
processes and reduce costs. Unlike target costing it is not accompanied by a set of
techniques or procedures that are automatically applied to achieve the cost
reductions.
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10. Lean Manufacturing andJust-In-Time
Toyota described lean manufacturing to have the following overall goal:
“to get the right things to the right place at the right time, the first time.”
Additional aims of a lean system can be to minimise waste and be open to change.
The Japanese 5S concept is often associated with lean principles which enables the
application of Just-In-Time Manufacturing. The 5Ss are:
1. Structurise – Introduce order where possible.
2. Systemise – Arrange and identify items for ease of use.
3. Sanitise – Be tidy.
4. Standardise – Be consistent in the approach taken.
5. Self-discipline – Maintain through motivation.
The rationale of the JIT system is to produce the type of units needed in the
quantity needed at the time they are needed. The fulfilment of this objective
eliminates all the unnecessary intermediate and finished product inventories.
Kanban (PULL) system of production In a "PULL" system of production, nothing
is produced until units are withdrawn from final assembly. A component or finished
part would remain at a workstation in the production line until the next production
process is ready to "PULL" it in. As a consequence, final assembly will determine
the nature and timing of all operations. This will ultimately feed back to purchasing
and supply.
Implementing Just-In-Time (JIT) is a form of business process re-engineering

aiming to reduce non-value added costs and long run costs.
The aims of JIT are to produce the required items, at the required quality and
in the required quantities, at the precise time they are required.
There are two distinct aspects of JIT:

(i) JIT purchasing; matching of material purchasing with usage resulting in
near zero levels of stock holding.
The Japanese approach to JIT recognises important procurement issues:
(a) purchasing; delivery of materials occurs in sufficient quantities to
satisfy immediate requirements only;
b) quality at source; there is no safety net of spare inventory.
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(ii) JIT production; a system linked to the Kanban PULL system of production
described earlier, whereby each component in a production process is only
produced when it is required by the subsequent production process.
The aim of JIT is to deliver the required production items, at the required
quality in the required quantities, at the time they are needed. JIT seeks to
achieve the following:
• Elimination of non-value added activities
• Zero inventory
• Zero defects
• Batch sizes of one
• Zero breakdowns
• A 100% on-time delivery service

The above goals represent perfection, and act as targets to create an environment
for continuous improvement.
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11. Total Quality Management
● It is a management strategy aimed at embedding awareness of quality in all

organisational processes.
● The continuous improvement in quality, productivity and effectiveness obtained
by establishing management responsibility for processes as well as outputs.
● With TQM every process has an identified process owner and every person in
the business operates within a process and contributes to its improvements.
● The main principle behind TQM is to get it right the first time or continuous
improvement.
● Internal products (goods or services) are identified and associated internal
suppliers and internal customers.
● TQM involves training costs, establishment and documentation of quality
procedures and standards and measurement costs.
Successful Implementation of TQM

● Total commitment throughout the organisation, from the chief executive
through senior and middle management right down to the most junior staff
member.
● Decision-making processes are participative. Management is both visible and
accessible.
● Survey to understand customer needs and expectations.
● Emphasis on get it right first time.
● Continuous training to improve on current levels.
● Continuous measurement of performance levels achieved.
● Make quality a way of life.
In a TQM environment NFPIs should cover:

● Measuring quality of supplies
● Measuring quality of work done as it proceeds
● Measuring customer satisfaction.
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Summary reading:
Discuss the meanings of the following and their inter-relationship:
1. Objectives and strategies

2. Results and determinants
3. Business change techniques
You should consider BOTH profit-seeking organisations and not-for-profit

organisations in order to highlight any differences between the two types
of organisation. (14 marks)
Answer:
Objectives may be viewed as profit and market share in a profit-oriented

organisation or the achievement of ‘value for money’ in a not-for-profit organisation
(NFPO). The overall objective of an organisation may be expressed in the wording
of its mission statement.
In order to achieve the objectives, long-term strategies will be required. In a

profit-oriented organisation, this may incorporate the evaluation of strategies that
might include price reductions, product design changes, advertising campaign,
product mix change and methods changes, embracing change techniques such as
BPR, JIT, TQM and ABM. In NFP situations, strategies might address the need to
achieve ‘economy’ through reduction in average cost per unit; ‘efficiency’ through
maximisation of the input:output ratio, whilst checking on ‘effectiveness’ through
monitoring whether the objectives are achieved.
The annual budget will quantify the short-term results anticipated of the
strategies. These results may be seen as the level of financial performance and
competitiveness achieved. This quantification may be compared with previous years
and with actual performance on an ongoing basis. Financial performance may be
measured in terms of profit, liquidity, capital structure and a range of ratios.
Competitiveness may be measured by sales growth, market share and the number
of new customers. In a not-for-profit organisation, the results may be monitored by
checking on the effectiveness of actions aimed at the achievement of the
objectives. For instance, the effectiveness of a University may be measured by the
number of degrees awarded and the grades achieved. The level of student ‘drop-
outs’ each year may also be seen as a measure of ineffectiveness.
The determinants of results may consist of a number of measures. These may

include the level of quality, customer satisfaction, resource utilisation, innovation
and flexibility that are achieved. Such determinants may focus on a range of non-
financial measures that may be monitored on an ongoing basis, as part of the
feedback information in conjunction with financial data.
A range of business change techniques may be used to enhance performance

management.
Techniques may include:
Business process re-engineering (BPR) which involves the examination of

business processes with a view to improving the way in which each is implemented.
A major focus may be on the production cycle, but it will also be applicable in areas
such as the accounting department.
29
Just-in-time (JIT) which requires commitment to the pursuit of ‘excellence’ in all
aspects of an organisation.
Total quality management (TQM) which aims for continuous quality

improvement in all aspects of the operation of an
organisation.
Activity based management systems (ABM) which focus on activities that are
required in an organisation and the cost drivers for such activities, with a view to
identifying and improving activities that add value and eliminating those activities
that do not add value.
Long-term performance management is likely to embrace elements of BPR, JIT,

TQM and ABM. All of these will be reflected in the annual budget on an ongoing
basis.
30
12. Quality Cost
To enhance customer satisfaction and meet customer’s demanding of ever-

improving levels of products and services, Quality has become one of the critical
success factors (CSF) in modern day organisations.
Total Quality Management (TQM) is where all business functions are involved in
a process of continuous quality improvement. TQM emphasised in designing
and building quality in the products and services, rather than to increase quality
control inspections. It also focuses on the causes of quality rather than the
symptoms of poor quality such as rework units and customer returns.
Management accounting systems can help produce a variety of reports and both
financial and non-financial measures to allow managers to know the cost of quality.
Cost of Quality
Conformance (Compliance) Costs – intention of eliminating costs of failure
1. Prevention Costs
These are costs incurred in preventing the production of poor quality products. They
include costs related to preventive maintenance, quality planning and training and
the extra costs of acquiring higher quality raw materials
2. Appraisal Costs
These are costs incurred to ensure that materials and products meet quality
standards. They include inspection costs on purchased components, work in
progress and finished goods, quality controls audits and field tests.
Non-Conformance (Non-Compliance) Costs – a result of failure products

and can only be reduced by increasing conformance costs.
3. Internal Failure Costs

These are costs associated with materials and products that fail to meet quality
standards. They include costs incurred before the product is despatched to the
customer, such as the cost of scrap, repair, retesting downtime and work stoppages
caused by defects.
4. External Failure Costs

These are costs incurred when products or service failed to meet customer needs
after they are delivered. They include costs of handling customer complaints,
warranty replacement, repairs of returned products, recalls of products and a
damaged reputation. These costs often have an adverse impact on future sales.
31
13. Value Chain Analysis
A Value Chain Analysis is used to increase customer satisfaction and managing

costs more effectively. It links the value-creating activities from the basic raw
material suppliers through to the end-user – the customer.
A value chain analysis is used to analyse, coordinate and optimise linkages in the
value chain to improve customer satisfaction.
In itself, the Value Chain is a model which helps us break down the business cycle
into strategic activities that add value to a product or service. Through this
analysis, the company can identify where costs are too high, or are reasonable, and
also understand where and how differentiation from competitors can be achieved.
In the context of managing business information, the company can also decide
where information systems can help reduce costs and deliver competitive
advantage.
A value chain is a means of analysing an organisation's strategically relevant

activities in order to understand the behaviour of costs.
● Identifies every activity that the company undertakes from purchase of raw
materials through to the sale to the customer.
● Developed to help identify which activities within the firm were contributing to a
competitive advantage (adding value) and which were not.
● Identifies how well activities are being performed and how they are contributing
to the service provided
o Poorly performed activities reduce value
o Unnecessary activities increase cost but don’t add value
● Checks that activities in one area support activities of another
● Identifies the crucial success factors by identifying which operations create
value
● Can be used as the basis for cost allocation, such as activity based costing
Describe how value chain analysis can be used to increase customer

satisfaction and manage costs more effectively.
Increasing attention is now being given to value chain analysis as a means of

increasing customer satisfaction and managing costs more effectively.
The value chain is the linked set of value-creating activities all the way from basic
raw materials sources from component suppliers through to the ultimate end-use
product or service delivered to the customer.
Understanding how value chain activities are performed and how they interact with
each other creates the conditions to improve customer satisfaction, particularly in
terms of cost efficiency, quality and delivery.
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Value chain analysis
Student Accountant February 2012 (extract 1 of 2)
Porter’s value chain model is perhaps the most well-known tools for analysis of the
value chain. The value chain views the organisation as a set of interlinked activities,
rather than a set of separate departments. Each activity should add value to the
product or service passing through it, so that ultimately value will be added to what
the customer buys.
Porter identifies five primary activities and three support activities as shown in the
diagram below:
By viewing the organisation as a set of processes, management can plan ways to

improve the processes so that further value can be added, or costs can be saved.
Process change can take place at different levels:
• Process reengineering – this is a fundamental rethink of the business

processes that the organisation carries out, usually driven by changes in the
external environment.
• Process re design – this focuses on an extensive improvement in current

business processes, and may involve automation of certain processes, and
changes in job descriptions.
• Process improvement – this means modifying existing processes, but not

replacing them.
Nick Ryan is a tutor for ATC International
33
14. McKinsey’s 7S
The McKinsey’s 7S’s model for organizational change is a management tool

designed to analyse and understand the key organisational structures within a
company in order to assess its potential for effective change. The model examines
seven key areas of the company and the relationships of each of these elements to
each other. The elements are grouped into two sub-categories of 'hard elements'
and 'soft elements':
The hard elements represent un-shifting company traits, those which are relatively
stable and simple to define such as company strategy, structure and system. The
soft elements, on the other hand, represent more complex traits of the company
which are influenced by culture, environment and individuals. These could be
shared values, skills, style and staff.
Structure
Strategy Systems
Shared
Values
Skills Style
Staff
The seven elements

A simplified description for each of the elements can be given as:
Hard Elements
1. Strategy: The company plan or route-map to maintain competitive advantage
2. Structure: The company hierarchy
3. Systems: The day-to-day processes and procedures throughout the company
Soft Elements
4. Shared Values: The core values of the company
5. Style: The company leadership style
6. Staff: The company's employees and their broad abilities
7. Skills: The skills and competencies of employees
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By analysing each of the elements, inconsistencies are revealed which can then be
aligned with the other elements before change is effectively implemented.
The central theme of the model is that the seven elements are interconnected and
interdependent upon one another. In order to achieve business success, each of the
seven elements must be aligned and mutually reinforcing each other. Effecting
change using this model involves the assessment of all areas, simultaneously taking
into account their nature and effect on each other.
By asking questions to check the congruence of the key elements of a business, the
7S model can help companies to analyse and improve existing processes, examine
potential effects of a future venture, identify gaps and align departments, or
determine how best to implement a strategy. The model can be used in any
company or team effectiveness issue where highlighting inconsistencies of approach
may be beneficial.
35
McKinsey’s 7s model
Student Accountant February 2012 (extract 2 of 2)
McKinsey’s 7s model focuses on seven factors that must be considered and aligned
when planning organisational change. The seven factors are divided into the ‘hard
factors’ – those that can be easily influenced by management – and ‘soft factors’,
which are more intangible.
Hard factors
The hard factors are:
• strategy – how the organisation will build competitive advantage
• structure – how the organisation is structured, who reports to who
• systems – the daily procedures and technical infrastructure that is used to
help employees achieve their aims.
Soft factors
Equally important are the soft factors, which consist of:
• shared values – the central factor that influences all others. This reflects the
beliefs of the organisation, and would include the mission and vision
• staff – the employee base, staffing plans and talent management
• skills – the ability to do the organisation’s work. It is reflected in the
performance of the organisation
• style – the style of management, and the culture of interaction among staff.
The model can be used to identify what capabilities the organisation needs to
perform its processes, and ultimately to meet its business strategy.
Nick Ryan is a tutor for ATC International
36
15. Benchmarking
Many organisations are turning to benchmarking to identify the best way of

performing activities and business processes. Benchmarking involves comparing
key activities with world-class best practices. It attempts to identify an activity that
needs to be improved and finding a non-rival organisation with world-class best
practice for that activity and studying how it performs the activity, as rival
organisations may be unwilling to share such CSF of efficient activities.
Benchmarking is beneficial as the organisation can save time and money by

avoiding mistakes that other companies have made and / or to avoid duplicating
the efforts of other companies. Thus, it is important to find and implement best
practice.
A company needs to measure its performance. Of course on its own this is not
particularly helpful, the company will then need to compare its performance with
others. The idea of comparing performance is called benchmarking.
Benchmarking is the process of identifying "best practice" in relation to both

products (including) and the processes by which those products are created and
delivered. The search for "best practice" can take place both inside a particular
industry, and also in other industries.
Seven-step approach to benchmarking

The consulting firm Kaiser Associates proposes a seven-step approach to
benchmarking as follows:
1. Determine which areas or functions to benchmark. It would probably not be

feasible to benchmark all functions at one time, so it is necessary to choose
those activities where benchmarking can bring the greatest benefits to the
organisation. This may be based on which activities offer the greatest scope
for cost savings, or which are ‘key service differentiators’.
2. Identify the performance indicators and performance drivers that will be

measured during the benchmarking exercise.
3. Select the organisations that will be used as the benchmark.
4. Measure the performance of the benchmark using the measures identified in

step two above.
5. Measure your own performance, and compare it to the benchmark to

identify the gaps.
6. Specify actions and programmes to close the gap. This involves analysing
how the benchmark achieves superior performance, and identifying similar
practices that could be adopted.
7. Implement and monitor the actions and programmes. Monitoring should not
be a one-off process, but should continue for a longer period after the
benchmarking exercise.
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Types of Benchmarking
Functional benchmarking
This is where a function of the business is compared to a similar function of another
business. The two businesses do not necessarily have to be competitors.
This sort of benchmarking can lead to innovation and dramatic improvements.
Competitive or external benchmarking

Businesses consider their position in relation to performance of the best in the
sector. Competitors are unlikely to provide willingly any information for comparison
so this type of analysis is often undertaken through trade associations or third
parties to protect confidentiality.
Internal benchmarking
This involves comparing businesses or operations from within the same
organisation (e.g. business units in different countries).
Strategic benchmarking
This is a form of competitive benchmarking where businesses need to improve
overall performance by examining the long-term strategies and general approaches
that have enabled competitors to succeed to succeed.
It involves considering high level aspects such as core competencies and developing
new products. Changes resulting from this type of benchmarking may be difficult to
implement. Again, the above can only be done if the company has adopted
appropriate performance measures.
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16. Performance Management Information System
In the exam a Management Information System (MIS) will refer to the system used
to collect and provide information to management.
The types of MIS you will need to be familiar with are:
Transaction processing system (TPS)

This collects basic information on sales / purchases, to produce financial accounts,
but no management information (such as purchases by cost centre)
Management information system (MIS)

This takes the output from the TPS and uses it to produce standardised regular
reports such as an aged debt report. This may be suitable for low impact risks that
just need regular monitoring
Manufacturing resource planning system (MRPS)

This takes the above and combines accounting and financial data together. For
example production quality statistics alongside variance analysis. This can lead to
sophisticated control over production in a factory but does not aid much on
strategic issues.
Enterprise resource planning systems (ERPS)

The ERPS integrates information from all departments into a single system, creating
a data warehouse which allows calculations such as Customer Profitability Analysis
and forecasting trends.
Strategic enterprise management (SEM)

This takes the above and adds non-financial data such as the Balanced Scorecard to
allow an overall picture of the business to be built up.
Executive information system (EIS)

This allows senior members of staff to see summarised position of the organisation
as well as ‘drilling down’ to see more detail about areas of interest.
Modern technologies such as unified corporate databases, radio-frequency

identification devices (RFID), cloud and network technology can help to
improve the management accounting system.
In the exam, candidates will be asked to evaluate the compatibility of management

accounting objectives and the management accounting information system. The
case scenario will describe the objectives such as to become the market leader.
Therefore, the information system must include an external focus to measure if
such objectives have been met. The benefits of information systems aims to
provide instant access to previously unavailable data that can be used for
benchmarking and control purposes and help improve business performance (for
example, through the use of enterprise resource planning, knowledge management
and customer relationship management systems and also, data warehouses)
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Information Systems and Developments in Technology
Process automation refers to repetitive processes being performed by machines

rather than by humans. Machines are able to produce consistent standard, quickly
and without errors, outperforming humans in manufacturing.
The internet of things include devices that are connected to the internet and
continuously send information such as smart phones, smart speakers, exercise
watches and machine control devices.
Process automation and the internet of things would change the way information is
constantly collected, processed and reported to the management. Therefore, it is
important that the organisation’s information system is capable to perform analysis
of big data to the competitive advantage.
In APM exam, students is expected to understand how process automation and

internet of things influence information and systems used by organisations in the
case scenarios.
Artificial intelligence (AI) describes the ability of machines to exhibit human like
thinking, understanding, reasoning, learning or perception. It helps organisations
process information quickly without any human inputs. AI is often used in
managing processes, collection information and add value in terms of improved
efficiency in operations. For management accountants to remain relevant in this
brave new world it is essential that they understand, and input into the AI which is
being used in analysis.
AI can also be used for identifying unusual transactions that may help accountants
to become better at detecting fraud.
AI can also help accountants provide much more accurate forecasts, based on a
more thorough analysis of the external environment that will affect revenue and
costs.
Data visualisation refers to presenting data using visual techniques such as bar
charts, mapping charts using geographical data, tables, lines, graphs, dashboards
and diagrams so the information can be seen easily. What has changed in recent
years is the volume of data that is available for use by businesses, from devices
such as smart phones, smart devices on the 'internet of things', the explosion of
social media, and the use of sophisticated data analytic techniques to assist in
analysing all of this data. There is also increased demand from management for
analysis of this data.
Cloud computing
Traditionally, an IT department managed the organisation’s hardware, software and
data, and was responsible for security.
Cloud computing involves buying the right to use computer applications which are
held in a remote location, and accessed via the internet. The most basic cloud
services include storage spaces such as Dropbox or Google Drive. Software as a
service (SaaS) is another trend, where the user buys the right to use an application
held on the cloud provider’s hardware, for example, many accounting products such
as Xero and Quickbooks are cloud based. It is even possible to have complete
system infrastructure via the cloud – the cloud service provider sets up the
hardware and software architecture, and users access it via the web.
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The advantage of cloud computing is that it changes what is normally a fixed cost
into a variable cost. Users are generally charged for the amount they use, rather
than having to make large upfront investments. This makes systems very ‘scalable’
which means that organisations buy exactly the amount of IT they need, rather
than having to invest in steps. It also saves time – large, dispersed organisations
can get access to a global centrally managed system via the internet in a fraction of
the time it would have taken to set up local, interconnected networks at each
location.
Cloud computing allows organisations to standardise their information systems

globally, very much reinforcing the approach of ERP systems. Senior management
can access the global data remotely, and there is more ability to share information
among all employees as they will all be able to access data from wherever they are
located.
One possible disadvantage of cloud computing is security. Having your information

system or data on somebody else’s hardware means that you lose control of it.
However, the providers of cloud services generally have excellent security
measures in place, so the data is probably safer than it would be if it were held in
house.
Implications for managing and measuring performance
1. The role of the management accountant has always been to provide information
to organisations to help them plan and control their organisations, and make
decisions. Traditionally much of this information was financial. With huge amount of
information that is now available to organisations, which is very easily accessed,
and shared, this means that traditional financial information perhaps becomes less
important.
2. The management accountant used to be the provider of information for

performance management, but managers and employees can now find much of the
information that they need for themselves in the various information systems.
3. With IT developments, there is better collaboration and sharing, which should

lead to better team working within organisations. But managers may not be able to
see the big picture. This is where the management accountant can help. There is a
greater role in terms of interpreting the information, and pointing senior
management to the data that is really important. It also includes explaining how
the financial and non-financial data interlink.
Process automation
Process automation is the concept of processes being performed by machines
rather than by humans. Machines can perform some repetitive processes, to a
consistent standard, quickly and without errors, so are often better at performing
these tasks than the human. Robotic process automation implies the use of
computer software in the automation.
In manufacturing industries, robots are common, for example in car production

lines, where they perform many of the assembly tasks. In services industries too,
many processes are being automated, such as bank transactions being processed
entirely without human involvement. Robots are even assisting in surgical
procedures in hospitals.
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Analytics in Finance and Accountancy
The use of analytics by finance and accountancy professionals is not new. Many
finance teams have been using data to report on trends and past performance since
the 1980s. However, the volume of data that we, as a society, create and the
availability of computing power to process and analyse it means that we can do
much more than just look at past trends. In times of rapid change business leaders
are seeking insights into what might happen rather than just focusing on what has
done so.
Demonstrate and evaluate different methods of data analysis
Descriptive analytics analyses past actions to answer what has happened. This
method is commonly used which reports on past and present events using
statistical methods such as counts, maximum, minimum, mean and percentages
readily available in spreadsheets. Examples include breakdown of sales units,
volume, types of products sold, etc in the past year allowing the company to
understand past performance using dashboards and reports.
Diagnostic analytics uses past results and analyses its reasons and causes.
Diagnostic analytics is predominately used for analysing the sensor data from
machines to obtain patterns from a history of previous faults, which allows
predictions of failures. Diagnostics helps answer the question: ‘Why did it happen?’
Predictive analytics leverages the existing data to build statistical models to help
make predictions about future events or values. Quite simply, the question
predictive analytics helps answer is ‘What is going to happen?’ We should caution
that the past cannot predict the future. In a report published by ACCA and CA ANZ,
discussions with audit partners and managers from a Big Four office in Australasia,
it emerged that the use of predictive analytics in engagements is increasing and
improves not only the overall audit quality, but also its efficiency. More specifically,
the predictive audit helps uncover risks and detect frauds (Earley 2015).
Prescriptive analytics describes what action should be taken. The key signature
of prescriptive analytics, which distinguishes it from the other types of analytics, is
the output of a suggested course of action (Hare et al. 2016) from a set of available
options. This is the ideal form of analytics to support decision making: rather than a
statistical or mathematical output, it creates a decision as an output. The output of
prescriptive analytics can move directly to automating a process, rather than
maintaining a human in the decision-making loop. Prescriptive analytics supports
the full spectrum of decision making from operational to strategic. Building on
predictive analytics, the prescriptive analytics approach combines predictive
models, business rules, linear programming, scoring and optimisation techniques.
The combination allows for the handling of optimisation problems or predictions
with rules. Hence the breadth of use cases is wide, covering cross-selling, customer
churn, optimal route planning for warehouse delivery and optimisation of supply
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chain and logistics. Prescriptive analytics answers the question: ‘What can we do to
make it happen?’
While use of prescriptive analytics is rare among the CFOs and finance teams
consulted for this research, government policy advisers and the CEO of an impact
investing organisation are moving towards this type of analytics. Here, the desire
underlying the use of data and stories (lived experiences of people) is the creation
of actionable insights building on descriptive and diagnostic analytics.
Ethical considerations
Given that for most organisations data represents a major asset, the involvement
of the management accountant to communicate reliable and accurate data and
therefore of the analytics applied to the data. Also, the ethical aspect is further
reinforced to provide an ideal foundation for determining returns from investments
and other measures in analytics projects. By focusing on ethics and data from the
outset, if any decisions made using the analytic insights create risk and that risk
can be understood and managed. However, the government may have different
approaches to ethics in data analytics such as it do not the infringe civil rights of
individuals, data governance, data privacy such as EU’s General Data Protection
Regulation (GDPR), data security including cyber and other threats
Black box algorithms is an artificial intelligence system which takes millions of data
points such as big data as inputs, a deep learning model, to make predictions of
output but its inputs and processes are impossible to understand. Hence, a black
box is an impenetrable system. The problem is users do not know how the output
predictions are done. This may cause ethical issues from the lack of understanding
on the input and processes.
Methods of data analytics

Text analytics is text mining process using artificial intelligence software to
translate large volumes of unstructured text into quantitative data to identify
insights, trends, and patterns. For example to identify negative customer
experience or the popularity of a product from different written resources in order
to help business make better decisions.
Image or imagery analytics is the extraction of meaningful information from images

using digital image processing techniques. It range from reading bar codes to
identifying a person from their face. Image analytics can be used to identify
objects, count objects, improve image quality, remove noise and to anlyse images.
Video analytics or video content analytics is the process of automatically analyzing

video to track people and objects to determine security threats, intruders, offenders
and raise alarm. Artificial intelligence and machine learning will perceive and
interpret the digital images and videos using cameras, data and algorithms for
automated surveillance, crime detection and prevention.
Voice or speech analytics is a form of interaction analytics which is the process of

using artificial intelligence software to analyse recorded voice calls to gather
customer information to improve communication and future interaction. The
process is primarily used by customer contact centres to extract information buried
in client interactions with an enterprise.
Sentiment analysis is the study of of subjective and information from contextual

mining of text to understand the social sentiment of business brand, product or
service while monitoring online conversations.
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17. Environmental Management Accounting
Environmental accounting is a broader term that encompasses the provision of

environment-related information both externally and internally. It focuses on
reports required for shareholders and other stakeholders, as well of the provision of
management information.
Environmental management accounting, on the other hand, is a subset of

environmental accounting. It focuses on information required for decision making
within the organisation, although much of the information it generates could also be
used for external reporting.
Environmental management accounting is simply a specialised part of the

management accounts that focuses on things such as the cost of energy and water
and the disposal of waste and effluent. It is important to note at this point that the
focus of environmental management accounting is not all on purely financial costs.
It includes consideration of matters such as the costs vs benefits of buying from
suppliers who are more environmentally aware, or the effect on the public image of
the company from failure to comply with environmental regulations.
Environmental management accounting uses some standard accountancy

techniques to identify, analyse, manage and hopefully reduce environmental costs
in a way that provides mutual benefit to the company and the environment,
although sometimes it is only possible to provide benefit to one of these parties.
For example, activity-based costing may be used to ascertain more accurately the
costs of washing towels at a gym. The energy used to power the washing machine
is an environmental cost; the cost driver is ‘washing’.
Once the costs have been identified and information accumulated on how many
customers are using the gym, it may actually be established that some customers
are using more than one towel on a single visit to the gym. The gym could drive
forward change by informing customers that they need to pay for a second towel if
they need one. Given that this approach will be seen as ‘environmentally-friendly’,
most customers would not argue with its introduction. Nor would most of them
want to pay for the cost of a second towel. The costs to be saved by the company
from this new policy would include both the energy savings from having to run
fewer washing machines all the time and the staff costs of those people collecting
the towels and operating the machines. Presumably, since the towels are being
washed less frequently, they will need to be replaced by new ones less often as
well.
Adopting the similar classification used for Quality Costs, the following four
categories of environmental costs reported by Hansen and Mendoza (1999):
1. Environmental Prevention Costs are costs of activities undertaken to prevent

the production of waste that could cause damage to the environment. Such as
design and operation costs to reduce contaminants, employee training, recycling
costs and certification costs to meet international and national standards.
2. Environmental Detection Costs are costs incurred to ensure that a firm’s

activities and products conform to regulatory laws and voluntary standards. Such
as inspection cost on regulatory compliance, auditing environmental activities and
contamination tests.
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3. Environmental Internal Failure costs are costs incurred from performing
activities that have been produced but not discharged into the environment. Such
as costs to eliminate or reduce waste levels to comply with regulatory
requirements. Such as cost of disposing toxic materials and recycling scrap.
4. Environmental External Failure costs are costs incurred on activities after

discharging waste into the environment. Such as clean up costs on land, oil spills,
waste discharges and restoring land to its natural state.
US Environmental Protection Agency (US EPA) in 1998 define 4 types of

environmental costs depending on how an organisation intended on using the
information.
1. Conventional costs: raw material and energy costs having environmental

relevance including abnormal losses in manufacturing process.
2. Potentially hidden costs: costs captured by accounting systems but then

losing their identity in ‘general overheads’ such as normal loss in manufacturing
process.
3. Contingent costs: costs to be incurred at a future date such as clean-up costs.
4. Image and relationship costs: costs that, by their nature, are intangible, such
as the costs of preparing environmental reports.
Accounting for Environmental Costs
1. Activity-Based Costing
ABC allocates internal costs to cost centres and cost drivers on the basis of the
activities that give rise to the costs. In an environmental accounting context, it
distinguishes between environment-related costs, which can be attributed to joint
cost centres, and environment-driven costs, which tend to be hidden on general
overheads.
2. Lifecycle Costing
Within the context of environmental accounting, lifecycle costing is a technique
which requires the full environmental consequences, and, therefore, costs, arising
from production of a product to be taken account across its whole lifecycle, literally
‘from cradle to grave’.
3. Input-Output Analysis
This technique records material inflows and balances this with outflows on the basis
that, what comes in, must go out. So, if 100kg of materials have been bought and
only 80kg of materials have been produced, for example, then the 20kg difference
must be accounted for in some way. It may be, for example, that 10% of it has
been sold as scrap and 90% of it is waste. By accounting for outputs in this way,
both in terms of physical quantities and, at the end of the process, in monetary
terms too, businesses are forced to focus on environmental costs.
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18. Mission and Strategy
Mission statement often includes maximise shareholder’s wealth through providing

quality products and services to meet customer satisfaction. A good set of KPI shall
measure the achievement of the mission statement.
18. a Johnson and Scholes - Three levels of strategy
Corporate Strategy (Strategic information)

The strategic level is the one associated with the higher levels of management
(such as the board). Strategic performance is measured over longer periods (3–10
years) since this depends on the achievement of the strategies which will enable
the achievement of the overall mission of the business. The information will be
externally focused requiring information on competitors and markets against which
the company’s performance can be benchmarked. This information will be used
mainly for planning rather than controlling.
In the exam, the management accountant might be asked to prepare information to
assist in a decision such as whether to leave or to join an industry.
Business Strategy (Tactical information)

At the tactical level, the middle layer of management will be concerned with shorter
term and more detailed objectives (possibly over a quarter or year) than the
strategic level. The information will be collected on the deployment of the
company’s resources and activities on a functional department or business unit
level. This information will be used to see that the strategic objectives are being
supported by the company’s activities. It will contain information to aid some short-
term planning but will focus more on assisting this layer of management to control
the operations of the business. Much of the information at this level will be
internally generated and will be combined with the targets supplied by the strategic
level in order to make decisions.
In the exam, the management accountant, might be asked to prepare information
to assist in an analysis comparing the organisation with a similar one in the same
industry.
Operational Strategy (Operational information)

The operational level focuses on the day-to-day activities of the business ensuring
that specific tasks set by the tactical level are achieved. Therefore, information at
this level is detailed and task-specific. It will be prepared on a regular basis (often
daily or weekly). It will be aimed to assist management at this level in controlling
the business in order to achieve its short-term plans (weekly sales or monthly profit
targets). There will be little external information needed at this level as there is
very little planning activity being carried out.
In the exam, the management accountant, might be asked to prepare information
to assist in deciding whether a particular style of management accounting might be
beneficial to the business.
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18. b Mendelow - stakeholder mapping
Stakeholders can be divided into those with:
● High Interest with High Power = Key players
● Low Interest with High Power = Keep satisfied
● High Interest with Low Power = Keep informed
● Low Interest with Low Power = Minimal Effort.
The Power/Interest Matrix
0
Minimal Keep
Low Effort Informed
Power 5
Keep Key
High Satisfied Players
10
0 5 10
Low High
Level of Interest
Stakeholders can be classified in many ways:

Internal e.g. managers, employees
Connected e.g. Shareholders, customers, suppliers, lenders, trade unions,
competitors
External e.g. Government, public, pressure groups (such as Green Peace)
Narrow e.g. Most affected by the company’s strategies include employees,

managers, shareholders, suppliers, customers
Wide e.g Less affected by the company’s strategies include government,

less dependent customers (possible substitute goods and services),
general public
Primary e.g. Employees, management, suppliers, customers and government

(for economic infrastructure). The company would not be a going
concern without these stakeholders.
Secondary e.g. The loss of this stockholder’s participation will not affect the
company’s going concern. Such as the general public.
Active e.g. Employees, management, major shareholders, pressure groups

and regulators who are actively involved in the company’s activities
Passive e.g. Those who are not involved in the company’s policy making like
the non-controlling shareholders, general public and government.
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18. c PESTEL or PEST
● Political – includes government policies and spending on education and
infrastructure
● Economic – includes the state of the economy, interest rates and tax levels,
exchange rates, trends and cycles.
● Social – includes attitudes, demographics and household structure
● Technological – includes new technologies making current products obsolete
● Environmental – includes the move towards environmentally cleaner products
● Legal – includes changes in law making it e.g. harder / more expensive to
operate.
With PESTEL the key things to consider are:

Is the current environment making it easier or harder for the organisation? In the
exam things are usually getting harder, look for the financial indicators to be
getting worse because of this.
If the environment is making conditions harder, what can the organisation do about
it. Remember that the macro – environment will effect an entire industry the same
way. This means all the organisation’s rivals will also be affected.
If the company is going to move into a new industry what will the conditions be like
(different industries will be effected in different ways.
It is important to remember that legal and economic factors are specifically
mentioned in the APM syllabus. This is particularly true of global economic factors
that affect multinationals as well as companies setting up in new countries.
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19. Strategy Planning Models
There are broadly 2 models for business strategy planning, namely a. Freewheeling
Opportunism (or Entrepreneurial Model) and b. Strategy Planning Models.
a. Freewheeling Opportunism
Henry Mintzberg referred to freewheeling opportunism as an opportunistic

strategy, dominated by the search for new opportunities, with bold and often high
risk decisions that need to be made by the entrepreneur him or herself.
Freewheeling opportunism is a top-down (centralised), informal and short-term

approach to strategic planning.
b. Strategy Planning Models
1. PORTER’S FIVE FORCES MODEL

The use of Porter’s five forces model (see Figure 1) will help identify the sources of
competition in an industry or sector.
Threat of new
entrants
Bargaining Bargaining
COMPETITIVE
power of power of
RIVALRY
suppliers buyers
Threat of
substitute
products
The model has similarities with other tools for environmental audit, such as
political, economic, social, and technological (PEST) analysis, but should be used at
the level of the strategic business unit, rather than the organisation as a whole. A
strategic business unit (SBU) is a part of an organisation for which there is a
distinct external market for goods or services. SBUs are diverse in their operations
and markets so the impact of competitive forces may be different for each one.
Five forces analysis focuses on five key areas: the threat of entry, the power of
buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.
THE THREAT OF ENTRY
This depends on the extent to which there are barriers to entry. These barriers
must be overcome by new entrants if they are to compete successfully. Johnson et
al (2005), suggest that the existence of such barriers should be viewed as delaying
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entry and not permanently stopping potential entrants. Typical barriers are detailed
below.
Economies of scale
For example, the benefits associated with volume manufacturing by organisations
operating in the automobile and chemical industries. Lower unit costs result from
increased output, thereby placing potential entrants at a considerable cost
disadvantage unless they can immediately establish operations on a scale that will
enable them to derive similar economies.
The capital requirement of entry
These vary according to technology and scale. Certain industries, especially those
which are capital intensive and/or require very large amounts of research and
development expenditure, will deter all but the largest of new companies from
entering the market.
Access to supply or distribution channels
In many industries, manufacturers enjoy control over supply and/or distribution
channels via direct ownership (vertical integration) or, quite simply, supplier or
customer loyalty. Potential market entrants may be frustrated by not being able to
get their products accepted by those individuals who decide which products gain
shelf or floor space in retailing outlets. Retail space is always at a premium and
untried products from a new supplier constitute an additional risk for the retailer.
Supplier and customer loyalty
A potential entrant will find it difficult to gain entry to an industry where there are
one or more established operators with a comprehensive knowledge of the industry,
and with close links with key suppliers and customers.
Cost disadvantages independent of scale
Well-established companies may possess cost advantages which are not available
to potential entrants irrespective of their size and cost structure. Critical factors
include proprietary product technology, personal contacts, favourable business
locations, learning curve effects, favourable access to sources of raw materials, and
government subsidies.
Expected retaliation
In some circumstances, a potential entrant may expect a high level of retaliation
from an existing firm, designed to prevent entry – or make the costs of entry
prohibitive.
Government regulation
This may prevent companies from entering into direct competition with nationalised
industries. In other scenarios, the existence of patents and copyrights afford some
degree of protection against new entrants.
Differentiation
Differentiated products and services have a higher perceived value than those
offered by competitors. Products may be differentiated in terms of price, quality,
brand image, functionality, exclusivity, and so on. However, differentiation may be
eroded if competitors can imitate the product or service being offered and/or
reduce customer loyalty.
THE POWER OF BUYERS
The power of the buyer will be high where:
• there are a few, large players in a market. For example, large supermarket
chains can apply a great deal of price pressure on their potential suppliers. This
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is especially the case where there are a large number of undifferentiated, small
suppliers, such as small farming businesses supplying fresh produce to large
supermarket chains
• the cost of switching between suppliers is low, for example from one haulage
contractor to another
• the buyer’s product is not significantly affected by the quality of the supplier’s
product. For example, a manufacturer of foil and cling film will not be affected
too greatly by the quality of the spiral-wound paper tubes on which their
products are wrapped
• buyers earn low profits
• buyers have the potential for backward integration, for example where the
buyer might purchase the supplier and/or set up in business and compete with
the supplier. This is a strategic option which might be selected by a buyer in
circumstances where favourable prices and quality levels cannot be obtained
• buyers are well informed. For example, having full information regarding
availability of supplies.
THE POWER OF SUPPLIERS
The power of the seller will be high where (and this tends to be a reversal of the
power of buyers):
• there are a large number of customers, reducing their reliance upon any single
customer
• the switching costs are high. For example, switching from one software supplier
to another could prove extremely costly
• the brand is powerful (BMW, McDonalds, Microsoft). Where the supplier’s brand
is powerful then a retailer might not be able to operate a particular brand in its
range of products
• there is a possibility of the supplier integrating forward, such as a brewery
buying restaurants
• customers are fragmented so that they have little bargaining power, such as the
customers of a petrol station situated in a remote location.
THE THREAT OF SUBSTITUTES
The threat of substitutes is higher where:
• there is product-for-product substitution, e.g. for fax and postal services
• there is substitution of need. For example, better quality domestic appliances
reduce the need for maintenance and repair services. The information
technology revolution has made a significant impact in this particular area as it
has greatly diminished the need for providers of printing and secretarial services
• there is generic substitution competing for disposable income, such as the
competition between carpet and flooring manufacturers.
COMPETITIVE RIVALRY
Competitive rivalry is likely to be high where:
• there are a number of equally balanced competitors of a similar size.
Competition is likely to intensify as one competitor strives to attain dominance
over another
• the rate of market growth is slow. The concept of the life cycle suggests that in
mature markets, market share has to be achieved at the expense of
competitors
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• there is a lack of differentiation between competitor offerings because, in such
situations, there is little disincentive to switch from one supplier to another the
industry has high fixed costs, perhaps as a result of capital intensity, which may
precipitate price wars and hence low margins. Where capacity can only be
increased in large increments, requiring substantial investment, then the
competitor who takes up this option is likely to create short-term excess
capacity and increased competition
• there are high exit barriers. This can lead to excess capacity and, consequently,
increased competition from those firms effectively ‘locked in’ to a particular
marketplace.
In summary, the application of Porter’s five forces model will increase management
understanding of an industrial environment which they may want to enter.
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2. THE BOSTON CONSULTING GROUP MATRIX
There is a fundamental need for management to evaluate existing products and
services in terms of their market development potential, and their potential to
generate profit. The Boston Consulting Group matrix, which incorporates the
concept of the product life cycle (PLC), is a useful tool which helps management
teams to assess existing and developing products and services in terms of their
market potential. More importantly, the model can also be used to assess the
strategic position of Strategic Business Units (SBU), and in this respect it is
particularly useful to those organisations which operate in a number of different
markets.
The matrix offers an approach to product portfolio planning. It has two controlling
aspects, namely relative market share (meaning relative to the competition) and
market growth. Management must consider each product or service marketed, and
then position it on the matrix. This should be done for every product manufactured
or service provided, and management should then plot the position of competitors’
products and services on the matrix in order to determine relative market share.
High market share Low market share
Growing market Star Problem Child
Mature market Cash cow Dog
Stars
Stars are products which have a good market share in a strong and growing
market. As a product moves into this category it is commonly known as a ‘rising
star’. While a market is strong and still growing, competition is not yet fully
established. Since demand is strong, and market saturation and over-supply is not
an issue, the pricing of such products is relatively unhindered, and therefore these
products generate very good margins. At the same time, manufacturing overheads
are minimised due to high volumes and good economies of scale. These are great
products, and worthy of continuing investment for as long as they have the
potential to achieve good rates of growth. In circumstances where this potential no
longer exists, these products are likely to fall vertically in the matrix into the ‘cash
cow’ quadrant (‘fallen stars’), and their cash characteristics will change. It is
therefore vital that a company has ‘rising stars’ developing from its ‘problem
children’ in order to fill the void left by the fallen stars.
Problem children
‘Problem children’ have a relatively low market share in a high-growth market,
often due to the fact that they are new products, or that they are yet to receive
recognition by prospective purchasers. In order to realise the full potential of
problem children, management needs to develop new business prudently, and
apply sound project management principles if it is to avoid costly disasters. Gross
profit margins are likely to be high, but overheads are also high, covering the costs
of research, development, advertising, market education, and low economies of
scale. As a result, the development of problem children can be loss-making until
the product moves into the rising star category, which is by no means assured. This
is evidenced by the fact that many problem children products remain as such, while
others become tomorrow’s ‘dogs’.
Cash cows
A cash cow has a relatively high market share in a low growth market, and should
generate significant cash flows. This somewhat crude metaphor is based on the
idea of ‘milking’ the returns from a previous investment which established good
distribution and market share for the product. Activities to support products in this
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quadrant should be aimed at maintaining and protecting their existing position,
together with good cost management, rather than aimed at growth. This is because
there is little likelihood of additional growth being achieved.
Dogs
A dog has a relatively low market share in a low growth market, might well be loss
making, and therefore have negative cash flow. A common belief is that there is no
point in developing products or services in this quadrant. Many organisations
discontinue ‘dogs’, but businesses that have been denied adequate funding for
development may find themselves with a high proportion of their products or
services in this quadrant.
Limitations of the Boston Consulting Group matrix
The popularity of the matrix has diminished as more comprehensive models have
been developed. Management should exercise a degree of caution when using the
matrix. Some of its limitations are detailed below.
• The rate of market growth is just one factor in an assessment of industry
attractiveness, and relative market share is just one factor in the assessment of
competitive advantage. The matrix ignores many other factors which contribute
towards these two important determinants of profitability.
• There can be practical difficulties in determining what exactly ‘high’ and ‘low’
(growth and share) can mean in a particular situation.
• The focus upon high market growth can lead to the profit potential of declining
markets being ignored.
• The matrix assumes that each SBU is independent. This is not always the case,
as organisations often take advantage of potential synergies.
• The use of the matrix is best suited to SBUs as opposed to products, or to broad
markets (which might comprise many market segments).
• The position of dogs is frequently misunderstood, as many dogs play a vital role
in helping SBUs achieve competitive advantage. For example, dogs may be
required to complete a product range and provide a credible presence in the
market. Dogs may also be retained in order to reduce the threat from
competitors.
Notwithstanding these limitations, the Boston Consulting Group matrix provides a
useful starting point in the assessment of the performance of products and services
and, more importantly, of SBUs.
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3. SWOT Analysis
A SWOT analysis analyses strengths, weaknesses, opportunities and threats.
Strengths should be build upon and weaknesses should be improved. Any

opportunities should be exploited and threats be analysed and avoided.
A SWOT analysis summarises the key issues from the analysis of the business
environments and the strategic capability of an organisation. The aim is to identify
the extent to which the current strategy of an organisation and its more specific
strengths and weaknesses are relevant to and capable of dealing with changes
occurring in the business environment. SWOT stands for strengths, weaknesses,
opportunities, and threats, but rather than simply listing them in terms of
managerial perceptions, the intention is to undertake a more structured analysis so
as to yield findings that can contribute towards the formulation of strategy. SWOT
analysis is used in the rational planning model and needs to be undertaken to assist
in closing the gap between predicted and desired performance of strategic planning.
The provision of a simple and logically straightforward framework that can be used
to appraise the organisation’s position is a significant benefit of SWOT analysis.
Management attention is focused on what might be done to exploit strengths and
opportunities and also what actions might need to be taken in order to eliminate
weaknesses and nullify threats. SWOT analysis can assist in the management of
risk by identifying internal weaknesses and threats from within the external
business environment.
Management should recognise the dynamic nature of the external business

environment and that the SWOT analysis is relevant to a specific point in time.
Hence there is a need for a continuous focus on the potential opportunities and
threats which may arise in the external business environment.
SWOT analysis is nothing more than another tool available to those involved in the
strategic planning processes. As with all tools it can cause problems when in the
wrong hands! Thus it is vital that the organisation possesses the expertise in order
to use SWOT analysis in a correct and beneficial manner. There is always the risk
that important factors may go unrecognised by those personnel involved in the
strategic planning process. The external business environment is complex and
dynamic and hence opportunities and threats may go undetected.
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4. Porter’s 3 Generic Choices
i. Cost Leadership.
Cost leadership is a generic strategy aimed at achieving overall cost leadership in
an industry. In situations where companies compete in an industry in which
customers are highly influenced by price, cost leadership assumes strategic
importance. Thus it is vitally important that the board of directors understands their
costs and cost drivers. They must also be fully cognisant of exactly what constitutes
quality to their targeted customer group. The essential task is to deliver the
requisite level of quality at the lowest possible cost which allows the pricing
strategy of penetration price.
If the organisation could attain a cost level that is lower than that of each of its
competitors then it could sustain times of falling prices and thus lower prosperity
better than its competitors thereby ensuring long-term survival. Cost leadership
might enable the organisation to pursue a policy based on penetration pricing. If
the board of directors could estimate the total market size, then they would be able
to determine what share of the market they would require in order to realise
revenue and profit targets.
The aim of the low price is to establish a large market share quickly by encouraging
customers to adopt the product. Such a tactic would be based on the premise that
if a dominant market could rapidly be achieved, then competition would be deterred
from entering the marketplace because of the high probability of being unable to
establish a critical mass while low prices prevail. As part of the overall strategy of
cost leadership the board of directors should aim to build distributor and customer
loyalty which will reduce the price elasticity of demand of its products.
ii. Differentiation
Product differentiation involves the use of multiple products, each of which is
branded and subject to promotion. Competitors must, out of necessity compete in
many areas and strive to overcome brand loyalty through reductions in the selling
price of their product offerings. Product differentiation involves the identification of
those features for which customers are willing to pay. These may be related to a
product’s image, quality, reliability, durability or post sales support in terms of the
availability and quality of after sales service.
Where product differentiation can be achieved it may enable the board of directors
to implement a pricing strategy based on market skimming, which involves setting
a relatively high price stressing the attractions of the new features such as the
robustness, durability and perceived quality attaching to those with a genuine
interest in the product or its associated attractions. Reaction and support is thus
solicited from the ‘top end’ of the particular market. If the launch is successful in
this ‘cream skimming’ exercise, and the decision has been taken to invest in the
necessary new production resources so that larger scale production becomes
possible, then the appeal of the new product can be enlarged through a shift in
advertising and a reduction in price. The price reduction can be made in stages to
coincide with supply side increases as new resources come into use. One of the pre-
requisites for the successful operation of a pricing strategy based on market
skimming is the existence of technical barriers to entry into the market. It must be
difficult for competitors to come up with a similar product quickly with which they
can undercut the price being charged by the organisation.
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If an organisation can successfully achieve product differentiation it may also be
possible to implement a pricing strategy based upon premium pricing. Such a
strategy would involve pricing its product above the price of competitors’ products
on a permanent basis. The success of such a strategy will be dependent upon
potential buyers perceiving that the product is different and superior to competitors’
products.
iii. Focus or Niche strategy.

Niche marketing targets markets in which the company can focus on cost and
quality in order to meet the needs of customers who comprise a specific market.
The directors could target their product at a specific market segment comprising
relatively well-off people who are willing to pay a premium for the unique feature of
its product.
It is quite conceivable that such a policy might be aimed at a particular

geographical region in which relatively well-off people live. An organisation might
meet the needs of such a niche segment of the market better than its competitors
simply by the concentration of a specific focus on a narrower target market than
those of its competitors. Cost leadership would give the organisation the
opportunity to develop a cost-focus strategy providing niche customers with a lower
priced product than the competitor offerings. Obviously such a niche would have to
be sufficiently large to enable the desired levels of profitability to be attained.
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20. Decision-Making with Certainty
20.1 One Limiting Factor (more than 2 products)

Rule: Select the highest contribution per limiting factor
20.2 More than 2 Limiting Factors (only 2 products)

Rule: Linear Programming. Shadow price / dual price is the extra
contribution available if one extra unit of limiting resource become available.
It is also the maximum price that companies are willing to pay to receive an
extra limiting resource i.e. the Breakeven Price.
20.3 Further Processing

Rule: Extra Conrtibution exceeds Extra Cost = Further Process, vice versa
20.4 Make or Buy Decisions

Rule: Select the cheaper alternative
20.5 Discontinue or Shut Down of Division or Product

Rule: If positive contribution, continue, vice versa
20.6 Relevant Costing – Special Order / One-off contract

Rule: Incremental Revenue exceeds Incremental Cost = Accept contract
DM rule: If direct material (DM) is regularly used, must purchase required

quantity at current replacement cost even if in stock.
If DM is no longer in use, lost scrap income is the relevant cost.
If substitution of DM is available for another raw material, consider extra

further conversion cost and saved purchased cost.
DL rule: If monthly salaried employee, direct labour (DL) cost is not

relevant.
If hourly waged DL, extra hours is relevant.
If labour is fully employed, extra labour cost to replace or extra overtime

hours or lost contribution is relevant.
Relevant costs: Non-relevant costs:
Opportunity cost Sunk cost
Incremental cost Committed cost
Variable cost Fixed O/H absorbed
Avoidable cost Depreciation (non cash flows)
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20.7 Cost Volume Profit Analysis
Formulae required (not given in exam):
1. Contribution per unit = Selling price per unit – Variable cost per unit
2. Total contribution = Contribution per unit x Sales volume
3. Breakeven point (units) = ___Fixed costs____

Contribution per unit
4. Breakeven point ($) = _____Fixed costs_____

Contribution Sales Ratio
5. Contribution target = Fixed costs + Target profit
6. Target sales volume (units) = Fixed costs + Target Profit

Contribution per unit
7. Margin of safety (units) = Budgeted Sales units – Breakeven units
8. Multi-Product Breakeven ($)= _____Company Level Fixed Costs_______

Weighted Average Contribution Sales Ratio
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21. Decision-Making with Uncertainty
21.1 Risk Attitudes
1. Risk Seeking = Maximax. Rule: Choose the best of the best outcome
2. Risk Averse = Maximin. Rule: Choose the best among the worst outcome
3. Risk Neutral = Minimax Regret. Rule: Choose the least of the maximum
regret i.e. (Opportunity Cost) using a Regret Table.
21.2 Probabilities
Expected Values (EV) = Probability x Outcomes
EV is the weighted average outcome based on the likehood of occurrence.
Rule: Select the highest EV.
21.3 Sensitivity Analysis
Rule: Smallest percentage change that results in losing profit is the most
sensitive variable.
21.4 Value of Perfect Information
VPI = Expected profit with certainty – Expected profit with uncertainty
VPI = Highest possible profit – Selected EV with uncertainty
VPI is the maximum price the company is willing to pay to receive perfect
information i.e. the breakeven price where extra income equals extra cost.
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The Risk of Uncertainty
Clearly, risk permeates most aspects of corporate decision-making (and life in

general), and few can predict with any precision what the future holds in store.
Risk can take myriad forms – ranging from the specific risks faced by individual
companies (such as financial risk, or the risk of a strike among the workforce),
through the current risks faced by particular industry sectors (such as banking, car
manufacturing, or construction), to more general economic risks resulting from
interest rate or currency fluctuations, and, ultimately, the looming risk of recession.
Risk often has negative connotations, in terms of potential loss, but the potential
for greater than expected returns also often exists.
Clearly, risk is almost always a major variable in real-world corporate decision-

making, and managers ignore its vagaries at their peril. Similarly, trainee
accountants require an ability to identify the presence of risk and incorporate
appropriate adjustments into the problem-solving and decision-making scenarios
encountered in the exam hall. While it is unlikely that the precise probabilities and
perfect information which feature in exam questions can be transferred to real-
world scenarios, a knowledge of the relevance and applicability of such concepts is
necessary.
In this first article, the concepts of risk and uncertainty will be introduced together
with the use of probabilities in calculating both expected values and measures of
dispersion. In addition, the attitude to risk of the decision-maker will be examined
by considering various decision-making criteria, and the usefulness of decision trees
will also be discussed. In the second article, more advanced aspects of risk
assessment will be addressed, namely the value of additional information when
making decisions, further probability concepts, the use of data tables, and the
concept of value-at-risk.
The basic definition of risk is that the final outcome of a decision, such as an
investment, may differ from that which was expected when the decision was taken.
We tend to distinguish between risk and uncertainty in terms of the availability of
probabilities. Risk is when the probabilities of the possible outcomes are known
(such as when tossing a coin or throwing a dice); uncertainty is where the
randomness of outcomes cannot be expressed in terms of specific probabilities.
However, it has been suggested that in the real world, it is generally not possible to
allocate probabilities to potential outcomes, and therefore the concept of risk is
largely redundant. In the artificial scenarios of exam questions, potential outcomes
and probabilities will generally be provided, therefore a knowledge of the basic
concepts of probability and their use will be expected.
PROBABILITY
TABLE 1: PROBABILITY OF NEW PRODUCT SALES
Sales $500,000 $700,000 $1,000,000 $1,250,000 $1,500,000
Probability 0.1 0.2 0.4 0.2 0.1
The term ‘probability’ refers to the likelihood or chance that a certain event will
occur, with potential values ranging from 0 (the event will not occur) to 1 (the
event will definitely occur). For example, the probability of a tail occurring when
tossing a coin is 0.5, and the probability when rolling a dice that it will show a four
is 1/6 (0.166). The total of all the probabilities from all the possible outcomes must
equal 1, ie some outcome must occur.
A real world example could be that of a company forecasting potential future sales
from the introduction of a new product in year one (Table 1).
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From Table 1, it is clear that the most likely outcome is that the new product
generates sales of £1,000,000, as that value has the highest probability.
INDEPENDENT AND CONDITIONAL EVENTS

An independent event occurs when the outcome does not depend on the outcome
of a previous event. For example, assuming that a dice is unbiased, then the
probability of throwing a five on the second throw does not depend on the outcome
of the first throw.
In contrast, with a conditional event, the outcomes of two or more events are
related, ie the outcome of the second event depends on the outcome of the first
event. For example, in Table 1, the company is forecasting sales for the first year of
the new product. If, subsequently, the company attempted to predict the sales
revenue for the second year, then it is likely that the predictions made will depend
on the outcome for year one. If the outcome for year one was sales of $1,500,000,
then the predictions for year two are likely to be more optimistic than if the sales in
year one were $500,000.
The availability of information regarding the probabilities of potential outcomes

allows the calculation of both an expected value for the outcome, and a measure of
the variability (or dispersion) of the potential outcomes around the expected value
(most typically standard deviation). This provides us with a measure of risk which
can be used to assess the likely outcome.
EXPECTED VALUES AND DISPERSION

Using the information regarding the potential outcomes and their associated
probabilities, the expected value of the outcome can be calculated simply by
multiplying the value associated with each potential outcome by its probability.
Referring back to Table 1, regarding the sales forecast, then the expected value of
the sales for year one is given by:
Expected value
= ($500,000)(0.1) + ($700,000)(0.2)
+ ($1,000,000)(0.4) + ($1,250,000)(0.2)
+ ($1,500,000)(0.1)
= $50,000 + $140,000 + $400,000
+ $250,000 + $150,000
= $990,000
In this example, the expected value is very close to the most likely outcome, but
this is not necessarily always the case. Moreover, it is likely that the expected value
does not correspond to any of the individual potential outcomes. For example, the
average score from throwing a dice is (1 + 2 + 3 + 4 + 5 + 6) / 6 or 3.5, and the
average family (in the UK) supposedly has 2.4 children. A further point regarding
the use of expected values is that the probabilities are based upon the event
occurring repeatedly, whereas, in reality, most events only occur once.
TABLE 2: POTENTIAL RETURNS FROM TWO INVESTMENTS

Investment A Investment B
Returns Probability of return Returns Probability of return
8% 0.25 5% 0.25
10% 0.5 10% 0.5
12% 0.25 15% 0.25
In addition to the expected value, it is also informative to have an idea of the risk
or dispersion of the potential actual outcomes around the expected value. The most
common measure of dispersion is standard deviation (the square root of the
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variance), which can be illustrated by the example given in Table 2 above,
concerning the potential returns from two investments.
To estimate the standard deviation, we must first calculate the expected values of
each investment:
Investment A
Expected value = (8%)(0.25) + (10%)(0.5) + (12%) (0.25) = 10%
Investment B
Expected value = (5%)(0.25) + (10%)(0.5) + (15%) (0.25) = 10%
The calculation of standard deviation proceeds by subtracting the expected value
from each of the potential outcomes, then squaring the result and multiplying by
the probability. The results are then totalled to yield the variance and, finally, the
square root is taken to give the standard deviation, as shown in Table 3.
In Table 3, although investments A and B have the same expected return,
investment B is shown to be more risky by exhibiting a higher standard deviation.
More commonly, the expected returns and standard deviations from investments
and projects are both different, but they can still be compared by using the
coefficient of variation, which combines the expected return and standard deviation
into a single figure.
TABLE 3: APPLICATION OF STANDARD DEVIATION TO POTENTIAL RETURNS

Investment A
Returns Expected return Returns minus Squared Probability Column 4 x
expected returns Column 5
8% 10% .2% 4% 0.25 1%
10% 10% 0% 0% 0.5 0%
12% 10% 2% 4% 0.25 1%
Variance 2%
Standard 1.414%
deviation
Investment B
Returns Expected return Returns minus Squared Probability Column 4 x
expected returns Column 5
5% 10% .5% 25% 0.25 6.25%
10% 10% 0% 0% 0.5 0%
15% 10% 5% 25% 0.25 6.25%
Variance 12.5%
Standard 3.536%
deviation
COEFFICIENT OF VARIATION AND STANDARD DEVIATION

The coefficient of variation is calculated simply by dividing the standard deviation
by the expected return (or mean):
Coefficient of variation = standard deviation / expected return
For example, assume that investment X has an expected return of 20% and a
standard deviation of 15%, whereas investment Y has an expected return of 25%
and a standard deviation of 20%. The coefficients of variation for the two
investments will be:
Investment X = 15% / 20% = 0.75

Investment Y = 20% / 25% = 0.80
The interpretation of these results would be that investment X is less risky, on the
basis of its lower coefficient of variation. A final statistic relating to dispersion is the
standard error, which is a measure often confused with standard deviation.
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Standard deviation is a measure of variability of a sample, used as an estimate of
the variability of the population from which the sample was drawn. When we
calculate the sample mean, we are usually interested not in the mean of this
particular sample, but in the mean of the population from which the sample comes.
The sample mean will vary from sample to sample and the way this variation occurs
is described by the ‘sampling distribution’ of the mean. We can estimate how much
a sample mean will vary from the standard deviation of the sampling distribution.
This is called the standard error (SE) of the estimate of the mean.
The standard error of the sample mean depends on both the standard deviation and
the sample size:
SE = SD/√(sample size)
The standard error decreases as the sample size increases, because the extent of
chance variation is reduced. However, a fourfold increase in sample size is
necessary to reduce the standard error by 50%, due to the square root of the
sample size being used. By contrast, standard deviation tends not to change as the
sample size increases.
DECISION MAKING CRITERIA

The decision outcome resulting from the same information may vary from manager
to manager as a result of their individual attitude to risk. We generally distinguish
between individuals who are risk averse (dislike risk) and individuals who are risk
seeking (content with risk). Similarly, the appropriate decision-making criteria used
to make decisions are often determined by the individual’s attitude to risk.
To illustrate this, we shall discuss and illustrate the following criteria:

1 Maximin
2 Maximax
3 Minimax regret
An ice cream seller, when deciding how much ice cream to order (a small, medium,
or large order), takes into consideration the weather forecast (cold, warm, or hot).
There are nine possible combinations of order size and weather, and the payoffs for
each are shown in Table 4.
TABLE 4: DECISION-MAKING COMBNATIONS

Order/weather Cold Warm Hot
Small $250 $200 $150
Medium $200 $500 $300
Large $100 $300 $750
The highest payoffs for each order size occur when the order size is most
appropriate for the weather, ie small order/cold weather, medium order/warm
weather, large order/hot weather. Otherwise, profits are lost from either unsold ice
cream or lost potential sales. We shall consider the decisions the ice cream seller
has to make using each of the decision criteria previously noted (note the absence
of probabilities regarding the weather outcomes).
1 Maximin
This criteria is based upon a risk-averse (cautious) approach and bases the order
decision upon maximising the minimum payoff. The ice cream seller will therefore
decide upon a medium order, as the lowest payoff is £200, whereas the lowest
payoffs for the small and large orders are £150 and $100 respectively.
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2 Maximax
This criteria is based upon a risk-seeking (optimistic) approach and bases the order
decision upon maximising the maximum payoff. The ice cream seller will therefore
decide upon a large order, as the highest payoff is $750, whereas the highest
payoffs for the small and medium orders are $250 and $500 respectively.
3 Minimax regret
This approach attempts to minimise the regret from making the wrong decision and
is based upon first identifying the optimal decision for each of the weather
outcomes. If the weather is cold, then the small order yields the highest payoff, and
the regret from the medium and large orders is $50 and $150 respectively. The
same calculations are then performed for warm and hot weather and a table of
regrets constructed (Table 5).
TABLE 5: TABLE OF REGRETS

Order/weather Cold Warm Hot
Small $0 $300 $600
Medium $50 $0 $450
Large $150 $200 $0
The decision is then made on the basis of the lowest regret, which in this case is
the large order with the maximum regret of $200, as opposed to $600 and $450 for
the small and medium orders.
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22. Budgeting
1. Planning
2. Control
3. Communication
4. Co-ordination
5. Evaluation
6. Motivation
7. Authorisation & Delegation
Objectives of a budgetary control system
1. – To compel planning
Budgeting makes sure that managers plan for the future, producing detailed plans
in order to ensure the implementation of the company’s long term plan. Budgeting
makes managers look at the year ahead and consider the changes in conditions
that might take place and how to respond to those changes in conditions.
2. – To co-ordinate activities
Budgeting is a method of bringing together the activities of all the different
departments into a common plan. If an advertising campaign is due to take place in
a company in three months’ time, for example, it is important that the production
department know about the expected increase in sales so that they can scale up
production accordingly. Each different department may have its own ideas about
what is good for the organisation. For example, the purchasing department may
want to order in bulk in order to obtain bulk quantity discounts, but the accounts
department may want to order in smaller quantities so as to preserve cash flow.
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3. – To communicate activities
Through the budget, top management communicates its expectations to lower level
management. Each department has a part to play in achieving the desired results
of the company, and the annual budget is the means of formalising these
expectations. The whole process of budget setting, whereby information is shared
between departments, facilitates this communication process.
4. – To motivate managers to perform well

The budget provides a basis for assessing how well managers and employees are
performing. In this sense, it can be motivational. However, if the budget is imposed
from the top, with little or no participation from lower level management and
employees, it can have a seriously demotivational effect.
5. – To establish a system of control

Expenditure within any organisation needs to be controlled and the budget
facilitates this. Actual results are compared to expected results, and the reasons for
any significant, unexpected differences are investigated. Sometimes the reasons
are within the control of the departmental manager and he/she must be held
accountable; at other times, they are not.
6. – To evaluate performance
Often, managers and employees will be awarded bonuses based on achieving
budgeted results. This makes more sense than evaluating performance by simply
comparing the current year to the previous year. The future may be expected to be
very different than the past as economic conditions change. Also, events happen
that may not be expected to reoccur. For example, if weather conditions are
particularly wet one year, a company making and selling umbrellas would be
expected to make higher than usual sales. It would not be fair to assess managers
against these historical sales levels in future years, where weather conditions are
more normal.
7. – To delegate authority to budget holders

A formal budget permits budget holders to make financial decisions within the
specified limits agreed, i.e. to incur expenditure on behalf of the organisation.
8. – To ensure achievement of the management’s objectives

Objectives are set not only for the organisation as a whole but also for individual
targets. The budget helps to work out how these objectives can be achieved.)
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Planning and control are major activities of management in all organisations.
Budgets are central to the process of planning and control. The involvement with
budgets places the management accountant as a key player in the provision of
management information.
Budgets are set within an overall organisational planning and control framework. A
common sub division of the wider planning and control framework in organisations
is strategic planning, management control and operational or task control.
Strategic planning, management control and operational control
Characteristics Strategic Management Operational

planning control control
1. Structure Unstructured and Rhythmic, Rational, relies on

irregular prescribed rules
procedures
2. Nature of External and Internal and some Tailored to the

information predictive, less historical, more operation, often
accurate accurate non-financial
3. Persons involved Few and top Many, top and Junior managers,
management middle supervisors or
management none
4. Mental activity Creative, analytical Administrative, Follow direction or

persuasive none
5. Time horizon Long-term Short-term Day to day or real

time
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Traditional Budgeting
22.1 Incremental Budgeting
Next year’s budget is based on the current year’s budget adjusted for inflation and
and relevant information such as prices changes, new competitors, etc. It is fast
and simple but has the disadvantage that past years budget slack and any error will
be included in next years budgets.
22.2 Annual Fixed Budgeting
Fixed budgeting occurs where there is one budget set for the year and it is left
unchanged for the rest of the year. Fixed budget ignores changes in PESTEL factors
and fails to repond quickly to changes.
Incremental budgeting and Annual Fixed budgets are suitable if the industry is
stable with low growth and past year’s results does not change much year on year.
Modern Budgeting
22.3 Zero Based Budgeting (ZBB)
A simple idea of preparing a budget from a ‘zero base’ each time, ie as though
there is no expectation of current activities to continue from one period to the next.
ZBB is normally found in service industries where costs are more likely to be
discretionary. A form of ZBB is used in local government. There are four basic
steps to follow. First, prepare decision packages. Second, rank the decision
packages in order of importance, starting with the mandatory requirements of a
department. This forces the management to consider carefully what their aims are
for the coming year. Third, identify the level of funding that will be allocated to the
department. Fourth, utilise the funds in order of the ranking until exhausted. The
advantage is that errors and slacks are not build into the next years budget but it is
time-consuming and costly to prepare ZBB.
22.4 Rolling Budget

Rolling budget is suitable for dynamic fast growth industries. When a budgetary
period (quarter 1) lapsed, a new quarter is added to the budget to maintain an
annual budget of 4 quarters. Then, the actual results of quarter 1 is used to “roll
on” for the remaining budgetary periods.
22.5 Top-Down Budgeting (Non-Participatory Budgeting)

Some organisations do not require junior management to participate in the
budgetary process. This may be because of security or more likely due to
centralised nature of the company. This budgetary method saves time and money.
There will be goal congruence as the budget is prepared by senior management and
reduces the likelihood of information ‘leaking’ from the company.
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22.6 Bottom-Up Budgeting
This is a system of budgeting in which budget holders have the opportunity to
participate in setting their own budgets. Also called participative budgeting. The
middle and bottom management are more responsible and will be involved to
prepare budgets to submit to top management for final approval.
Advantages of participation Disadvantages of participation
1 Increased motivation to the 1 Senior managers may not be able to

budget holder(ownership of give up control
budget)
2 Should contain better 2 Poor decision making due to

information, due to local inexperience
knowledge
3 Increases managers’ 3 Lack of goal congruence

understanding
4 Better communication forced 4 Budget preparation is slower and may

upon the company lead to conflict
5 Senior managers can concentrate 5 Junior managers may introduce

on strategic matters budgetary slack
6 Participation may not really occur as

senior managers revise data receive
to their own ends
22.7 Activity Based Budgeting (ABB)
Activity based budgeting comes from the principles of activity based costing. The
basic ideas are:
● The cost of an activity can be calculated accurately
● This can be compared with the value the activity adds to the customer.
If the cost of an activity is larger than its value added, then:
o The cost of the activity could be reduced
o The activity could be stopped /outsourced
o The price to the customer could be increased.
In addition managers can identify if activities in one department are adding to costs
in another (e.g. poor quality products needing to be replaced leading to more
distribution costs).
The idea behind activity based budgeting is that they focus on critical success
factors and the activities which must be performed well in order to be successful.
This means that as a company’s strategy changes the budget will also change.
70
Since ABB focuses on the whole activity there is more chance of getting in right first
time (i.e. it links up with TQM).
22.8 Activity-Based Management (ABM)

Traditional budgets show the costs of functions and departments (eg staff costs and
establishment costs) instead of the costs of those activities that are performed by
people (e.g. receipt of goods, processing and dispatch of orders). Thus managers
have no visibility of the real 'cost drivers' of their business. In addition, it is
probable that a traditional budget contains a significant amount of non-value-added
costs (NVAC) that are not visible to managers. The annual budget also tends to fix
the capacity for the forthcoming budget period, thereby undermining the potential
of activity-based management (ABM) analysis to determine required capacity from
a customer-demand perspective. Those experienced in the use of ABM techniques
will be familiar with such problems. However, their tasks would be much easier to
perform, and their results more reliable, if such problems were removed.
22.9 Beyond Budgeting
In‘Beyond Budgeting’ Hope and Fraser argued that traditional budgets:

● Add little value
● Are used excessively in measuring performance
● Are used as a method to communicate the values of the organisation rather
than as a means of financial control
● Are too inwardly focussed
● Are a major barrier to change
They argue that using rolling budgets and non-financial performance indicators
should:
● Create a culture based on beating the competition (since goals are related to
external benchmarks) rather than simply gaining more internal resources
● Rewards can be team-based increasing the amount of motivation
● It is easier to judge the performance of people lower down the organisation
(who are closer to the customers)
● It empowers more junior managers meaning they can respond more quickly
to changes in the external environment.
22.10 Motivational Theories
Agency theory considers the relationship between a principal and an agent. Berry,
Broadbent and Otley cite the illustration of the owner (the principal) of a holiday
bungalow who employs a local agent to handle sub-lets on her behalf. The problem
is ‘how can the agent be motivated and monitored?’. The motivation may be
achieved by the payment of a commission (the reward). The monitoring may be
through the submission of regular accounts of income and expenditure (as a
measure of performance).
The key requirements are that:
• the agent must have to give an account of performance to the principal; and
• the principal must be able to hold the agent to account.
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23. Forecasting and Variances
23.1 Time Series Analysis
Activity
Time period
There are four components
1. The Trend
This is the way in which the time series appears to be moving over a long interval
of time. It is the deep underlying long-term movement in a prevailing direction,
either upwards or a downwards or flat. For example, sales might be on an upward
or a downward trend over time.
There are two methods of evaluating the trend.
(i) Fit the line by eye on the graph.
(ii) Moving averages.
2. Seasonal Variations
Seasonal variations are short-term regular fluctuations at intervals of different
months of the year or on different days of the week or even at different hours of
the day, depending on the circumstances in question.
3. Cyclical Variations
These are medium-term fluctuations that take place over a longer period of time
than seasonal variations. Cyclical variations are circumstances that exist in repeat
cycles.
4. Residual (Random or non-recurring) Variations

These are fluctuations due to unpredictable evets that do not follow the general
pattern from seasonal variations and cyclical varitaions and must be removed to
prevent distortion in the time series analysis. Such as strikes, flood, fire and natural
disasters.
72
23.2 Variances
1. Material variances
AQ x AP $x
Material Price Variance
AQ x SP $x
Material Usage Variance
SQ for Actual Production x SP $x
Total Material Variance
2. Labour variances
AH paid x AR $x
Labour Rate Variance
AH paid x SR $x
Idle Time Variance
AH worked x SR $x
$x Labour Efficiency Variance

SH for Actual Production x SR
Total Labour Variance
3. Variable overhead variances
Actual VOH $x
VOH Expenditure Variance
AH x VOAR $x
VOH Efficiency Variance
SH for Actual Production x VOAR $x
Total VOH Variance
73
4. Fixed overhead variances
If using Marginal Costing,
Actual FOH $x
FOH Expenditure Variances
Budgeted FOH $x
Total FOH Variance
If using Absorption Costing and absorbs FOH using DLH,
Actual FOH $x
FOH Expenditure V
Budgeted FOH
$x
SH x FOAR
Capacity V
$x FOH Volume V
AH x FOAR
Efficiency V
SH for Actual Production x FOAR $x
Total FOH Variance
5. Sales variances
If using Absorption Costing,
AQ x ASP $x
Sales Price Variance
AQ x SSP $x
AQ x Standard Profit $x
Sales Volume Variance
SQ x Standard Profit $x
Total Sales Variance
If using Marginal Costing,
AQ x ASP $x
Sales Price Variance
AQ x SSP $x
AQ x Standard Contributon $x
Sales Volume Variance
SQ x Standard Contribution $x
74
6. Controllable and Uncontrollable Material Variances
AQ x AP $x
Mat Price Operational V
AQ x RP $x (MPOV)
Mat Price Planning V
(MPPV)
AQ x SP $x
Mat Usage Operational V
(MUPV)
RQ x SP $x Mat Usage Planning V
(MUPV)
SQ x SP $x
AP = Actual price
SP = Standard price
RP = Revised price
RQ = Revised quantities for actual production
SQ = Standard quantities for actual production
AQ = Actual quantities
7. Material Mix and Yield Variances
A AQ x AM x AP $x
B $x
A AQ x AM x SP $x Material Price Variance

B $x
AQ
A AQ x SM x SP $x Material Mix Variance

B $x
AQ
A SQ for Actual Pdn x SM x SP $x Material Yield Variance

B $x
SQ
75
8. Controllable and Uncontrollable Labour Variances
AH x AR $x
Lab Rate Operational V
AH x RR $x (LROV)
Lab Rate Planning V
(LRPV)
AH x SR $x
Lab Efficiency Operational V
(LEOV)
RH x SR $x
Lab Efficiency Planning V
(LEPV)
SH x SR $x
Total Labour Variance
AR = Actual rate
SR = Standard rate
RR = Revised rate
RH = Revised hours for actual production
SH = Standard hours for actual production
AH = Actual hours
9. Sales Mix and Quantity Variances
X AQ x AM x ASP $x
Y $x
X AQ x AM x SSP $x Sales Price Variance

Y $x
AQ
X AQ x AM x Std Contri (Std Profit) $x

Y $x
AQ
X AQ x SM x Std Contri $x Sales Mix Variance

Y $x
AQ
Sales Quantity Variance

X SQ x SM x Std Contri $x
Y $x
SQ
76
10. Controllable and Uncontrollable Sales Variances
AQ x Actual Selling Price (ASP) $x Sales Price Operational V

(SPOV)
AQ x Revised Selling Price (RSP) $x
Sales Price Planning V
AQ x Standard Selling Price (SSP) $x (SPPV)
Total Sales Price Variance
AQ x Std Contri $x
Sales Volume Operational V
RQ x Std Contri $x (SVOV) Market Share V
SQ x Std Conri $x Sales Volume Planning V

(SVPV) Market Size V
Total Sales Volume Variance
77
24 Performance Evaluation
Key Performance Indicators (KPIs)
Quantitative KPIs Qualitative KPIs
Financial Performance Non-Financial Non-Financial

Indicators (FPIs) Performance Indicators Performance Indicators
1. Profitability ratios (NFPIs) (NFPIs)
2. Liquidity ratios 1. Number of complaints 1. Sense of satisfaction
3. Gearing ratios 2. Negligence claims 2. Complaints, comments,
4. Efficiency ratios 3. Number of returns, compliments
5. Investors ratios remedial, rework units 3. Observations
6. Market share 4. Six sigma
7. Residual income (RI)
8. Return on investment
(ROI)
9. Economic value added
(EVA)
10. NPV
11. IRR, MIRR
Hard accountability
Soft accountability
Information gathered Information gathered from:

from Financial Statements 1. Competitiveness
2. Productivity
3. Quality of service / product
4. Personnel motivation / QWL
5. Customer satisfaction
Kaplan and Norton’s Balanced Scorecard (BSC)

Fitzgerald and Moon’s Six Building Blocks
Lynch and Cross’s Performance Pyramid
Problems in performance measurement
78
Performance Evaluation
There are many measures that can be used to assess performance. These
performance measures may be classified into financial and non-financial measures
or quantitative and qualitative measures.
Quantitative measures are those measures which can be expressed in numerical

terms, example, profit, market share.
Qualitative measures are those which cannot be expressed in numerical terms but
which may be supported by numerical data, example, product quality may be
evidenced by the number of complaints.
Financial performance measures also called monetary measures include turnover,

profit, return on capital employed and so on as listed above.
Traditionally organisations have focused on a range of measures such as capital

structure, market ratios, liquidity and overall ROI. Also greater analysis of costs and
profit possibly by product, cost centre and geographical area. Such measures may
be argued as being unduly inward looking, with a major focus on the achievement
of monetary targets in conjunction with techniques such as budgeting and standard
costing and variance analysis, with detailed focus on and analysis of deviations
from the planned or target figures. Also using financial statements as the basis of
overall measures such as ROI, profit sales percentage and asset turnover ratios.
Management style using budgets
Hopwood (1973) looked at management styles using budgeting. The use of budgets
in evaluation and control is also influenced by the way they are used by the
manager. Different management styles of budget use have been observed, for
example:
1. Budget constrained style

The manager is evaluated on his ability to meet cost targets in the short term and
place considerable emphasis on meeting budget targets in order not to exceed the
budget;
2. Profit conscious style

The manager is evaluated on his ability to increase profits in the long term where a
balanced view is taken between budget targets, long-term profit goals and
effectiveness in operations;
3. Non-accounting style
The manager is evaluated on non-financial performance indicators (NFPI) such as
customer satisfaction ratings, product quality and customer retention.
79
What are Critical Success Factors (CFSs) and Key Performance Indicators
(KPIs) in relation to performance measurement?
Johnson, Scholes and Whittington defined Critical Success Factors (CSFs) as ‘those
product features that are particularly valued by a group of customers and,
therefore, where the organisation must excel to outperform competition.’
For example, in the context of transportation (by rail, car, bus or aeroplane), the
CSF would be safety and punctuality. These are likely to be important to the
customer, although other aspects of service provision might be as important such
as convenience (timetabling), cleanliness and security. The relative importance of
CSFs is likely to vary with the market segment (the group of customers). For
example, business travellers may value punctuality, while leisure travellers might
value cleanliness and security. Rail companies will have CSFs concerning financial
performance and passenger numbers.
CSFs are normally measured through Key Performance Indicators (KPIs). These are
targets that the organisation has to achieve. Acceptable punctuality is usually
defined by a percentage of trains that have arrived at the scheduled arrival time or
before. A certain amount of latitude is usually allowed – for example, in the United
Kingdom a train is deemed to have arrived on time if it arrives at its planned
destination station within five minutes (i.e. 4 minutes 59 seconds or less) of the
planned arrival time. For longer distance operators a criterion of arrivals within 10
minutes (i.e. 9 minutes 59 seconds or less) is used.
Critics of this approach have also suggested that it encourages train companies to
be conservative in their train timetabling, so ensuring that they meet the target.
Safety can be measured in terms of accidents or fatalities per thousand kilometres
travelled. Cleanliness might be measured by the number of complaints received
about litter and dirtiness. Security might be measured by the number of criminal
offences committed on the railway.
Critical success factors (CSFs) are those areas of business performance where the
company must succeed in order to achieve its overall strategic objectives.
1. Monitoring CSFs are those that are used to keep abreast of ongoing operations,
for example, comparison of actual results to budgets or industry averages. These
may be included in Planning Variances.
2. Building CSFs are those which look to the future of the organisation and its
development, for example, the launch of niche products such selling train tickets on
online. These may be included in Operational Variances.
The selection of KPIs to meet the company’s CSFs in the Mission Statement will
result in “What gets measured, gets done.”
This has the advantage of driving performance in areas the management wish to
focus on. However, there is a danger of over-management of the KPIs measured
and neglect of areas not measured by any KPIs.
80
24.1 Responsibility Accounting
Responsibility accounting segregates revenue and cost information into areas of
personal responsibility to assess the performance achieved by relevant persons to
whom authority has been designated.
This system recognise various decision centres throughout the organisation and
trace costs, revenue, assets and liabilities, to the individual managers who are
primarily responsible for making decisions about the costs, revenue, etc in
question.
Cost Centre
A unit of a business where the manager is made accountable for all the cost.
Revenue Centre
A unit of an organisation where the manager is accountable for the sales earned in
the unit.
Profit Centre
Where the manager is responsible for the profitability of the unit.
Investment Centre
Where the manger is responsible for both the profitability and the capital
investment of the unit.
24.2 Divisionalisation
Decentralisation refers to delegating responsibilities to divisional managers or unit
heads.
Advantages
● It increases motivation of the divisional managers as they feel involved in the
decision making of the organisation.
● It is a form of training for the divisional managers and it easy for them to rise
through the ranks to strategic positions.
● It should promote goal congruence (see later), as all decisions been taken are
all geared towards achieving the objectives of the whole organisation.
● It drastically reduces the time taken to make decisions.
Disadvantages
● Divisional managers may make dysfunctional decisions (decisions that are not
in the best interests of the organisation).
● There is a need for a performance appraisal system to assess the performance
of individual managers.
● Top management may lose control by delegating decision making to divisional
managers, since they are not aware of what is going on in the whole
organisation.
● Lack of economies of scale. For example, efficient cash management can be
achieved much more effectively if all cash balances are centrally controlled.
81
24.3 Return on Capital Employed (ROCE)
ROCE = ______Profit before Interest and Tax (PBIT)______

Capital Employed (Equity + NCL or Total Assets – CL)
Advantages of ROCE
1. It is easy to understand and easy to calculate.
2. ROCE is still the commonest way in which business unit performance is
measured and evaluated, and is certainly the most visible to shareholders.
3. Managers may be happy in expressing project attractiveness in the same
terms in which their performance will be reported to shareholders, and
according to which they will be evaluated and rewarded.
4. The continuing use of the ROCE method can be explained largely by its
utilisation of balance sheet and income statement magnitudes familiar to
managers, namely profit and capital employed.
Criticisms of ROCE
1. It fails to take account of the project life or the timing of cash flows and time
value of money within that life.
2. When assets are valued at net book value, reported performance improves
with time as the assets get old. In this case there is a disincentive to invest
in new assets.
3. It uses accounting profit and capital employed, hence subject to manipulation
due to various accounting conventions.
4. Performance measurement based on ROCE encourages short-termism in
decision making. Failure to invest in new assets could be harmful to the long-
term interest of the division and the organisation as a whole.
5. It is difficult to assess the significance of ROI. There is no definite investment
signal. The decision to invest or not remains subjective in view of the lack of
objectively set target ROI
6. ROI is sometime confused with Internal Rate of Return (IRR)
24.4 Return on Investment (ROI)
ROI = Divisional Profit

Divisional Investment
The ROI measures the percentage of the division’s generated profit and the asset it
employed in generating it. ROI can be further breakdown into:
ROI = Profit Margin x Asset Turnover
Divisional Profit = Divisional Profit x Divisional Sales

Divisional Investment Divisional Sales Divisional Investment
82
24.5 Residual Income (RI)
RI = profit – (capital employed x the cost of capital)
Advantages of residual income

Residual income overcomes many of the problems of ROI:
● It encourage investment centre managers to undertake new investments if
they add to residual income.
● As a consequence it is more consistent with the objective of maximising the
total profitability of the company.
● It is possible to use different rates of interest for different types of asset.
Disadvantages of residual income

● Like ROI, residual income is also based on accounting profit and capital
employed which can be manipulated.
● It encourage investment centres managers to think in the short-term about
how to increase next year’s residual income for the centre, hence does not
encourage decision making for long-term.
● Residual income is not as widely used as the ROI despite overcoming some of
the problems in ROI.
In decision making, managers should not use measures like ROI and RI. However,
generally the aforementioned measures are used in performance measurement;
therefore managers tend to include these in their assessments of new projects
However the performance is appraised, it is normal to appraise divisional managers

over one year. When using ROI and RI the investment will fall in value over time
as a result of depreciation. This has the impact of increasing the reported
performance for each year that investment is not made within the division
A cynical manager could improve his perceived performance simply as a result of

deferring investment and using increasingly outdated assets. This could well have
adverse consequences to the business including
1. Poorer quality output due to worn out machines

2. Higher risk of machine breakdown
3. Using outdated technology.
83
24.6 ROI and RI as Performance Measure
ROI is the return on an investment that a division had invested. It is expressed in

percentage form and therefore is a relative measure. The ROI allows comparison
between different size of investments.
If RI is used as a performance measure, most of small investments will not be

accepted as their returns are measured in absolute dollars which is unlikely to
surpass larger scale investments because the RI is an absolute measure. RI reflects
the increase in wealth as a result of the investment.
Disadvantages of ROI and RI
• It can be difficult to identifying which is the controllable profits and investments.
• In the short-term, both ROI and RI overly emphasize on short-term

performance at the expense of long-term performance. Investment projects
that have positive net present values and shows poor ROI and RI in the early
years can be rejected.
• As assets age, their carrying value reduces due to depreciation, thus, the ROI
and RI will improve over time. This may lead to managers deferring investment
in new assets and retaining old ones.
• In a complex business, many performance measures are need rather than

simply interpreting the business performance using RI and ROI.
• Both ROI and RI require the cost of capital which may be difficult to calculate.
24.7 NFPI - Statistics
Customer satisfaction is a NFPI and companies often use average satisfaction score.
The following are different types of average in statistics:
Mean simple average or the arithmetic mean
Median in an ascending or descending order, median is the sample in the

middle
Mode the highest frequency of occurrence
84
24.8 Value Based Management (VBM)
VBM believes that the value of a company is measured by its discounted future
cash flows. Value is created only when companies generate positive returns that
exceed the cost of the capital invested.
Managers are required to demonstrate the value mindset that their financial
objective is to maximise value of the company.
Organisational processes such as planning, target setting, decision-making,

performance measurement, and incentive systems need to be linked to value
creation at the different levels of the organisation. Value based management
encourage managers and employees to behave in a way that maximises the value
of the organisation.
Thus, the objective of VBM is ‘why’ and ‘how’ to change the organisation’s corporate
culture to focus on value creation.
Managers need to use value based performance measurement indicators to make

better decisions.
The value-based approach takes the primary objective of maximising shareholder

wealth and seeks to align performance with this objective. The principle measure
used at the strategic level will be economic value added (EVA). EVA is equivalent in
the long term to discounted cash flow net present value (NPV) which is widely used
in project appraisal. Other relevant value measures might be market value added
(MVA) and shareholder value added (SVA).
1. Net Present Value (NPV) are discounted cash flows with positive NPV is
considered value adding.
2. Economic Value Added (EVA) after returns to debt and equity holders in the form
of weighted average returns on capital employed from the NOPAT, any remaining
profits would add value to equity holders.
3. Market Value Added (MVA) is the increase in stock market value less funds
subscribed by shareholders. This concept can cover the whole life of the business.
The market value added is the difference between the cash that investors have put
into the business (either by purchase of shares or the reinvestment of potentially
distributable profits) and the present value of the cash they could now get out of it
by selling their shares.
4. Shareholder Value Added (SVA) includes share price and dividends per share to
reflect total shareholder return. Other measures may include cashflows for survival
such as free cash flow and growth in earnings per share.
At the same time, non-financial objectives and targets such as customer

satisfaction, product innovation, and employees satisfaction, social, ethical and
environmental responsibilities are also important to the entire organisation.
Successful companies are usually the ones that combine their financial and non-
financial goals to have a balanced approach to performance review and
measurement.
85
24.9 Economic value added (EVA)
The aim of EVA is to provide management with a measure of their success in

increasing shareholders wealth. It is a better measure than profits.
EVATM = NOPAT – (Economic Capital Employed b/d x WACC)

● It is a measure of the true economic value that has been added to the business
in period under consideration.
● The cost of capital used reflects the weighted cost of the business’s equity and
debt capital, including short term debts.
● Based on economic values of assets and not accounting or historical values.
Principles of EVA
● The objective of a profit making organisation is to maximise shareholders
wealth.
● The value of a business depends on the extent to which shareholders expect
future economic profits to exceed the cost of capital invested.
● Current performance (EVA) is reflected is reflected in the current share price.
● So for the share price to increase, the business must achieve an increase in
EVA.
86
Adjustments to Profits include:
W1. Find NOPAT $
Profits after tax (PAT) X
Add back:
Intangible assets amortised X

Accounting depreciation X
Increase in provision for doubtful debts X
Research and development costs X
Operating lease X
Deferred tax (often hidden in tax expense and tax paid) X
Non-cash expenses X
Interest paid net of tax X
Less:
Decrease in provision for doubtful debts (X)

Loss tax relief on interest (X)
Economic depreciation (X)
Net Operating Profit After Tax (NOPAT) X
Adjustments to Capital Employed include:
W2. Find Adjusted CE b/d $
Reported CE at start of year (CE b/d) X
Add back:
Cumulative intangible assets amortised X

Economic value of capitalised development costs X
Economic value of capitalised operating leases X
Non-cash expenses X
Provision for doubtful debts X
Less:
Economic Depreciation on previously capitalised assets (X)
Adjusted CE at start of year (CE b/d) X
W3. Find WACC = KE + KD after tax
87
Advantages include:
● Less distortion by accounting policies since the measure is closer to cashflows
● An absolute value which can easily be understood
● Increasing EVA should result in increase of real wealth for shareholders
● Encouraging expenditure on costs which build up the business by treating them
as an investment rather than an expense.
Disadvantages include:
● Focus on short-term performance
● Focus on past performance
● Potentially a large number of adjustments need to be made, making it difficult
to compare different investment centres.
Uses of EVA
EVATM can be used for:
● Setting organisational goals
● Determining bonuses
● Performance measurements
● Corporate valuation
88
24.10 Net Present Value (NPV)
NPV is useful in decision-making where projects with positive NPV should be

accepted and projects with negative NPV should be rejected.
Higher discount rate gives lower NPV.
Lower discount rate gives higher NPV.
Fisher (1930) Real Discount Rate
(1 + Nominal rate) – 1 = Real discount rate

(1 + Inflation rate)
Say, the money cost of capital (or nominal rate) is 15·44%. Annual inflation during
the period is estimated at 4%. A real discount rate of 11% has been used. It has
been calculated as follows:
Real discount rate = (1 + Nominal rate) – 1 = 1.1544 – 1 = 1.11 – 1 = 0.11or11%

(1 + Inflation rate) 1.04
24.11 Internal Rate of Return (IRR)
IRR is when the NPV is zero and is useful in decision making where project’s IRR is
greater than the cost of capital should be accepted. It is calculated with a financial
calculator or as follows using interpolation of a low discount rate with positive NPV
and a high discount rate with negative NPV.
IRR = Low % + ____+NPV____ x (High % - Low %)

+NPV – (-NPV)
Consider the following cashflows:
Yr 0 Yr 1 Yr 2 Yr 3 Total
Cashflows ($600,000) $141,840 $259,705 $303,625
DF 12.5% ($600,000) $126,080 $205,199 $213,246 ($55,475)
DF 5% ($600,000) $135,086 $235,560 $262,283 $32,929
IRR = 5% + ___ _+$32,929__ __ x (12.5% - 5%)

+$32,929 – (-$55,475)
IRR = 5% + +$32,929 x 7.5%

+$88,404
IRR = 5% + 2.8%
IRR = 7.8%
IRR using spreadsheet
=IRR(Year 0:Year N)
89
24.12 Modified Internal Rate of Return (MIRR)
MIRR is useful where positive cashflows (CF) generated from the project are
reinvested at an investment rate. MIRR is more realistic than IRR because IRR
assumes any positive cashflows are reinvested at the same discount rate, which is
often not the case.
  n
PV
R
MIRR =  
(1 + r
e ) − 1
 PV 
I

𝑛 +𝐶𝐹@𝑟𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒
𝑀𝐼𝑅𝑅 = √ −1
−𝐶𝐹
Yr 0 Yr 1 Yr 2 Yr 3 Total
Cashflows ($600,000) $141,840 $259,705 $303,625
Reinvest
at 4.5% X 1.0452 X 1.045 X1
Future value
at Yr 3 $154,893 $271,392 $303,625 $729,910
  3
$ 729 , 910
MIRR =   − 1 = 1 . 216516667 − 1 = 1 . 067511808 − 1 = 0 . 67 5 or 6 . 75 %
 
 $ 600 , 000 
MIRR is the discount rate where the future value of reinvestments in Year 3
$729,910 is equal to the initial investment $600,000 in Year 0.

In this case, the project’s MIRR is compared with the cost of capital and if the MIRR
greater than the cost of capital, the project will be accepted.
MIRR using spreadsheet
=MIRR(Year 0:Year N;CC%;RR%)
CC% is cost of capital in decimals

RR% is reinvestment rate in decimals
90
24.13 Transfer Pricing
The sale of goods between one division and another within the same organisation.
The setting of the transfer price will have no direct impact on the overall
performance of the company but a very real impact on individual divisional
performance.
The setting of transfer prices will therefore be highly political. The manager can
improve his own reported performance more easily by arguing for a better transfer
price than in any other way.
Aims of a good transfer pricing policy include encourage autonomy, set clear,
transparent and understandable transfer prices, facilitate performance evaluation
and promote goal congruence
1. Spare Capacity
Optimal Transfer Price = Marginal Cost i.e. variable cost
2. Full Capacity
Optimal Transfer Price of Product A
= Lost Contribution of Product B + Marginal Cost of Product A
Types of Transfer Pricing
• Market price transfer prices
The transfer price of the goods and services will be equal to that provided to an
external party at market prices.
• Adjusted market price transfer prices
In some cases there will costs that can be avoided if the goods are transferred
internally (e.g. packing costs). It makes sense when calculating the transfer price
to deduct these from the market price used above.
• Marginal costs transfer prices
The transfer price is the variable costs incurred by the transferring division.
• Full cost transfer prices
The transfer price is the total costs incurred by the transferring division that provide
the goods and services.
• Negotiated transfer prices
Sometimes, the transfer price between divisions is negotiated between the

transferring and receiving division. The transferring division will set a minimum
price it is willing to receive while the receiving division will set a maximum price it
is willing to pay. Next, negotiation takes place to determine an optimum transfer
price.
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24.13.1 International Transfer Prices
There are a number of additional issues when the transfer is between divisions in
different countries:
● Exchange rate fluctuation
Strengthening or weakening of a country’s currency against another currency
would affect transfer pricing and profit. When the currency of the transferring
division strengthens, the receiving division would have to pay more to the
transferring division.
● Taxation rates
Multi-national companies often exploit differences in tax rates in their transfer
pricing. Often, low transfer prices are set for companies in countries with high
tax rates when they transfer partially assembled products to divisions with
lower tax rates. Thus, the transferor pays less tax for its sales. Products are
then completed and sold from the division in the country with lower tax rates.
● Import duties
There is an incentive to lower transfer prices between divisions in different
countries to minimise the import duties paid in order to maximise the group’s
total profits.
● Fund repatriation
Certain governments may impose policies to prevent foreign companies to
repatriate funds back to their home countries.
● Anti-dumping legislation
In order to protect infant industries or home-grown companies the governments
may impose regulations for products to be transferred at market price to
prevent multi-national companies from transferring goods cheaply into their
country.
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24.14 Financial Performance Indicators (FPI) - Ratios
Profitability Ratios
Gross Profit Margin (GPM) = Gross Profit x 100%

Revenue
Operating Profit Margin (OPM) = Profit before interest and tax (PBIT) x 100%
Revenue
Net Profit Margin (NPM) = Net Profit x 100%

Revenue
Return on Capital Employed = Profit before interest and tax (PBIT) x 100%
Capital Employed (CE)
Capital Employed (CE) = NCA + CA – CL i.e. Asset Base
or CE = Equity + NCL i.e. Capital Structure
Asset Turnover = Revenue

CE
ROCE = Operating Profit Margin x Asset Turnover
PBIT x 100% = _PBIT__ x 100% x Revenue

CE Revenue CE
Liquidity Ratios
Current ratio = Current Assets__

Current Liabilities
Quick (acid test) ratio = Current Assets - Inventories

Current Liabilities
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Efficiency Ratios
Inventory holding period = Inventories_ x 365 days

Cost of Sales
= Cost of Sales
Inventories
Average collection period = Trade Receivables x 365 days

(AR days) Credit Sales
= Credit Sales____
Trade Receivables
Average payment period = Trade Payables___ x 365 days

(AP days) Credit Purchases
= Credit Purchases
Trade Payables
Cash Cycle measures the time it takes a company to convert its Inventories,
Receivables and Payables into cash as follows:
Inventory Days + AR Days – AP Days = Cash Cycle Days
Gearing Ratio
Gearing Ratio = Debt x 100%

CE
= Debt_ x 100%
Equity
Interest Cover = PBIT

Interest Payable
Operational Gearing = FC or FC____ or Contribution

VC FC + VC PBIT
Operational gearing measures fixed cost (FC) as a proportion to variable cost (VC)
or total cost because if Revenue falls, VC would fall proportionately but FC would
remain constant.
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Investors Ratio
Dividend Cover = Profit after Tax (PAT)

Dividends
Earnings per Share = Earnings

(EPS) Shares
Price / Earnings Ratio = Market Price per Share

(PE Ratio) Earnings per Share
Dividend Yield = Dividends

Market Capitalisation
Market Capitalisation = Market Price per Share x Number of shares
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24.15 Non-Financial Performance Indicators (NFPI)
Non-financial measure of performance should focus on critical success factors of a

non-financial nature. The measures include market share, capacity utilisation,
labour turnover, etc.
Below are some examples of NFPI:
AREA POSSIBLE CRITERIA
COMPETITIVENESS ● sale growth by product or service

● measures of customer base
● relative market share and position
ACTIVITY ● sales units

● labour hours
● machine hours
● number of material requisitions serviced
● number of accounts reconciled
PRODUCTIVITY ● efficiency measurements of resources

planned against those consumed
● production per person
● production per hour
● production per shift
QUALITY OF ● number of customer complaints

SERVICE/PRODUCT ● rejections as a percentage of production or
sales
● number of account lost or gained
QUALITY OF WORKING LIFE ● days absence

● labour turnover
● overtime
● measures of job satisfaction
INNOVATION ● proportion of new products and services to

old ones
● new product or service sales level
CUSTOMER SATISFACTION ● speed of response to customer need

● informal listening by calling a certain
number of customers each week
● number of customer visit to the factory or
workplace
● number of managers visit to customers
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24.16 The Balanced Scorecard (BSC)
Kaplan and Norton (1992) devised the ‘balanced scorecard’ as a way in which to
improve the range and linkage of performance measures.
Aspect of performance Key question

1. Financial perspective How do we create value for our
shareholders
2. Customer perspective What do customers want from us
3. Internal business perspective What processes must we excel at to
achieve our objectives?
4. Innovation and learning perspective How can we learn and improve and
create value
The above illustrates four perspectives’ financial, customer, internal business and
innovation and learning. These measures seek the answer to the questions which
may be viewed as goals requiring measurement. The balanced scorecard adds to
the traditional financial focus by seeking to monitor the internal business
perspective in non-financial terms, to monitor change and improvement in products
and methods and to provide an external focus aiming at ensuring customer
satisfaction and continued or increased business from them.
1. Financial perspective
● Return on capital employed
● Cash flows
● Residual income
● Economic value added
● Profit target
● Cost reduction target
2. Customer perspective
● Percentage on-time delivery
● competitive price
● target for new customers, target for retention of existing customers
● percentage of orders met within X days
● market share target
3. Internal business perspective

● Number of activities per function
● Production cycle time
● Duplicate activities across functions
● Process alignment (is the right process in the right department?)
● Process bottlenecks
● Process automation
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4. Innovation and learning perspective
● Is there the correct level of expertise for the job?
● number of new products launched
● percentage of total revenue coming from new product
● success of continuous improvement programs
● Employee turnover
● Job satisfaction
● Training/Learning opportunities
Benefits of balanced scorecard

The justifications of balanced scorecard are that:
● Both financial and non-financial measures are considered and short-term
financial performance is not over-emphasised.
● Financial performances based on accounting figures are easily manipulated and
as such unreliable.
● It is a strategy focused performance management system.
● Changes in the business and market environment do not show in the financial
results of a company until much later. Factors other than financial performance
must therefore be targeted.
Problems of balanced scorecard
The problems of balanced scorecard are that:

● The target for the different perspectives could be contradictory and inconsistent
with each other.
● Non-financial performance targets could become an end in themselves, rather
than a means towards the overall financial objective of maximizing shareholders
wealth.
● Time consuming.
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24.17 Performance Pyramid (PP)
Lynch and Cross (1991) viewed business as a performance pyramid. This four level
pyramid links strategy and operations. Corporate vision is seen as looking forward
through defining markets and the basis on which the company will compete. The
basis of competing may include pricing policy, product innovation and quality
features such as, quality of sales force, after sales service, financial aid to
customers and point of sale amenities. The pyramid views a range of objectives for
both external effectiveness and internal efficiency. These objectives are to be
achieved through measures at various levels. The specification for a business unit is
seen as:
• it has its own distinct business concepts and mission;

• it has its own competitors;
• it is better off managing its strategies in an independent manner.
There should be both financial and marketing measures for each business unit
which will focus on short term goals of profitability and cash flow and long term
goals of growth and market position.
Corporate Vision
Business Units
Market Satisfaction Financial Measures
Business
Operating Customer satisfaction Flexibility Productivity
Systems
Departments
and work Quality Delivery Process / Cycle time Cost / Waste
centres
Operations
External Effectiveness Internal Efficiency
What Lynch and Cross call ‘getting it done in the middle’ focuses on business
operating systems where each system is geared to achieve specific objectives and
will cross departmental/functional boundaries, with one department possibly
serving more than one operating system. For example, an operating system may
have new product introduction as its objective and is likely to involve a number of
departments from Design and Development to Marketing. At this level performance
focus will be on three areas. Firstly ensuring customer satisfaction. Secondly,
flexibility to accommodate change (in methods and customer requirements).
Thirdly, productivity looking for the most cost effective and timely means of
achieving customer satisfaction and flexibility.
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At the bottom level of the pyramid is what Lynch and Cross label as ‘measuring in
the trenches’. Here the objective is to increase quality and delivery and decrease
cycle time and waste. At this level a number of non-financial indicators will be used
in order to measure the operations.
The four levels of the pyramid are seen to fit into each other in the achievement of
objectives. For example, improved quality will assist in the achievement of
customer satisfaction and hence growth and market position.
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24.18 The Building Block Model (BBM)
This model is particularly suited to service industries.

Fitzgerald and Moon divide performance measurement into three areas:
1. Standards.
2. Rewards.
3. Dimensions. Leading factors include Quality, Resource ulilisation, Flexibility
and Innovation. Lagging factors include Financial performance and
Competitiveness.
Dimensions
1. Financial performance
2. Competitiveness
3. Quality
4. Resource utilisation
5. Flexibility
6. Innovation
Standards Rewards
1. Ownership 1. Clarity
2. Achievability 2. Motivation
3. Equity 3. Controllability
Dimensions are the selected KPIs to ensure that CSFs in the Mission Statement
are met.
The management can use standards to set practical targets in areas in need of
improvement and attention, then, rewards can be link to HRM to motivate staff
performance when targets are met.
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Fitzgerald et al (1993) and Fitzgerald & Moon (1996) consider performance
measurement in service businesses. The table above shows their building blocks for
dimensions, standards and rewards for performance measurement systems. They
view the dimensions of performance in two sets, the results measured by financial
performance and competitiveness and the determinants as measured by quality,
flexibility, resource utilisation and innovation. Focus on the examination and
improvement of the determinants should lead to improvement of the results. There
are particular characteristics of service businesses which will affect performance
and its measurement. These are:
1. Simultaneity - production and consumption of the service coinciding;

2. Perishability - the inability to store the service;
3. Heterogeneity - variability in the standard of performance of the provision of
the service;
4. Intangibility - a service has no physical substance
5. Subjectivity - of what is provided to and valued by individual customers.
6. Non-Transferability – a service is non-transferable to another customer.
1. Standards
This refers to the targets that are set within the organisation. These should be:
● High enough to motivate.
● Be owned by the employees (through participation in target-setting).
● Be seen to be equitable.
2. Rewards
This refers to what the organisation (and the employee) is trying to achieve.
● The organisation’s objectives should be clearly understood.
● Employees should be motivated to work towards these objectives.
● Employees should be able to control areas over which they will be held
responsible.
3. Dimensions
This refers to how performance will be measured. The areas are:
● Financial performance
● Competitive performance
● Quality of service
● Flexibility – speed or ability to meet customer request
● Resource Utilisation
● Innovation.
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24.19 Six Sigma
The main theory of quality improvement is the Six Sigma concept.

The idea is to try and reduce the chance of an item failing to be of a good enough
quality. This does not mean having a single standard, there may be a range of
values which are acceptable.
This range is known as the tolerance. For example a hamburger chain may say
that as long as a burger is not too hot or too cold it is acceptable. This would give
a range of acceptable temperatures (the tolerance).
The six sigma approach is about many gradual improvements rather than
occasional large ones.
The stages that six sigma goes through are (DMAIC for existing product
and DMADV for new product):
Defining customer requirements

● Identity problems quality
● Prepare statement of problem (nature, specific, quantity)
● Set up project team to address problem and make an improvement. (the team
should be made up of personnel from all the areas to be affected)
Measuring existing performance

● The team should undertake preliminary analysis to identify the cause of the
problems
● The team will then focus most of their attention to the main cause
Analysing the existing process

● Detail investigation
● Test of different theories
● Elimination method is used
Improving the process (if Existing Product) or Design the process (if New
Product)
● Redesigning of process
● Most effective method
Controlling the new process (if Existing Product) or Verify the process (if
New Product)
● Implementation
● Compare plan and actual
● Continuous audit of process
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24.20 Performance Measurement in Not-For-Profit Organisation (NFPO)
and the Public Sector
In simple terms the basic objective of a not for profit is to provide a service without
making a loss, a profit or surplus simply being either a timing issue or a means to
an end.
The wider issue is that the organisation is providing a service of social or moral
worth. We can attempt to measure this service.
The objective for such an organisation will differ widely from one organisation to
another. They may include one or more of the following:
● Client satisfaction
● Employee satisfaction (particularly when volunteers are a substantial part of
the workforce)
● Maximisation of surplus (perhaps to assist in growth or protect against loss of
future funding)
● Growth
● Usage of facilities (for example library services)
● Maintenance of capability (for example a fire service or army).
The key to remember in the exam is that for every not for profit organisation there
will be multiple objectives that have to be addressed as opposed to a profit making
organisation where profit is the key aim in relation to satisfying the owners or
shareholders.
Problems of measuring performance in NFPO and Public Sector

1. Multiple objectives
As seen above most organisations will have competing objectives. The
difficulty arises when attempting to identify the relative importance of the
objectives.
2. Measurement of services provided
The nature of many services is that they are more qualitative than
quantitative. When measuring such outputs it is often very difficult to get
meaningful aggregate measures of performance.
3. No profit motive
Measures such as ROI and RI cannot be used to gain an overall measure of
performance.
4. Identification of cost unit
The cost unit is likely to be relatively complex and there is likely to be more
than one cost unit. For example what is a cost unit for a hospital/ there are
likely to be multiple such cost units being used by a single patient.
5. Key constraint
For most organisations the key constraint is the level of finance available. A
charity is limited to its donations and a government department is limited to
its allocation from the finance department. This constraint is separate in most
organisations to their end objective.
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6. Political intervention
Unlike commercial entities not for profit entities are far more likely to be
affected by political influence, either directly in the form of elected official or
indirectly by public sentiment.
7. Legal considerations
It is likely that adherence to restrictive legal rules are going to impact on a
not for profit entity because of the nature of the organisation or the links to
government at a local or national level.
Measuring Performance in NFPO and Public Sector

In order to establish meaningful measures within such an environment we can
employ the following solutions:
1. Input measurement
In the absence of easily measured output then more consideration can be put
into the costs and resourcing of an organisation.
2. Independent scrutiny and target setting
There is need for fine judgement when setting qualitative targets. By use of
independent experts then measures can be set that reflect performance levels
appropriate without introducing bias.
3. External comparison
A powerful assessment of the performance of an organisation is to benchmark
that performance in relation to similar organisations. This allows for both
historical results to be used but also best practice measures to be developed.
Value for Money (VFM)

Value for money (VFM) is a framework by which not-for-profit-organisations
(NFPO) can be measured. It separates the performance of the business into three
areas – the three E’s:
1. Effectiveness
2. Efficiency
3. Economy
1. Effectiveness (to meet long term mission statement)

This may be described as how well the organisation meets its objectives. Perhaps
an easier way of understanding it would be to see how well the output of services
match the client need.
2. Efficiency (to maximise input:output ratio)

This describes how well resources are utilised; it measures the output of services
for a given level of resource or input.
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3. Economy (to minimise cost of input)
This considers the cost of sourcing the input resources. The aim being to minimise
the costs of the input for a given standard and level of resource.
Firstly on the economy and efficiency with which the organisation’s services are
provided and then on the effectiveness of the organisation’s performance in
achieving its objectives.
This may be complicated by the inter-relationship of objectives. For example, in

Higher Education the main objectives may be seen as ‘the provision of a quality
educational environment in order that students obtain qualifications suited to their
chosen careers and with skills relevant to the needs of industry and commerce’.
Subsidiary objectives which will help in the achievement of the main objectives may
include ‘a quality research environment for post-graduate students and staff and a
consultancy provision to generate income and to develop staff expertise, fostering
quality approaches to teaching and learning’.
The measures of economy, efficiency and effectiveness may be in conflict with each
other. Economy may be seen as spending frugally. For example, how best to
minimise the cost per graduate in Higher Education. Efficiency may be seen as the
maximisation of input/output ratio. In Higher Education this may be maximising the
student: staff ratio. This will tend to mean larger class sizes, which whilst
economical in use of teaching resources is not necessarily effective in creating the
best learning environment. Effectiveness is the achievement of the main objectives
and relevant measures will include the number and grading of degree awards and
success in job placement of graduates.
VFM for profit-seeking organisations shall not be measured using 3E’s. Instead
it is measured using quality, reputation, customer repeat purchases, loyalty, etc.
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24.21 Data Analytics
Big Data on Performance Measurement and Management
Big data is commonly used, but not commonly understood. It refers primarily to the
vast amount of data continually collected through devices and technologies such as
credit cards and customer loyalty cards, the internet and social media and,
increasingly, WiFi sensors and electronic tags. Much of this data is ‘unstructured’ –
data that does not conform to a specific, pre-defined data model.
Simply, Big Data refers to the very large amounts of data which are now available
through the increased use of technology and can be used to develop predictive
information about human (customer and supplier) behaviour. There are three
characteristics of Big Data: volume, velocity and variety.
1. Volume: The large volume of data obtained through loyalty card programmes,
social media, website and in stores.
2. Velocity: The speed to process the information for decision-making including

data mining software.
3. Variety: The various types of information collected ranging from sales and
purchases records to social media comments and photographs as well as
geographical location.
Management accountants and finance professionals have already spotted the

potential of big data. The increased demand for high-level analytic skills creates
important opportunities for accountants and finance professionals. Trained to
structure, gather and analyse financial information, they can apply their core skills
to non-financial and other datasets.
The increase in the value they bring to organisations could, therefore, be dramatic.
The management of big data for accountants and finance professionals means more
than ‘game-changing’ opportunities. It means new challenges. The future is not just
about a ‘straight’ transference of skills: it is about developing new ones. Finance
professionals will need to find ways to use big data to measure organisational
performance and both organisational and investment risks. In addition, as the
importance of big data in business grows, they will need to find ways to measure its
intrinsic value as an organisational asset.
To differentiate themselves in the marketplace in the next 5 to 10 years and turn

big data to their advantage, accountants and finance professionals will need to do
three things:
1 develop methods and services for the valuation of data – and extend their role in
compliance and internal control to the ethical and effective stewardship of data
assets.
2 use big data to offer more specialised decision-making support – often in real
time – and decide when data can most usefully be shared with internal and external
stakeholders or ‘monetised’ as new products.
3 use big data and its associated tools not only to identify risks in real time and
improve forensic accounting but also to evaluate the risks and rewards of long-term
investment in new products and new markets.
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Opportunities and Challenges of Big Data to Management Accountants
1 Valuation of data assets
Opportunity
• Helping companies value their data assets through the development of robust
valuation methodologies
• Increasing the value of data through stewardship and quality control
Challenge
• Big data can quickly ‘decay’ in value as new data becomes available
• The value of data varies according to its use
• Uncertainty about future developments in regulation, global governance and
privacy rights and what they might mean for data value
2 Use of big data in decision making
Opportunity
• Using big data to offer more specialised decision-making support in real time
• Working in partnership with other departments to calculate the points at which
big data can most usefully be shared with internal and external stakeholders
Challenge
• Self-service and automation could erode the need for standard internal
reporting
• Cultural barriers might obstruct data sharing between silos and across
organisational boundaries
3 Use of big data in the management of risk
Opportunity
• Expanding the data resources used in risk forecasting to see the ‘bigger picture’
• Identifying risks in real-time for fraud detection and forensic accounting
• Using predictive analytics to test the risk of longer-term investment
opportunities in new markets and products
Challenge
• Ensuring that correlation is not confused with causation when using diverse data
sources and big data analytics to identify risks
• Predictive analytic techniques will mean changes to budgeting and return-on-
investment calculations
• Finding ways to factor failure-based learning from rapid experimentation
techniques into processes, budgets and capital allocation
The opportunities and challenges suggest three imperatives in the next 10 years,
those of:
• developing new metrics

• learning new analytical skills
• creating a visual language of data ‘art’.
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Combined, these imperatives make up a new professional agenda. Accountants and
finance professionals must find ways not only to measure big data as an
organisational asset but also to use it as a measure of organisational performance.
The trend towards integrated reporting and the inclusion of non-financial ‘capitals’
in company reports and accounts makes adopting this approach all the more
urgent. It will increasingly be necessary to combine ‘hard’ financial data with ‘softer’
and non-financial datasets to provide the bigger picture of performance. Meanwhile,
there will also be requirements to extract value from big data through advanced
analytics – and to interpret the meaning of big data in ‘visual language’ that can be
used in company dashboards, decision-making ‘cockpits’ and information ‘hubs’.
There is no standard format for integrated reporting. However, there are changes in
focus of the company’s reporting which will require the input of the management
accountants of that business. Integrated reporting has a focus on opportunities and
risk, how resources are allocated and performance both recent historic and
expected in the future.
There are six capitals involved in value creation including traditional tangible and
financial assets but also including human, intellectual, environmental and
social assets.
Finance professionals who succeed in the future will form a bridge between data
science and data art, combining analytical skills and sophisticated models
developed by mathematicians and statisticians with the skills of data art and data
‘storytelling’. They will collaborate closely with the IT and information management
departments in cross-functional and multidisciplinary teams: the future could see
the emergence of a new professional ‘hybrid’, the chief financial technology officer
(CFTO) or chief financial information officer (CFIO). Most importantly, they will form
partnerships with senior leaders in the development of strategy and the
management of risk – and provide a service critical to the future of business.
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Article on 2 February 2018
Big Data and Performance Management
Big Data refers to the large collections of data that may be analysed to reveal
patterns, trends and associations, especially relating to human behaviour and
interactions. Big Data has already been explained in another article, entitled ‘Big
Data’ (see 'Related links'). This article will describe some real life examples of the
use of Big Data for performance management and measurement purposes.
Performance management involves managing the organisation in order to ensure

that it meets its objectives. Broadly, Big Data is relevant to performance
management in the following ways:
• Gaining insights (eg about customers’ preferences) which can then be used to
improve marketing and sales, thus increasing profits and shareholders’ wealth.
• Forecasting better (eg customer’s future spending patterns, when machines

will need replacing) so that more appropriate decisions can be made.
• Automating of high level business processes (eg lawyers scanning documents)

which can lead to organisations becoming more efficient.
• Providing more detailed and up to date performance measurement.
This article demonstrates some practical applications of Big Data.
WALMART’S POLARIS SEARCH ENGINE

Walmart is an American retailer that operates in 28 countries around the world. It
is the world’s largest company based on revenues. Many of Walmart’s customers
buy online through the company’s website. Walmart wanted to make sure that
customers can find what they are looking for on its website, so it developed its
Polaris search engine. If customers are looking for a particular product, they enter
the description in a search box, and the website displays products which meet that
description.
What is unusual about Polaris is the way it ranks the search results. It attempts to
show the products that the customer is most likely to buy towards the top of the
list. The algorithm takes into account many factors, including the number of likes
that the product has on social media networks and how many favourable reviews it
has.
The system also uses artificial intelligence to learn so that it can continually provide
better search results. If a phrase has been entered that the engine did not initially
understand, for example, the engine can ‘learn’ what that phrase meant based on
what the customer actually bought. Thus the system was soon able to figure out
that when a user entered ‘House’ into the search box, they were probably looking
for merchandise connected with the TV series of that name, not furniture or other
items for their house. If someone searches for ‘Flats’, the engine has learned that
they probably want to buy shoes, not apartments or flat screen TVs.
The metric that is used to measure the success of the website is customer
conversion rate – the number of customers that actually buy a product after a
search. It is estimated that the Polaris search engine has increased the conversion
rate by between 10% and 15%. That is worth billions of dollars in extra revenue.
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BEREDYNAMIC
Beredynamic is a manufacturer of high quality audio products such as microphones
and headphones. The company is based in Germany, but has a wide international
sales and distribution network. The company wanted to improve its analysis of
sales. Most ad hoc reports required data to be extracted from its legacy systems
into a spreadsheet where the reports would then be manually compiled. This was
time consuming, leading to delays in producing the reports. The reports themselves
were not always accurate either.
The company developed a data warehouse that automatically extracts transactions

from its existing ERP and financial accounting systems. The structure of this
warehouse was carefully designed so that standard information is stored for each
transaction such as product codes, country code, customer and region. This is
supplemented by a web based reporting solution that enables managers to create
their own reports, both standard and ad hoc, based on the data held in the
warehouse.
The system allows the company to perform detailed analysis of sales, which helps it
to identify trends in different products or markets. This leads to two business
advantages. The first is that the sales and distribution strategy can be changed
when demand changes in certain markets – for example, when sales of gaming
headphones began to increase in Japan, the company introduced promotions for all
its gaming products in that country, including a large advertising campaign and
introduction of product bundles specially for the Japanese market. The second
advantage is that production plans can quickly be changed as demand changes. If
demand is falling, production is slowed to ensure that the company is not left with
excessive inventory. If demand is expanding, production is increased to take
advantage of higher sales.
The ability to provide more detailed analysis quickly can also be used for
performance measurement and appraisal, for example, comparing actual sales with
targets by region, assessing whether a promotion achieved the expected increase in
profits. Such reports can be produced quickly based on real time data, meaning
that management can respond quickly to any adverse variances.
The success of the new system is measured in terms of the growth in revenues and
profits. While this seems simple, it has to be recognised that some growth would
have been expected even if the system had not been implemented, so determining
how much revenue growth has resulted from the greater analysis can be difficult.
Assumptions need to be made.
TESCO
British supermarket group Tesco has operations in several countries around the
world. In Ireland, the company developed a system to analyse the temperature of
its in-store refrigerators. Sensors were placed in the fridges that measured the
temperature every three seconds and sent the information over the internet to a
central data warehouse. Analysis of this data allowed the company to identify units
that were operating at incorrect temperatures. The company discovered that a
number of fridges were operating at temperatures below the -21◦C to -23◦C
recommended. This was clearly costing the company in terms of wasted energy.
Having this information allowed the company to correct the temperature of the
fridges. Given that the company was spending €10 million per year on fridge
cooling costs in Ireland, an expected 20% reduction in these costs was a significant
saving.
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The system also allowed the engineers to monitor the performance of the fridges
remotely. When they identified that a particular unit was malfunctioning, they could
analyse the problem then visit the store with the right parts and replace them.
Previously the fridges would only be fixed when a problem had been discovered by
the store manager, which would usually be when the problem had developed into
something more major. The engineers would have to visit the store, identify the
problem, and then make a second visit to the store with the required parts.
MORTON’S STEAK HOUSE

A customer jokingly tweeted US chain Morton’s and requested that dinner be sent
to the Newark airport where he was due to arrive late. Morton’s saw the tweet,
realised he was a regular customer, pulled up information on what he typically
ordered, figured out which flight he was on and then sent a waiter to meet him at
the airport and serve him dinner.
Clearly this action was a publicity stunt which the restaurant hoped that their
customer would publicise in future tweets. What it demonstrates is how easy it was
for Morton’s to identify the customer who sent the tweet, and to ascertain what his
favourite meal was. It also shows how companies like to influence social media
users who have a large following as a means of increasing their own publicity.
It is difficult to measure the impact of interventions into social media. No doubt the
happy customer would have communicated this story, and this may have improved
the reputation of the restaurant, but it is very difficult to measure the impact of this
on sales.
CONCLUSION
The cases above have shown how detailed analysis of data can be used in a number
of different ways to improve the performance of an organisation. Big data can be
used to understand customers and trends better, to provide insights into costs, and
to make it easier for customers to find what they want on the website. Companies
are likely to continue to identify innovative uses of the increasing volumes of data
available to them, and analysis of Big Data is likely to grow in importance as an
important strategic tool for many businesses.
Nick Ryan is a tutor and technical author for Becker Professional Education
Last updated: 2 Feb 2018
112
24.22 Problems of Performance Measurement
The above shows a list of possible problems which may accompany the use of
performance measures (Berry, Broadbent and Otley). This raises the question of
the compatibility (congruence) of individual and organisational goals. Organisational
goals have been discussed above. Individual goals may focus on financial and non-
financial areas such as remuneration, promotion prospects, job security, job
satisfaction and self-esteem. There may be a conflict for each individual between
actions to ensure the achievement of individual goals and/or organisational goals.
The list of potential problems in Figure 6 may be illustrated in the context of any
type of organisation. The comments which follow are illustrated in the context of
what could occur (although should not occur!) in a UK University.
1. Tunnel vision may be seen as undue focus on performance measures to the

detriment of other areas. For example, efforts to ensure that an average student:
staff ratio of 20:1 is maintained may lead to larger class sizes to the detriment of
soft skills development in areas such as communication and teamwork.
2. Sub-optimisation may occur where undue focus on some objectives will leave
others not achieved. For example, efforts to ensure high publication rates per staff
member could lead to less focus on student learning and result in fewer first class
and upper second class honours degree awards.
3. Myopia refers to short-sightedness leading to the neglect of longer term

objectives. An example would be the need for staff to be heavily involved in
consultancy work in order to boost short term departmental income. This could be
to the detriment of longer-term goals such as new course development or
innovations in approaches to teaching and learning.
4. Measure fixation implies behaviour and activities in order to achieve specific

performance indicators which may not be effective. For example, the recruitment of
less well qualified undergraduates in order to boost the student:staff ratio may
result in ongoing problems of high student drop-out rates and associated
counselling problems.
5. Misrepresentation refers to the tendency to indulge in ‘creative’ reporting in

order to suggest that a performance measure result is acceptable. For example, a
statistic that 80% of responses indicated satisfaction with the organisation of a
course, when only 10% of the students have responded to the question.
113
6. Misinterpretation involves failure to recognise the complexity of the
environment in which the organisation operates. In Higher Education, the existence
of multiple principals e.g., government, employers and students creates a complex
environment in which the objectives of the principals may not coincide. The
government may wish greater numbers of students into Higher Education where as
wide a range of courses as possible is offered. Employers may wish to focus on
obtaining a satisfactory number of graduates qualified in disciplines suited to their
(the employer) needs. Students may wish a quality educational environment with
considerable support through staff and services on offer.
7. Gaming is where there is a deliberate distortion of the measure in order to

secure some strategic advantage. This may involve deliberate under performing in
order to avoid higher targets being set. For example, restriction of departmental
consultancy earnings in one year in order that the target for the next year will not
be increased and/or to hold back consultancy possibilities which are ‘in the pipeline’
in order to create slack.
8. Ossification which by definition means ‘to harden’ refers to an unwillingness to

change the performance measure scheme once it has been set up. A university
example could be a standard set of questions in a questionnaire to test student
satisfaction with a course. ‘Good’ responses may simply indicate a poorly structured
questionnaire, rather than a high degree of student satisfaction.
24.21 Overcome problems of performance measure
A first step is to acknowledge that imperfection will exist in any scheme. A number
of steps may be taken in order to minimise the impact of imperfections. For each
suggestion which follows, the problems which are most likely to be reduced are
noted.
• Involve staff at all levels in the development and implementation of the scheme.
People are involved in the achievement of the performance measures at all levels
and in all aspects of an organisation. It is important that all staff are willing to
accept and work towards any performance measures which are developed to
monitor their part in the operation of the organisation and in the achievement of
its objectives. This should help reduce gaming and tunnel vision.
• Be flexible in the use of performance measures. It is best to acknowledge that

they should not be relied on exclusively for control. A performance measure may
give a short term measure which does not relate directly to actions which are
taking place in order to lead to an improved longer-term level of performance.
To some extent it should be acknowledged that improved performance may be
achieved through the informal interaction of individuals and groups. This
flexibility should help to reduce measure fixation and misrepresentation.
• Keep the performance measurement system under constant review. This should
help to overcome the ossification and gaming problems.
114
Another requirement in overcoming problems is to give careful consideration to the
dimensions of performance. Action here could include:
• Try to quantify all objectives’ however elusive! The argument here is that efforts
to quantify an objective will improve the efforts to understand and take action to
achieve the intended output of the objective. Such actions should help to
overcome sub-optimisation.
• Try to focus on measuring customer satisfaction. This is a vital goal. Without

continuing and improved levels of customer satisfaction, any organisation is
underachieving and is likely to have problems in its future effectiveness. Positive
signals from performance measures earlier in the value chain are only of
relevance if they contribute to the ultimate requirement of customer satisfaction.
Once again tunnel vision and sub-optimisation should be reduced through
recognition of this requirement.
Consideration should also be given to the audit of the system. Action may have to:
Seek expert interpretation of the performance measurement scheme. This should

help in considering the likely incidence of any or all of the problems listed. It is
important that this issue is considered at arm’s length and is not coloured by the
views of those operating the scheme.
Maintain a careful audit of the data used. Any assessment scheme is only as good
as the data on which it is founded and how such data is analysed and interpreted.
This should help, in particular, to reduce the incidence and impact of measure
fixation, misinterpretation and gaming.
It is also relevant to recognise key features necessary in any scheme. Once again,
such measures should help to overcome the range of problems.
Key features will include:
• Nurture a long-term view/perspective amongst staff. This may possibly be

difficult to achieve where rewards such as bonus or promotion are based on
relatively short-term measures.
• Try to hold down the number of performance measures. Better to focus on the
key events which are likely to result in customer satisfaction. Too many
performance measures may simply dissipate effort and possibly lead to
conflicting actions.
Develop performance benchmarks which are independent of past activity. This

refers to the need to focus on the way ahead and how by appropriate action to
improve from whatever the current situation may be.
115
Article: Integrated Reporting
Integrated reporting (IR) has been developed and promoted by the International
Integrated Reporting Council (IIRC), a global coalition of regulators, investors,
companies, standard setters, the accounting profession and non-governmental
organisations. IR has been introduced to the syllabuses of many of the Professional
level exams. This article aims to show how the idea of integrated reporting is
relevant to the APM syllabus.
RELEVANCE TO APM
IR is focused on showing the connectivity of strategic objectives, risk and
performance to demonstrate how organisations create value. This means that
organisations need to understand and report on all areas of performance and not
just focus on short-term financial results.
You will see that IR has many elements which easily relate to APM. The definitions
of IR are:
• A concise communication of an organisation’s strategy, governance and
performance.
• Demonstrates the links between its financial performance and its wider
social, environmental and economic context.
• Show how organisations create value over the short, medium and long term.
It is useful to imagine yourself investigating a company about which you know

nothing to decide whether or not you want to invest in it. Going to the latest annual
report and financial statements would probably be your starting point, but you will
be left with many unanswered questions – certainly if the company shows the
minimum information required by law and the accounting and financial reporting
standards. You will learn relatively little about the company’s business activities
(though segmental reporting helps), their competitors, their future plans or how
they intend to achieve sustainable competitive advantage. IR aims to fill the gaps
so that existing or prospective investors better understand the company.
Think about the evolution of modern management accounting. A few decades ago
management accounting was being criticised for being too internally and
operationally focused. It was recognised that there was a need for management
accounting to be useful for strategic decision-making and that management
accountants should act essentially as business partners in organisations. The role of
management accounting now is to assist in the analysis, formulation and
monitoring and evaluation of strategy. It has a significant contribution to make in
the validation of strategic plans and decisions.
APM is focused on how strategic objectives are linked to critical success factors and
key performance indicators and how this is translated throughout an organisation.
It encompasses the need to address risk, external influences, stakeholders, non-
financial results, brand, etc. It addresses the importance of selecting the right
performance management techniques, information systems, reporting functions to
ensure performance is delivered at all levels and over the short and long-term.
The following IR Content Elements are particularly relevant to APM:
• Organisational overview and the external environment

• Opportunities and risks
• Strategy and resource allocation
• Business model
• Performance
• Future outlook
116
Let's add some detail and examples to these elements:
ORGANISATIONAL OVERVIEW AND THE EXTERNAL ENVIRONMENT

What does the organisation aim to do? Who are the major stakeholders? Where is it
located? How is it structured? What external events will affect if most?
Fairly obviously the organisation’s mission and objectives, stakeholder analysis,

organisation chart and a PEST analysis would be relevant to this section of the IR.
OPPORTUNITIES AND RISKS

These must cover both internal and external matters. The traditional SWOT analysis
usually categorises opportunities and threats (risks) as external, but it is essential
to also look internally. A weakness (for example arising from gaps in new product
development) is a risk to future revenues. Similarly a strong brand name creates
greater opportunities for future revenue streams. Historically, the board of
companies would tend to emphasise a company’s opportunities, but investors
cannot make an informed decision about an investment without an appreciation of
the associated risk. Some risks can be quantified (for example, by expected values
and sensitivity analysis) but it is unlikely that quantified amounts would appear in
an IR. A qualitative indication should be provided about both internal and external
risks. The report should also mention how the risks are being managed and
mitigated.
STRATEGY AND RESOURCE ALLOCATION

Does the organisation intend to develop new products, set up new factories or
expand to new markets? This section of the IR can make extensive use of Porter’s
models, BCG matrix and the value chain. It would be valuable to investors to be
told how their company is going to respond to these changes in the market, how
much it might cost to achieve the new strategies and how this change will be
managed effectively.
BUSINESS MODEL
An organisation’s business model is 'its system of transforming inputs, through its
business activities, into outputs and outcomes that aims to fulfil the organisation’s
strategic purposes and create value over the short, medium and long term' (IIRC).
Many of the performance management models are particularly relevant here: for
example, the value chain explicitly sets out inputs, processes and outputs and
requires organisations to understand how value is added so that profits can be
made. If a company does not understand where it adds value then the company is
existing in a temporary state of good fortune. It is making profits now, but does not
understand why, so chance of continued success must low.
Inputs are the major inputs such as raw material or human resources. Outputs are
the key products and services. The business activities include not just the
manufacturing process, but also how the company innovates, carries out its
marketing, what its after-sales services are, how it delivers its goods and how it
acquires, trains and retains staff.
Business process re-engineering, value-based management, activity-based

management are also all methods that can influence an organisation’s business
model.
117
PERFORMANCE
This area of IR addresses how an organisation has performed against its strategy
and what are its key outcomes. These outcomes can be internal or external – for
example, revenue, cash flow, customer satisfaction, brand loyalty, environmental
impacts, etc.
It is vital that the most appropriate performance indicators are chosen so that
measurement of strategic goals is meaningful and that the value-adding activities
of an organisation are identified and managed. It is also recognises the importance
of reporting on non-financial, qualitative results.
FUTURE OUTLOOK
An integrated report should answer the question: What challenges and
uncertainties is the organisation likely to encounter in pursuing its strategy, and
what are the potential implications for its business model and future performance?
(IIRC)
PEST and a five forces analysis are likely to be particularly relevant here. For
example, if you were a stakeholder in a conventional television company you should
want to know how the company will address challenges from internet-based
companies such as Netflix.
EXAMPLES FROM THE ACCA’S INTEGRATED REPORT

Here are some relevant extracts from ACCA's Integrated Report 2013–14 (see
'Related links') demonstrating some of the reporting of the elements set out above.
Remember, the IIRC guidelines are principles based and organisations can change
element headings and groupings.
EXTERNAL ENVIRONMENT
• We are seeing new economies and sectors emerging and developing at
faster rates
• In the post-recession world, there is a greater demand for and
understanding of the importance of financial stability as an underpinning for
economic stability
• Consumers are more sophisticated and demanding, with an increasingly
tech-savvy audience expecting a personalised and tailored experience
• The competitive environment is much broader, with more and different
players and with technology enabling greater international competition
RISKS [INCLUDE]:
• Market risks: trade protectionism, global economic stagnation, loss of UK

audit recognition.
• Operational: exam process issues, worldwide legislative complexity, pricing
decisions, cybercrime and data protection.
The impact of each risk is assessed and mitigation measures are explained. For
example, on cybercrime and data protection:
• Impact: Potential corruption or loss of organisational data which could lead

to legal liability and reputational damage as more ACCA services are
provided on-line
• Mitigation: ACCA’s Information Security Officer monitors and advises on

data security. Policies in place to address data security risks which are
regularly reviewed, monitored and tested.
118
BUSINESS MODEL
• Key resources [include]: market offices supported by global

headquarters, people, partners, intellectual property and brand, suppliers, IT
infrastructure, financial capital.
• Key value-adding activities: creating global networks, qualifying and

regulating professional accountants to high standards, maintaining and
developing a global brand that attracts students around the world,
generating globally-relevant technical insight with public interest at its
heats, digitally-enabled developments for an online, self-service world.
• Key outputs [include]: professional, ethical accountants, widespread

recognition, best-in-class products and services.
• Key outcomes [include]: support and opportunities for members, joint

initiatives, global mobility for our members, customer satisfaction.
• Societal benefit: Businesses in all sectors that are run efficiently and
responsibly, that help grow economies sustainably and safeguard the
interests of the public and society.
CONCLUSION
The inclusion of IR in the APM syllabus should not cause major difficulties for
students. In many ways, it is corporate reporting catching up with the aspects of
analysis and reporting which management accountants have been already been
performing for internal, organisational use. Management accounting has, for many
years, recognised that there’s much more to appraising organisations than simply
looking at their financial results.
119

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ACCA

December 2023 Exam

3. The use of Information System (IS) to integrate and drastically improve

5. Quality improvement programs using TQM, moving to JIT purchasing and

6. Fairness of current reward system on salary and bonus in Staff Appraisal.

7. Transfer Pricing (TP) and Responsibility Accounting i.e. Cost Centre,

8. Environmental Management Accounting (EMA) and the use of in Activity

Finally, GOOD LUCK and after your exam, please email me at

Section A – one compulsory question (40m + 10m) 50 marks

It is likely to include the organisation’s mission statement and strategic objectives

Section A questions will ask candidates to produce a response in a specific format,

Section B questions will also require candidates to address a range of issues

Date of Exam: 6 December 2023 Wednesday

Each of the four professional skills has a number of leadership capabilities

The professional skills and capabilities are:

In summary, this means candidates have to express themselves clearly and

ANALYSIS AND EVALUATION

In summary, this means candidates firstly have to thoroughly investigate and

In summary, this means candidates have to explore, question and challenge

What to expect in the APM Exam?

This report should have appropriate report headings, sub-headings and an

Analysis and evaluation

Analysis can be demonstrated by appropriate use of the data/information to

To ensure that candidates take a considered forward-looking approach recognition

Examiner: Alex Watt

Sep-19 Dec-19 Mar-20 Jul-20

Sep-20 Dec-20 Mar-21 Jun-21

Evaluate KPI, General use of NFPI, Big

Education department, VFM for NFPO,

Sep-21 Dec-21 Mar-22 Jun-22

Sep-22 Dec-22 Mar-23 Jun-23

Q2 Eck ERK Gare

Q3 Scye Morlich Avich

Evaluate BBM impact on KPI. Calculate and compare AC and

Porter’s 5 Forces on competitive,

Discount rate (r)

Discount rate (r)

With performance management systems and data analytics, the management

1. summarised information presented for the board and in detail if needed;

To: [Board of Directors or CEO or CFO or Risk Management Committee]

From: [Accountant or Management Accountant]

Date: [Date of the exam]

Subject: [Performance Measurement or Management or KPI or Balance

[Quick summary of the requirements in 3 – 4 sentences]

(i) Form a title from the requirement

(ii) Form a title from the requirement

(iii) Form a title from the requirement

(iv) Form a title from the requirement

(v) Form a title from the requirement

Conclusion or Recommendation (if required)

1. “Current, Existing, Traditional” means no good because it is insufficient, out-

Therefore, you need to suggest improvements!

• High sales volume

5. In a service industry, traditional financial measures such as ROCE (which is

7. Traditional methods such as:

Absorption Costing (AC) is preferred if it gives similar results as Activities Based

The steps using absorption costing are:

1 Overhead costs are collected in various cost centres

Apportionment: General or common overhead costs like rent, heating,

2 Overhead Absorption is achieved by means of a predetermined Overhead