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December 2014–June 2015 Edition
STUDY QUESTION BANK
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ACCA
Paper P5 | ADVANCED PERFORMANCE
MANAGEMENT
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ACCA
PAPER P5
SA
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ADVANCED PERFORMANCE MANAGEMENT
STUDY QUESTION BANK
For Examinations to June 2015
®
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(ii)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
CONTENTS
Question
Name
Page
Answer
Marks
1
1
2
1001
1002
1003
15
20
20
3
3
3
3
1005
1007
1009
1010
15
10
15
20
Date worked
STRATEGIC PERFORMANCE MANAGEMENT
1
2
3
Antonio
St Margaret’s Hospital
INA Co (ACCA D03)
4
5
6
7
ZBB – Four Statements
Master Budget
Usefulness of Budgeting
Inherent Weakness (ACCA J05)
8
PL
BUSINESS STRUCTURE
E
PERFORMANCE MANAGEMENT AND CONTROL
2B Value Chain
4
1012
25
5
5
1014
1014
8
20
7
1016
25
EFFECT OF INFORMATION TECHNOLOGY
9
10
Bank Operations (ACCA J96)
CAET-IT
OTHER ENVIRONMENTAL AND ETHICAL ISSUES
D Logging
SA
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11
EXTERNAL INFLUENCES ON ORGANISATIONAL PERFORMANCE
12
13
14
15
16
News For You
Monopoly
Newco
Healthfoods (ACCA J07)
Equine Management Academy (ACCA J10)
8
9
9
10
11
1019
1021
1022
1025
1026
20
9
25
20
25
1028
1029
1032
20
20
13
16
1035
17
17
18
19
19
19
21
1037
1038
1039
1040
1041
1043
15
8
6
20
11
20
PERFORMANCE MEASUREMENT INFORMATION SYSTEMS
17
18
19
Management Information Systems
13
Management Accounting System (ACCA J03) 13
Polyside University
14
INFORMATION RECORDING AND REPORTING
20
Rockingham Hospital
PERFORMANCE HIERARCHY
21
22
23
24
25
26
TDM Co
Squeeky Clean
Bean Counters
Mission Statements (ACCA D02)
Motor Car Manufacturers (ACCA J03)
Healthy Eating Group (ACCA D07)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(iii)
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Question
Name
Page
Answer
Marks
Date worked
STRATEGIC PERFORMANCE MEASURES IN PRIVATE SECTOR
27
28
Success Education Centre (ACCA PP D07)
Taliesen (ACCA J05)
22
23
1045
1047
20
20
25
26
27
28
1049
1052
1057
1059
28
20
20
20
29
31
1061
1063
22
15
DIVISIONAL PERFORMANCE EVALUATION
Divisional Assessment
Babblings (89) Co
Meldo Division & Kitbull
Toutplut
E
29
30
31
32
TRANSFER PRICING
Black and Brown
RJ Business Consulting (ACCA D04)
PL
33
34
NOT FOR PROFIT ORGANISATIONS
35
36
Focus
Housing Department (ACCA J10)
31
32
1064
1065
15
20
NON FINANCIAL PERFORMANCE INDICATORS AND QUALITY
Sharpe Telecomunications Co (DipFM D05)
Quris Co (DipFM J06)
Calton Co
Better Electricals Group (ACCA J10)
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37
38
39
40
32
33
34
36
1066
1068
1071
1073
20
20
30
20
1075
1076
1077
1079
20
15
20
20
1080
1081
1082
1086
1088
1091
1093
15
10
20
25
35
20
10
HUMAN ASPECTS OF PERFORMANCE MANAGEMENT
41
42
43
44
Directors Share Options (DipFM D08)
Team Bonus
Dysfunctional Behaviour
Easdon Co (DipFM D06)
37
38
38
38
ALTERNATIVE VIEWS OF PERFORMANCE MANAGEMENT
45
46
47
48
49
50
51
Balanced Scorecard
Ambleford College
BLA Co (ACCA D03)
Bettaserve Co (ACCA PP D07)
Superior Business Consultancy (ACCA J10)
Spare for Ships Company (ACCA J10)
Plantaganet Co
39
39
40
41
43
44
45
COMPLEX BUSINESS STRUCTURES AND CORPORATE FAILURE
52
Meta-com
47
1094
10
47
1095
20
CURRENT DEVELOPMENTS
53
(iv)
Environmental management accounting
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Question
Name
Page
Answer
Marks
1097
1098
1100
1102
1105
15
20
20
25
20
Date worked
FURTHER PRACTICE QUESTIONS
Structure (ACCA D98)
GMB Co (ACCA D07)
There 4 U Company (ACCA J09)
Superior Software House (ACCA D08)
Specialist Clothing Company (ACCA J06)
48
48
49
51
52
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54
55
56
57
58
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(v)
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
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)
2%
3%
4%
5%
6%
7%
8%
9%
10%
0.935
0.873
0.816
0.763
0.713
0.926
0.857
0.794
0.735
0.681
0.917
0.842
0.772
0.708
0.650
0.909
0.826
0.751
0.683
0.621
1
2
3
4
5
0.666
0.623
0.582
0.544
0.508
0.630
0.583
0.540
0.500
0.463
0.596
0.547
0.502
0.460
0.422
0.564
0.513
0.467
0.424
0.386
6
7
8
9
10
0.475
0.444
0.415
0.388
0.362
0.429
0.397
0.368
0.340
0.315
0.388
0.356
0.326
0.299
0.275
0.350
0.319
0.290
0.263
0.239
11
12
13
14
15
0.990
0.980
0.971
0.961
0.951
0.980
0.961
0.942
0.924
0.906
0.971
0.943
0.915
0.888
0.863
0.962
0.925
0.889
0.855
0.822
0.952
0.907
0.864
0.823
0.784
0.943
0.890
0.840
0.792
0.747
6
7
8
9
10
0.942
0.933
0.923
0.914
0.905
0.888
0.871
0.853
0.837
0.820
0.837
0.813
0.789
0.766
0.744
0.790
0.760
0.731
0.703
0.676
0.746
0.711
0.677
0.645
0.614
0.705
0.665
0.627
0.592
0.558
11
12
13
14
15
0.896
0.887
0.879
0.870
0.861
0.804
0.788
0.773
0.758
0.743
0.722
0.701
0.681
0.661
0.642
0.650
0.625
0.601
0.577
0.555
0.585
0.557
0.530
0.505
0.481
0.527
0.497
0.469
0.442
0.417
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1
2
3
4
5
E
Periods
(n)
1%
(n)
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
1
2
3
4
5
0.901
0.812
0.731
0.659
0.593
0.893
0.797
0.712
0.636
0.567
0.885
0.783
0.693
0.613
0.543
0.877
0.769
0.675
0.592
0.519
0.870
0.756
0.658
0.572
0.497
0.862
0.743
0.641
0.552
0.476
0.855
0.731
0.624
0.534
0.456
0.847
0.718
0.609
0.516
0.437
0.840
0.706
0.593
0.499
0.419
0.833
0.694
0.579
0.482
0.402
1
2
3
4
5
6
7
8
9
10
0.535
0.482
0.434
0.391
0.352
0.507
0.452
0.404
0.361
0.322
0.480
0.425
0.376
0.333
0.295
0.456
0.400
0.351
0.308
0.270
0.432
0.376
0.327
0.284
0.247
0.410
0.354
0.305
0.263
0.227
0.390
0.333
0.285
0.243
0.208
0.370
0.314
0.266
0.225
0.191
0.352
0.296
0.249
0.209
0.176
0.335
0.279
0.233
0.194
0.162
6
7
8
9
10
11
12
13
14
15
0.317
0.286
0.258
0.232
0.209
0.287
0.257
0.229
0.205
0.183
0.261
0.231
0.204
0.181
0.160
0.237
0.208
0.182
0.160
0.140
0.215
0.187
0.163
0.141
0.123
0.195
0.168
0.145
0.125
0.108
0.178
0.152
0.130
0.111
0.095
0.162
0.137
0.116
0.099
0.084
0.148
0.124
0.104
0.088
0.074
0.135
0.112
0.093
0.078
0.065
11
12
13
14
15
(vi)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Annuity Table
Present value of an annuity of 1 i.e.
where
1  (1  r )  n
r
r = discount rate
n = number of periods
Discount rate (r)
2%
3%
4%
5%
6%
7%
8%
9%
10%
0.935
1.808
2.624
3.387
4.100
0.926
1.783
2.577
3.312
3.993
0.917
1.759
2.531
3.240
3.890
0.909
1.736
2.487
3.170
3.791
1
2
3
4
5
E
Periods
(n)
1%
0.990
1.970
2.941
3.902
4.853
0.980
1.942
2.884
3.808
4.713
0.971
1.913
2.829
3.717
4.580
0.962
1.886
2.775
3.630
4.452
0.952
1.859
2.723
3.546
4.329
0.943
1.833
2.673
3.465
4.212
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
6
7
8
9
10
11
12
13
14
15
10.37
11.26
12.13
13.00
13.87
9.787
10.58
11.35
12.11
12.85
9.253
9.954
10.63
11.30
11.94
8.760
9.385
9.986
10.56
11.12
8.306
8.863
9.394
9.899
10.38
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
11
12
13
14
15
(n)
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
1
2
3
4
5
0.901
1.713
2.444
3.102
3.696
0.893
1.690
2.402
3.037
3.605
0.885
1.668
2.361
2.974
3.517
0.877
1.647
2.322
2.914
3.433
0.870
1.626
2.283
2.855
3.352
0.862
1.605
2.246
2.798
3.274
0.855
1.585
2.210
2.743
3.199
0.847
1.566
2.174
2.690
3.127
0.840
1.547
2.140
2.639
3.058
0.833
1.528
2.106
2.589
2.991
1
2
3
4
5
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
6
7
8
9
10
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
4.793
4.910
5.008
5.092
4.586
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
11
12
13
14
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©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(vii)
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ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
(viii)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Question 1 ANTONIO
Antonio owns an ice cream shop in the coastal town of Camberwick Bay. He is disappointed by the
performance of the shop, as he feels that in spite of his hard work, his profits are too low.
He has managed to obtain some industry benchmarks for ice cream retailers from a government
sponsored benchmarking service, and now wishes to compare his own performance against the
benchmarks.
The industry benchmarks are as follows:
Industry average
68%
88%
19%
16%
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Metric
Gross profit margin
Total expenses/ revenue
Labour cost/ revenue
Rent/ turnover
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Antonio has provided you with the following extracts from his income statement for the most recent
year:
$
Revenue
250,000
Cost of sales
110,000
–––––––
Gross profit
140,000
Labour costs
15,000
Rent
60,000
Other expenses
15,000
–––––––
Profit before tax
50,000
–––––––
Antonio works full time in the shop, and only hires a part time assistant to help him. If Antonio were to
charge his time to the business at the industry labour rate, he estimates that the cost would be $45,000.
Antonio makes the ice cream himself, from locally produced milk and cream. Because it is freshly
made, any ice cream not sold the same day has to be disposed of.
Required:
(a)
Assess the performance of Antonio’s business against the benchmarks, suggesting areas
where Antonio needs to look for improvements.
(8 marks)
(b)
Discuss the usefulness of this benchmarking exercise to Antonio, and suggest what might
be the next step in helping him to improve the performance of his business.
(7 marks)
(15 marks)
Question 2 ST MARGARET’S HOSPITAL
St Margaret’s hospital is a hospital specialising in ear, throat and nose operations. The hospital has a
mix of private fee paying patients and patients whose treatment is paid for by the state health care
system. The mission of the hospital is “To provide high quality health care to all patients.” Any surplus
made by the hospital is donated to an organisation that specialises in medical research.
The Hospital is managed by an executive committee which comprises of CEO, a finance director and a
chief surgeon. The long term strategy of the hospital is set and monitored by a board of trustees, who
meet four times a year to review the performance of the hospital and to review the strategy.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Due to the growth in the number of patients, the hospital is now operating at capacity and waiting lists
for operations are becoming too long. The trustees are meeting to discuss the situation. One of the
trustees had an informal conversation with one of the accountants who worked in the hospital. The
accountant told him “We should only treat private patients, and should stop taking patients funded by
the state health care system. We make a surplus on private patients, while we only break even on state
funded patients.
The trustees are concerned that the performance report that they are provided with does not consider a
broad enough group of stakeholders, and would like advice on how performance management can be
related to the needs of stakeholders. They have asked you to provide them with some examples for
discussion at their next meeting.
(a)
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Required:
Two important stakeholder groups of the hospital are patients and medical staff (doctors and
nurses).
(b)
PL
For each of these two groups, identify three objectives (what do they want) from the
hospital, and for each objective, suggest a key performance indicator that would
measure how well the hospital is performing in relation to that objective.
(12 marks)
Discuss the suggestion of the accountant that the hospital should stop treating state
funded patients. Your discussion should consider the ethics of this statement. (8 marks)
(20 marks)
Question 3 INA CO
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INA Co manufactures and distributes generic paper-based products and currently has annual revenue of
$100 million.
At present, the management of INA Co are uncertain whether the purchasing department is maximising
its potential in terms of purchasing efficiency and effectiveness.
The management are currently considering the introduction of a system of benchmarking to measure
the performance of the purchasing department.
Required:
(a)
Explain the term “benchmarking” and briefly discuss the potential benefits that can be
obtained as a result of undertaking a successful programme of benchmarking. (6 marks)
(b)
Describe how a system of benchmarking could be introduced to measure the
performance of the purchasing department.
(8 marks)
(c)
Discuss the problems that the management of INA Co might encounter in implementing
a system of benchmarking and recommend how such problems should be successfully
addressed.
(6 marks)
2
(20 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Question 4 ZBB – FOUR STATEMENTS
Discuss the following propositions about the concept of zero-base budgeting (ZBB).
ZBB is a theoretical idea of interest to the academics, but of no practical use to the
businessmen of today.
(6 marks)
(b)
It is quite preposterous even to consider the implementation of a system of ZBB in a
period when management’s time and costs are consistently under review, and companies
cannot afford to waste resources.
(3 marks)
(c)
ZBB has some justification in central and local government, where controls on costs are
essential, but very little in private industry, where market forces impose their own
limitations.
(3 marks)
(d)
ZBB will never replace the traditional flexible budget, which is based on the practical
realities of the present rather than overturning the established budgetary system.
(3 marks)
PL
E
(a)
(15 marks)
Question 5 MASTER BUDGET
A budgetary planning and control system may include many individual budgets which are integrated
into a “master budget”.
Required:
SA
M
Outline and briefly explain with reasons the steps that should normally be taken in the
preparation of master budgets in a manufacturing company. Indicate the main budgets which
you think should normally be prepared.
(10 marks)
Question 6 USEFULNESS OF BUDGETING
(a)
Describe FOUR ways in which budgeting may be viewed as a useful management
accounting technique.
(4 marks)
(b)
Discuss why an activity based budgeting system may be viewed as more useful than a
traditional incremental budgeting system.
(5 marks)
(c)
Suggest reasons for the view that the major annual budget preparation exercise may not
be an effective use of business resources.
(6 marks)
(15 marks)
Question 7 INHERENT WEAKNESSES
Better budgeting in recent years may have been seen as a movement from “incremental budgeting” to
alternative budgeting approaches.
However, academic studies (e.g. Beyond Budgeting – Hope & Fraser) argue that the annual budget
model may be seen as (i) having a number of inherent weaknesses and (ii) acting as a barrier to the
effective implementation of alternative models for use in the accomplishment of strategic change.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 3
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Required:
(a)
Identify and comment on FIVE inherent weaknesses of the annual budget model
irrespective of the budgeting approach that is applied.
(8 marks)
(b)
Discuss ways in which the traditional budgeting process may be seen as a barrier to the
achievement of the aims of EACH of the following models for the implementation of
strategic change:
Benchmarking;
Balanced scorecard; and
Activity-based models.
(12 marks)
E
(i)
(ii)
(iii)
(20 marks)
Question 8 2B VALUE CHAIN
PL
2B is a medium-sized retailer of sports equipment and leisure clothing. 2B was established in 1987,
and currently operates from three retail shops in town centre locations.
The management team of 2B is very careful about how it recruits staff. In addition to the specific skills
required to do the job, any applicant must also have a “passion” for sport. This has resulted in 2B
gaining a reputation for excellent customer service and enthusiastic staff. A large proportion of staff
time is also devoted to training, both on the product range and customer service techniques. According
to a recent survey conducted by the store managers, the customers believe that 2B employees are
“helpful and knowledgeable”. The customers also praised the 2B shops for being “well designed” and
said that it was “very easy” to find what they were looking for.
SA
M
Another feature of 2B that is appreciated by the customers is the range of goods stocked. By
developing close relationships with the major manufacturers of sports goods and clothing, 2B is able to
stock a far wider range of items than its rivals. Control of this inventory was made easier, last year, by
the development of a sophisticated computerized inventory control system. Using the system, any
member of staff can locate any item of stock in any of the shops or the warehouse. If the required item
is not “in stock” at 2B, it is also possible to automatically check the availability of stock with the
manufacturer.
At a recent management meeting, one of the store managers suggested that 2B could consider
developing its very basic website into one capable of e-retailing. At present, the website only gives the
location of stores and some very basic details of the range of inventory carried. Although the
development of the website would be expensive, the managers have decided to give the suggestion
serious consideration.
Required:
(a)
Using the value chain model, explain those activities that add value in the 2B
organisation, BEFORE the e-retail investment.
(10 marks)
(b)
Identify those activities in the value chain of 2B that may be affected by the e-retail
investment, explaining whether the value added by each of them may increase or
decrease as a result of the e-retail investment.
(15 marks)
(25 marks)
4
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Question 9 BANK OPERATIONS
A bank has a section of its business which has two functions:
(1)
(2)
Answering credit control queries from customers both by telephone and in writing;
Investment business queries involving responding by telephone and in writing about surrender
values, assignment of policies and maturity value quotations.
The staff are arranged in four workgroups, one for each of four geographical areas. Each workgroup
consists of 30 employees plus supervisor. Each employee is expected to answer telephone enquiries
and a proportion of written enquiries for both credit control and investment business.
PL
Required:
E
Flexi-time working is allowed and considerable overtime is paid in addition to a basic salary payment.
There is a high backlog of written enquiries and customers have been complaining about poor telephone
response times and quality of response. High staff turnover exists and staff morale is low. As
management accountant you are part of a team required to investigate and report on performance
measurement and effectiveness of operations.
Explain, giving examples of their incidence in the provision of the above services, any THREE of
the following:
(i)
(ii)
(iii)
(iv)
Intangibility;
Heterogeneity;
Simultaneity;
Perishability.
(8 marks)
SA
M
Question 10 CAET-IT
CAET-IT provides electronic components for the Information Technology (IT) industry. The company
has three main operational departments: Sales, Accounts and Dispatch. Computer systems are used in
all three departments. There are no links between the three computer systems.
A brief description of each department is given below. The main information flows between the three
departments are shown in Figure 3.
Sales
The company currently has eight clerks handling telephone and faxed orders. Each has a workstation
linked to a small minicomputer operating in the UNIX environment.
Orders are only received by telephone or by fax. All order details are entered onto the computer
system. A formal order confirmation is raised and faxed to the customer. At the end of the day a Daily
Sales List, listing all orders received that day, is raised and sent to the Dispatch department.
The software used in Sales is a standard package bought five years ago. It stores customer account
details. Order confirmations are only sent out if the customer is not on a credit stopped list. The
system also holds product details because orders have to be priced and checked for stock availability.
Order confirmations are dispatched only if the products required are in stock. There are procedures for
dealing with out of stock items.
Details about dispatched and invoiced orders are received from the Dispatch and Accounts departments
and are used to update the order details on the computer system.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 5
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Dispatch
The Dispatch department has a single PC operating in a Windows environment.
department software was written by a local software supplier and installed last year.
The dispatch
Dispatch receives the Daily Sales List from Sales and enters the order details into their system. The
system stores these details on an Order data file.
E
One of the functions of the Dispatch software is to produce a standard Dispatch Note. This function
uses information from the Order data file as well as using information stored on Product and Customer
data files maintained in the Dispatch system. The Product and Customer data files are updated
periodically with details of new customers, change of address of customers, insertion and deletion of
products etc. Three copies of the Dispatch Note are produced. One copy is used by dispatch staff to
pick the goods and is subsequently stored in the department. A second copy is sent with the goods to
the customer and the third copy is sent to the Accounts department for invoicing purposes.
PL
At the end of the day a Daily Dispatch List is sent to Sales listing the orders dispatched that day. This
information is used by the Sales department to enter the dispatch date of the order on their computer
system.
The quantity of each product in stock is held on both the Dispatch and Sales computer systems. It is
generally accepted that the Dispatch system has the accurate figures (as they have access to the physical
stock). Consequently, Dispatch periodically prints out the current stock position on their computer
system and sends it to Sales so that they can check and update their stock details.
ACCOUNTS
Statement
SA
M
Dispatch Note (copy 3)
Invoice
Dispatch Note (copy 2)
DISPATCH
Daily Dispatch List
Current Stock Position
Telephone/fax orders
Faxed order confirmation
Daily Sales List
Stopped List
CUSTOMER
SALES
Daily Invoiced List
Figure 3
Main information flows at CAET-IT
Accounts
The computer system used in Accounts is a three-user Linux based PC network bought ten years ago.
The software is a standard accounts and invoicing system, supporting sales, purchase and general
ledgers.
6
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
The copy of the Dispatch Note received from Dispatch is used to enter details into the accounts system.
An invoice is raised and sent to the customer. Many customers pay on statement and so a weekly
statement is also produced. Payment details are entered into the system and the accounts software
maintains standard aged debtors and account details. Customers in arrears with their accounts are
placed on a stopped list. A copy of this stopped list is sent to Sales who enter this information into their
system. It is used in determining the credit-status of the customer.
Accounts also send a Daily Invoiced List to Sales who use it to record, in their system, that an order has
been invoiced.
The integration project
E
A recent consultant’s report identified the lack of integration of information systems as a major
organisational weakness. Consequently, the company has appointed an Information Systems (IS)
manager with the responsibility for justifying, defining and acquiring a new integrated information
system. The company does not plan to employ any other IS staff. If the project is agreed, the system
will be a bespoke development by an external software house.
Required:
(a)
PL
CAET-IT employs an internal auditor who ensures that component manufacture complies with
international standards. It has been agreed that the internal auditor will assist the IS manager in the
integration project.
The IS manager of CAET-IT has to produce a business justification for the integration
project. This business justification will include a cost-benefit analysis of the proposed
project.
SA
M
Briefly describe FOUR potential benefits to CAET-IT, of acquiring an integrated
information system.
(12 marks)
(b)
The initial set-up costs of the project and the net cash flow for each year of the project are
two pieces of information that the IS manager must collect or calculate to undertake the cost
benefit analysis required by the company.
(i)
List further pieces of information the IS manager must collect or calculate to
complete the cost-benefit analysis required by the company.
(4 marks)
(ii)
Explain the disadvantages of the CAET-IT cost-benefit policy.
(4 marks)
(20 marks)
Question 11 D LOGGING
D is an international logging company, which cuts down timber and supplies sawmills where the timber
is seasoned and then cut to appropriate sizes for use in a range of industries. D will work with any
timber, ranging from softwoods used in construction or paper manufacture to exotic hardwoods used in
expensive furniture. Its usual approach is to secure the rights from a landowner or in some cases a
national government, to cut timber. This can often involve the payment of large initial cash deposits to
these suppliers, money which D usually borrows. A logging team then cuts down the trees as quickly
as possible and hauls the timber to a convenient river where it is floated to a sawmill. Moving on
rapidly to the next site, the loggers usually leave considerable surface damage behind them.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 7
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Since an increasing proportion of the company’s work has been in the tropical rainforest, it has recently
come under pressure from environmental groups protesting that it is not socially responsible to act in
this way. Whilst the softwood forests can be regenerated in a couple of decades by replanting,
hardwoods in tropical forests take far longer to mature.
The Chief Executive of the company has argued that he is not concerned about these protests since, as
far as he is concerned, the company always acts ethically as it has the agreement of the national
government in any country in which the company operates.
E
A recent development in the timber industry has been the harvesting of timber from the bottom of
reservoirs which have been created by flooding valleys. Although the capital equipment required for
this approach is significantly more expensive than that used in conventional logging, the operating costs
are lower. Waterlogged trees in reservoirs have balloons attached, are cut, float to the surface and are
towed to a sawmill. The underwater process is quieter and less disruptive to wildlife and the
environment.
PL
It has been estimated that there are over half a billion trees, or 20 years’ supply, submerged in
reservoirs across the world, but it can take considerable research and expense to find them. As long as
the timber has remained submerged deeply enough, it is of the same quality as timber harvested from
the land. There is currently only one company conducting underwater logging, although a number of
other companies are also considering this development.
Some of the Board of Directors feel that D should pursue this underwater approach and abandon landbased logging. The Chief Executive and one other director feel that the underwater approach carries
too high a risk.
Required:
(i)
Briefly explain the differences between business ethics and corporate social
responsibility (CSR)
(5 marks)
SA
M
(a)
(ii)
(b)
Discuss the CSR issues relating to D’s business and how the company might
improve its CSR position.
(8 marks)
With reference to D, evaluate the two approaches to logging and recommend which you
think is most appropriate for D.
(12 marks)
(25 marks)
Question 12 NEWS FOR YOU
News For You (NFY) operates a chain of newspaper stands and sweet shops in the Albion, and is
considering the possibility of expanding their business across a wider geographical area. The business
was started in 2001 and annual revenues grew to $10 million by the end of 2004. Between 2004 and
2009 revenue grew at an average rate of 2% per year.
The business still remains under family control, but the high cost of expansion via the purchase or
building of new outlets means that the family would need to raise at least $2 million in equity or debt
finance. One of the possible risks of expansion lies in the fact that both tobacco and newspaper sales
are falling. New income is being generated by expanding the product range stocked by the stores to
include basic foodstuffs such as bread and milk. NFY purchases all of its products from a large
wholesale distributor. This is convenient, but the wholesale prices leave NFY with a relatively small
gross margin. The key to profit growth for NFY lies in the ability to generate sales growth, but the
company recognises that it faces stiff price competition from large food retailers.
8
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
In planning its future, NFY was advised to look carefully at a number of external factors that may affect
the business including government economic policy. In recent months the following key economic data
has been published:
The bank base rate has been reduced from 5% to 4.5%, and the forecast is for a further 0.5%
reduction in six months.
(ii)
The annual rate of inflation is now 1.2%, down from 1.3% in the previous quarter, and 1.7%
12 months ago. The rate is now at its lowest for 25 years, and no further falls in the rate are
expected over the medium/long term.
(iii)
Personal and corporation tax rates are expected to remain unchanged for at least 12 months.
(iv)
Taxes on tobacco have been increased by 10% over the last 12 months, although no further
increases are anticipated.
(v)
The government has initiated an investigation into the food retail sector, focusing on the
problems of “excessive” profits on certain foodstuffs created by the high prices being charged
for these goods by the large retail food stores.
Required:
PL
E
(i)
(a)
Explain the relevance of each of the items of economic data listed above to News For
You.
(10 marks)
(b)
Explain whether News For You should continue with their expansion plans. Clearly
justify your arguments for or against the expansion.
(10 marks)
(20 marks)
SA
M
Question 13 MONOPOLY
Two important elements in the economic and financial management environment of companies are the
regulation of markets to discourage monopoly and the availability of finance to fund growth and
development.
Required:
Outline the economic problems caused by monopoly and explain the role of government in
maintaining competition between companies.
(9 marks)
Question 14 NEWCO
Newco is a recently privatised company that supplies energy to the general public. One of the
objectives underlying Newco’s change of ownership was that it would be enabled to set its own goals
and targets without reference to third parties.
The chief executive of Newco has publicly stated that the aim of the business will be “to supply the best
possible service to the greatest number of consumers at the cheapest possible cost”. It is believed that
the cheapest possible cost will only be achieved by the introduction of a number of changes to improve
operating efficiency.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 9
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
The holders of this view are, like the chief executive himself, people who have been brought into
Newco during the last two or three years. This group is small in numbers but seems to be very
influential. They have had extensive experience in private sector businesses where strict internal
control and sophisticated management accounting systems were in place. This is not the situation in
Newco, where there are a number of disparate and sometimes contradictory control systems in use.
Required:
State the extent to which the chief executive’s aim is compatible with the interests of the
shareholders.
(9 marks)
(b)
Show what contribution the management accountant could make towards assessing
whether the aim has been achieved.
(8 marks)
(c)
Discuss how, and by whom, the success of Newco will be evaluated and the role the
management accountant could play in these evaluations.
(8 marks)
E
(a)
PL
(25 marks)
Question 15 HEALTHFOODS CO
Healthfoods Co (HFL) is a well-established company which markets fruit and vegetables under their
“Good Health” brand name at each of its 6 outlets in the country of Ateland. During recent years HFL
has marketed organically grown fruit and vegetables. The directors are now planning to market organic
mushrooms which have a unique eating quality and will be the most nutritious mushrooms available on
the market.
SA
M
The finance director has collated the following information regarding the proposed introduction and
sale of organic mushrooms in Ateland:
(1)
HFL will purchase the organic mushrooms from Orgmush Co (OML) and sell them at each of
its 6 outlets in Ateland. Sales volumes of organic mushrooms are expected to be at the same
level at each outlet.
(2)
OML, which is the only grower of this particular type of organic mushroom in Ateland, has
offered HFL a choice of four different contracts in respect of the forthcoming year. OML has
the capacity to produce 360,000 kilograms of organic mushrooms for each of the 6 outlets.
The cost incurred by HFL in respect of organic mushrooms will vary according to contract
size, as shown in the following table:
Contract
A
B
C
D
Number of kilograms Cost per kilogram
$
160,000
4.45
240,000
3.70
280,000
3.55
360,000
3.35
Note: The same contract type must be chosen for each outlet.
(3)
HFL will charge $5.50 per kilogram for all sales of organic mushrooms.
(4)
Any unsold produce will be sold to the Animal Farm Group for $0.25 per kilogram.
(5)
HFL must decide in advance of the forthcoming year which size of contract to enter.
10
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(6)
HFL uses acclaimed dieticians, international athletes or international film stars to promote its
products via television advertisements and has estimated the following probability
distribution of advertisements to be held during the forthcoming year:
Category of advertisement:
Acclaimed dietician
International athlete
International film star
%
20
40
40
E
Market research has indicated that where an acclaimed dietician appears in an advertisement, HFL can
be reasonably assured of selling 160,000 kilograms of mushrooms per outlet and where an international
athlete appears in an advertisement then 234,000 kilograms of mushrooms per outlet will be sold. HFL
expects to sell 360,000 kilograms of mushrooms per outlet when an international film star appears in an
advertisement.
Required:
Using expected values, advise HFL regarding which contract should be entered into with
OML.
PL
(a)
Your answer should show the expected annual contribution from each contract.
(b)
Determine whether your decision in (a) would change if you were to use each of the
Maximin and Minimax regret decision criteria.
Your answer should be supported by relevant workings.
(6 marks)
Briefly discuss why the directors of HFL might choose contract D irrespective of
whether or not contract D would have been selected using expected values as per part
(a).
(2 marks)
SA
M
(c)
(12 marks)
(20 marks)
Question 16 EQUINE MANAGEMENT ACADEMY
The Equine Management Academy (EMA) which was founded twenty years ago is a privately owned
organisation located in Hartland, a developing country which has a large agricultural sector and where
much transportation is provided by horses. EMA operates an Equine College which provides a range of
undergraduate and postgraduate courses for students who wish to pursue a career in one of the
following disciplines:
Equine (Horse) Surgery
Equine Dentistry, and
Equine Business Management.
The Equine College which has a maximum capacity of 1,200 students per annum is currently the only
equine college in Hartland.
The following information is available:
(1)
A total of 1,200 students attended the Equine College during the year just ended. . Student
mix and fees paid were as per the following table:
Student category
% of total number of students
Surgery
30
Dentistry
25
Business Management
45
©2014 DeVry/Becker Educational Development Corp. All rights reserved. Fee ($) per student, per annum
12,000
10,000
6,000
11
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Total operating costs (all fixed) during the year amounted to $6,500,000.
(3)
Operating costs of the Equine College are expected to increase by 4% during the current year.
This led to a decision by the management to increase the fees of all students by 5% with
effect from the first day of the current year. The management expect the number of students
and the mix of students during the current year to remain unchanged from those of the year
just ended.
(4)
EMA also operates a Riding School at which 240 horses are stabled. The Riding School is
open for business on 360 days per annum. Each horse is available for four horse-riding
lessons per day other than on the 40 days per annum that each horse is rested (i.e. not
available for the provision of riding lessons). During the year just ended, the Riding School
operated at 80% of full capacity.
(5)
Horse-riding lessons are provided for riders in three different skill categories. These are
“Beginner”, “Competent” and “Advanced”.
E
(2)
PL
During the year just ended, the fee per riding lesson was as follows:
Skill category of horse rider
Beginner
Competent
Advanced
Lesson mix
50%
25%
25%
Fee ($) per lesson
15
30
50
Total operating costs of the Riding School (all fixed) amounted to $5,750,000 during the year
just ended.
(7)
It is anticipated that the operating costs of the Riding School will increase by 6% in the
current year. The management have decided to increase the charge per lesson, in respect of
“Competent” and “Advanced” riders by 10% with effect from the first day of the current year.
There will be no increase in the charge per lesson for “Beginner” riders.
SA
M
(6)
(8)
The lesson mix and capacity utilisation of the Riding School will remain the same during the
current year as it was in the year just ended.
Required:
(a)
Prepare a statement showing the budgeted net profit or loss for the current year.
(7 marks)
(b)
Some time ago the government of Hartland, which actively promotes environmental
initiatives, announced its intention to open an academy comprising an equine college and
riding school. The management of EMA are uncertain of the impact that this will have on the
budgeted number of students and riders during the current year, although they consider that
due to the excellent reputation of the instructors at the riding school capacity utilisation could
remain unchanged, or even increase, in spite of the opening of the government funded
academy. Current estimates of the number of students entering the academy and the average
capacity utilisation of the riding school are as follows:
Equine College
Student Fees
No change
Decrease by 10%
Decrease by 20%
12
Probability
0·20
0·60
0·20
Riding School
Capacity
utilisation
90%
80%
70%
Probability
0·10
0·60
0·30
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Required:
Prepare a summary table which shows the possible net profit or loss outcomes,
and the combined probability of each potential outcome for the current year.
The table should also show the expected value of net profit or loss for the year;
(9 marks)
(ii)
Comment briefly on the use of expected values by the management of EMA;
(3 marks)
(iii)
Suggest three reasons why the government of Hartland might have decided to
open an academy comprising an equine college and a riding school. (6 marks)
E
(i)
(25 marks)
Question 17 MANAGEMENT INFORMATION SYSTEM






PL
During 2000 a printing company designed and installed a Management Information System that met the
business needs of a commercial environment which was characterised at that time by:
a unitary structure with one profit centre;
central direction from senior managers;
100% internal resourcing of ancillary services;
the employment exclusively of permanent full-time employees;
customers holding large stocks who accepted long delivery times;
most of the work was concerned with long print runs for established large publishing houses.
A radical change in the business environment has resulted in the following outcomes:
the development of a divisionalised structure with four profit centres that utilise each other’s
services;
SA
M


empowerment of team leaders and devolved decision making;

considerable outsourcing of activities;

a significant proportion of the employees work part-time and/or on temporary contracts;

customers now commonly operate JIT systems requiring immediate replenishment of stocks;

the typical customer requires specialist low volume but complex high value printing.
Required:
Recommend the significant changes in the Management Information System that would probably
be required to meet the needs of this new situation. Explain the reasons for your
recommendations.
Note: your answer does not require a consideration of technical matters.
(20 marks)
Question 18 MANAGEMENT ACCOUNTING SYSTEM
“A competent management accounting system should endeavour to enhance the performance of a
company. It should, in particular, consider the behavioural consequences of the system.”
Required:
(a)
Explain why it is necessary when designing a management accounting system to
consider the behavioural consequences of its application.
(5 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 13
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
(b)
Explain the potential behavioural issues that may arise in the application of
performance monitoring, budgeting and transfer pricing and suggest how problems may
be overcome.
(15 marks)
(20 marks)
Question 19 POLYSIDE UNIVERSITY
Polyside University has an income of about $50 million a year. It provides full-time three-year
undergraduate degree programmes and one-year postgraduate courses in a wide range of subjects. Each
subject is studied in one of the seven schools within the university.
Undergraduates
PL
Income determination and student admissions
E
Some members of Polyside’s academic board, the main decision-making body of the university, have
expressed concern about income determination, student admissions, the current management
organisation and the management reports produced by the university. They believe that the current
systems in these areas are not enabling the academic board of Polyside to make optimal decisions about
resource allocation in the university.
SA
M
All undergraduate programmes are funded by central government through the local education
authorities (LEAs). The government sets a total quota of students Polyside may recruit to all its
undergraduate courses, and funds each student for a specific amount. These amounts are then paid to
Polyside by the students’ LEA each term. If Polyside does not fill its quota of students, it loses the
funding associated with those students. If Polyside recruits more than its quota of students, it does not
obtain any extra funding from the government for the additional students. It is therefore important that
Polyside meets its quota of undergraduate applications. Polyside has met its quota in only one of the
past four years. If a student drops out of a course, the government, through the LEA, stops payment of
tuition fees from the end of the term in which the student has left.
By mid-August of the year of entry, when high school exam results are known, Polyside has normally
filled between 20% and 35% of its undergraduate quota. The balance of places is filled through the
“clearing system” during late August and September, when there is much competition between
universities for students. In this period intensive marketing campaigns are conducted by each of the
schools in the university, there are many enquiries for places, and application forms are sent out.
However, there are no systems in place to monitor how effective recruitment is in this important period
and there is therefore much uncertainty about exact student numbers until courses commence in
October each year.
There is often a high drop-out rate in undergraduate courses at the end of year 1, and a few students
drop out in the following years. Sometimes direct entrants into year 2 fill the empty places after year 1.
Postgraduates
Postgraduate students pay their own fees termly. There are no government restrictions on how many
may be recruited. There has been a growth in the number of postgraduate students at Polyside over the
last few years, but there has been a growing problem with late or non-payment of postgraduate tuition
fees.
14
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Management organisation
Each of the seven schools at Polyside is run by a school board, which consists of four members of the
academic staff, a director, a manager and three administrators for the school. Each school board is
responsible for all student admissions and ensuring the receipt of postgraduate fees. It maintains a
school-based information system to record all student admission data and fees due and paid by
postgraduates. The school board is in charge of appointing lecturers and authorises expenditure in the
school.
E
There is a small university central administration function which deals with the university’s cleaning,
catering, maintenance and learning resources. There is a central accounting function, which deals with
university salaries, all payments to suppliers, receipts from LEAs, the banking of postgraduate tuition
fees and the accounting for all university income and expenditure. The actual costs of these two central
functions are allocated to each of the schools during the year as a proportion of the school’s revenue.
PL
Each school board reports termly to the academic board of the university. Their reports cover academic
matters of course quality and administration. The academic board consists of the Vice Chancellor (the
“managing director”), seven academic representatives and the seven heads of school. It meets once a
term. There is a finance committee which reports to the academic board. The Vice Chancellor is
chairman of the finance committee.
SA
M
Currently the only management information about the whole university is provided by the central
accounts function to monthly finance committee meetings. This information is a detailed monthly and
cumulative, actual and budgeted, analysis of university income and expenditure. A report of the total
number of students on each course within the university is also compiled from information provided by
each of the schools. Due to the delay in receiving this information from the schools, this management
information is produced three weeks after the month end, and even later in the key admission period of
August/September. Each term one cumulative analysis of income and expenditure is provided for
notification to the academic board.
The breakdown of Polyside’s budgeted income and expenditure for the year to 31 July 20X7 was as
follows:
Income
Government funds
Tuition fees (net of bad debts)
Other income
%
55
37
8
Expenditure
Direct lecturing costs
Administration and accounting costs
%
60
40
Over 80% of expenditure comprises fixed costs. In recent years the university has moved to appointing
lecturers on temporary annual contracts.
Required:
(a)
Recommend to the Vice Chancellor, with reasons, how Polyside could change and
improve its current structure for providing management information.
(3 marks)
(b)
Recommend to the Vice Chancellor what management reports the finance committee
should receive to help Polyside monitor and improve its performance in income
determination, student admissions and debt collection.
For each report that you recommend, specify in detail what information it should
contain, who should prepare it, its frequency and why it would be useful for Polyside.
(10 marks)
(13 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 15
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Question 20 ROCKINGHAM HOSPITAL CO
A new private hospital of 100 beds was opened to receive patients on 2 January 20X1 although
many senior staff members, including the supervisor of the laundry department, had been in situ for
some time previously. The first three months were expected to be a settling-in period, the hospital
facilities being used to full capacity only in the second and subsequent quarters.
On 1 May 20X1 the supervisor of the laundry department received her first quarterly performance
report from the hospital administrator, together with an explanatory memorandum. Copies of both
documents are set out below.
PL
E
The supervisor had never seen the original budget, nor had she been informed that there would be a
quarterly performance report. She knew she was responsible for her department and had made every
endeavour to run it as efficiently as possible. It had been made clear to her that there would be a
slow build-up in the number of patients accepted by the hospital and so she would need only three
members of staff, but she had had to take on a fourth during the quarter due to the extra work. This
extra hiring had been anticipated for May, not late February.
Rockingham Private Patients Hospital Co
Memorandum
To
From
Date
All department heads/supervisors
Hospital administrator
30 April 20X1
SA
M
Attached is the quarterly performance report for your department. The hospital has
adopted a responsibility accounting system so you will be receiving one of these
reports quarterly. Responsibility accounting means that you are accountable for
ensuring that the expenses of running your department are kept in line with the
budget. Each report compares the actual expenses of running your department for
the quarter with our budget for the same period. The difference between the actual
and forecast will be highlighted so that you can identify the important variations
from budget and take corrective action to get back on budget. Any variation in
excess of 5% from budget should be investigated and an explanatory memorandum
sent to me giving reasons for the variations and the proposed corrective actions.
16
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Performance report – Laundry department
Three months to 31 March 20X1
Actual
$
$
$
4,125
3,450
(675)
1,490
1,495
5
920
770
(150)
560
510
(50)
250
250
–
2,460
2,000
(460)
10
45
35
——— ——— ———
9,815
8,520 (1,295)
——— ——— ———
%
(19.5)
–
(19.5)
(10.0)
–
(23.0)
78.0
——–
(15.0)
——–
PL
Department expenses
Wages
Supervisor salary
Washing materials
Heating and power
Equipment depreciation
Allocated administration costs
Equipment maintenance
Variation
%
(over) variation
under
8,000
6,500 (1,500) (23.0)
101,170 81,250 (19,920) (24.5)
———– ——— ———
——–
E
Patient days
Weight of laundry processed (kilos)
Budget
Comment. We need to have a discussion about the over-expenditure of the
department.
SA
M
Required:
(a)
Discuss in detail the various possible effects on the behaviour of the laundry supervisor
of the way that her budget was prepared, and the form and content of the performance
report.
(10 marks)
(b)
Re-draft, giving explanations, the performance report and supporting memorandum in
a way which, in your opinion, would make them more effective management tools.
(7 marks)
(17 marks)
Question 21 TDM CO
The managing director of TDM Co has recently returned from a conference entitled “Strategic planning
in the new millennium”. Whilst at the conference she attended a session on “corporation mission
statements”. She found the session very interesting but it was rather short. She now has some
questions for the management accountant.
“What does ‘corporate mission’ mean? I don’t see how it fits in with our strategic planning process.”
“Where does our mission come from and what areas of corporate life should it cover?”
“Even if we were to develop one of these mission statements, what benefits would the company get
from it?”
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 17
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Required:
Prepare a report which answers the managing director’s questions.
(15 marks)
Question 22 SQUEEKY CLEAN
Squeeky Clean Co makes detergent for washing clothes.
traditional washing powder, and supertablets.
The company makes two products –
Information relating to Year 3 is as follows:
Operating profit
Powder
10,000,000
$6
60,000
Supertablets
5,000,000
$7
35,000
Total
PL
Sales (kgs)
Contribution per kilo
Total contribution ($000)
Fixed costs
E
The directors of the company prepared a five year plan which forecast an annual operating profit of $80
million by the end of year 5. Year 3 of this plan, in which the company made an operating profit of $75
million, has just finished. The directors have asked you to perform a reforecast, to see if the target of
$80 million will be achieved in Year 5.
95,000
(20,000)
––––––
75,000
––––––
SA
M
You have had discussions with the director of sales and marketing. He tells you that sales of Powder in
Year 5 are likely to be the same as in Year 3 and he will not increase advertising on this product. As far
as the Supertablets are concerned, he has identified two options:
Option 1: No additional advertising. Sales of Supertablets will increase by 5% per year in each year.
Fixed costs will remain unchanged.
Option 2: An additional $1 million per year would be spent on advertising the Supertablets. If this
happens, he believes that sales of Supertablets would increase by 10% per year in both years. Other
fixed costs would remain unchanged.
Required:
Calculate the operating profit that would be achieved in Year 5 under each of the two options,
and determine the value of the profit gap that would occur, (if any).
Note: Ignore inflation.
18
(8 marks)
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Question 23 BEANCOUNTERS CO
Beancounters Co is a medium sized accountancy firm based in Homeland. The firm wishes to improve
its performance management system and has decided to adopt a critical success factor approach. It will
identify a small number of critical success factors, and one or two key performance indicators for each
factor, that could be used to monitor the firm’s performance.
Homeland is a successful industrial nation, and the accounting profession in that country has a long and
successful history. Recently, however, some high profile corporate scandals have led many in the
business community of Homeland to question the value of the audit, one of the main sources of income
of all accounting firms, including Beancounters Co.
E
There are four large International Accounting firms that focus their attention on the large multi
nationals. Medium-sized firms such as Beancounters Co focus on the growing medium-sized, mainly
owner managed businesses that require audit, tax advice and some consultancy. These firms tend to be
very cost conscious. The strategy of Beancounters Co has been to differentiate itself by providing real
value added to its audit clients.
Required:
(a)
PL
The economy of Homeland is emerging from a long recession following the credit crunch of 2008, but
there are signs that bank lending to small and medium sized businesses is starting to grow.
Based on the information above, identify two critical success factors that are relevant to
Beancounters Co from each of the following sources:
Industry factors;
Competitive strategy;
The external environment.
(3 marks)
SA
M
(i)
(ii)
(iii)
(b)
For each critical success factor identified, suggest a key performance indicator that
could be used to assess the performance of Beancounters Co.
(3 marks)
(6 marks)
Question 24 MISSION STATEMENTS
(a)
Explain the role and content of a Mission Statement.
(5 marks)
(b)
Explain how a Mission Statement could contribute towards the planning and
performance measurement process.
(9 marks)
(c)
Identify the potential problems arising from using a Mission Statement to manage
performance.
(6 marks)
(20 marks)
Question 25 MOTOR CAR MANUFACTURER
A motor car manufacturer has been specialising in the production and sale of one model of car. The
model is somewhat dated, and the current sales forecast indicates that the sales will decline from the
current levels over the next three years. Carbon monoxide emission regulations will prevent the model
being manufactured and sold after the end of the third year.
The company’s profit forecasts for the following years are: $140 million in the next year, $48 million
the following year and a loss of $44 million in the final year of production.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 19
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Managing Director is unhappy with the profit forecasts above and believes that the company has the
potential to increase the profit to $280 million in each of the next three years. The Managing Director
has undertaken a strategic review and developed the following strategies:
Strategy 1
A marketing proposal will enable the company to enter a new overseas market with the result that the
total (including the overseas market) sales level will be stabilised at 160,000 cars per year. This will
result in profits of $156 million per year for the next three years, if this strategy is implemented alone.
Strategy 2
E
A re-design of the car will enhance its sales appeal and will permit the company to increase its selling
price. This will lead to profits of $205 million per year for the next three years, if this strategy is
implemented alone.
Strategy 3
PL
A radical cost reduction programme will improve efficiency and lower all variable costs. This will lead
to profits of $217 million per year for the next three years, if this strategy alone is implemented.
If all three strategies are implemented simultaneously, the anticipated profits would be $312.8 million
per year for the next three years, due to synergies between the strategies.
Required:
Explain how “Gap Analysis” can be used to assist a company to plan the achievement of
its strategic profit objective. Illustrate your answer by completing the diagram below,
adding lines for each of the following situations:
SA
M
(a)
(i)
(ii)
(iii)
(iv)
Strategy one is implemented
Strategy two is implemented
Strategy three is implemented
All three proposed strategies are implemented.
$m Profit
280
Desired
utcome
$280m
140
Current
forecast
$140m
Now
Year
Next
year
(7 marks)
20
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(b)
Describe the major external environmental factors that need to be considered in
assessing the success of the three strategies.
(4 marks)
(11 marks)
Question 26 HEALTHY EATING GROUP
E
The directors of The Healthy Eating Group (HEG), a successful restaurant chain, which commenced
trading ten years ago, have decided to enter the sandwich market in Homeland, its country of operation.
It has set up a separate operation under the name of Healthy Sandwiches Co (HSC). A management
team for HSC has been recruited via a recruitment consultancy which specialises in food sector
appointments. Homeland has very high unemployment and the vast majority of its workforce has no
experience in a food manufacturing environment. HSC will commence trading at the start of next year.
The following information is available:
HSC has agreed to make and supply sandwiches to agreed recipes for the Superior Food
Group (SFG) which owns a chain of supermarkets in all towns and cities in Homeland. SFG
insists that it selects the suppliers of the ingredients that are used in making the sandwiches it
sells and therefore HSC would be unable to reduce the costs of the ingredients used in the
sandwiches. HSC will be the sole supplier for SFG.
(2)
The number of sandwiches sold per year in Homeland is 625 million. SFG has a 4% market share.
(3)
The average selling price of all sandwiches sold by SFG is $2.40. SFG wishes to make a
mark-up of 331/3% on all sandwiches sold. 90% of all sandwiches sold by SFG are sold
before 2 pm each day. The majority of the remaining 10% are sold after 8 pm. It is the
intention that all sandwiches are sold on the day that they are delivered into SFG’s
supermarkets.
(4)
The finance director of HSC has estimated that the average cost of ingredients per sandwich is
$0.70. All sandwiches are made by hand.
(5)
Packaging and labelling costs amount to $0.15 per sandwich.
(6)
Fixed overheads have been estimated to amount to $5,401,000 per year. Note that fixed
overheads include all wages and salaries costs as all employees are subject to fixed term
employment contracts.
(7)
Distribution costs are expected to amount to 8% of HSC’s revenue.
(8)
The finance director of HSC has stated that he believes the target sales margin of 32% can be
achieved, although he is concerned about the effect that an increase in the cost of all
ingredients would have on the forecast profits (assuming that all other revenue/cost data
remains unchanged).
(9)
The existing management information system of HEG was purchased at the time that HEG
commenced trading. The directors are now considering investing in an enterprise resource
planning system (ERPS).
SA
M
PL
(1)
Required:
(a)
Using only the above information, show how the finance director of HSC reached his
conclusion regarding the expected sales margin and also state whether he was correct to
be concerned about an increase in the price of ingredients.
(5 marks)
(b)
Explain FIVE critical success factors to the performance of HSC on which the directors
must focus if HSC is to achieve success in its marketplace.
(10 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 21
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
(c)
Explain how the introduction of an ERPS could impact on the role of management
accountants.
(5 marks)
(20 marks)
Question 27 SUCCESS EDUCATION CENTRE
The Success Education Centre (SEC), which commenced trading in 20Y8, provides tuition for students
preparing for accountancy examinations in Homeland. In 20X0, SEC established a similar semiautonomous operation in the neighbouring country of Awayland. Divisional managers have no control
over acquisition and financing policy with regard to operations under their control.
E
Financial data (all stated on an actual basis) for the two divisions for the two years ended 31 December
20X1 and 20X2 are as follows:
20X1
20X2
Homeland Awayland Combined Homeland Awayland
$000
$000
$000
$000
$000
Revenue
4,500
1,000
5,500
5,000
1,300
Salaries
1,500
600
2,100
1,575
630
Tuition materials & consumables 500
150
650
510
155
Other operating costs
1,000
300
1,300
1,040
300
–––––
–––––
–––––
–––––
–––––
3,000
1,050
4,050
3,125
1,085
–––––
–––––
–––––
–––––
–––––
Marketing
250
75
325
300
100
Interest (Group)
150
Depreciation and amortisation
350
50
400
350
100
–––––
–––––
–––––
–––––
–––––
600
125
875
650
200
–––––
–––––
–––––
–––––
–––––
3,600
1,175
4,925
3,775
1,285
–––––
–––––
–––––
–––––
–––––
Profit
900
(175)
575
1,225
15
–––––
–––––
–––––
–––––
–––––
Combined
$000
6,300
2,205
665
1,340
–––––
4,210
–––––
400
125
450
–––––
975
–––––
5,185
–––––
1,115
–––––
SA
M
PL
Income statement
Summarized statement of financial position
Non-current assets
Net current assets
10% Loan stock
Capital and reserves
2,750
750
–––––
3,500
20X1
250
150
–––––
400
3,000
900
–––––
3,900
1,500
–––––
2,400
–––––
2,400
–––––
2,750
1,315
–––––
4,065
20X2
500
200
–––––
700
3,250
1,515
–––––
4,765
1,250
–––––
3,515
–––––
3,515
–––––
Required:
(a)
22
Provide an assessment of the financial performance of SEC and of the respective
contributions of the operations in Homeland and Awayland during the two years ended
30 December 20X2.
(8 marks)
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(b)
Discuss FOUR items of additional information that would be required in order to
provide a more comprehensive assessment of the financial performance of each
operation.
(4 marks)
(c)
Discuss FOUR factors that should be taken into consideration when assessing the
comparative financial performance of the two operations.
(4 marks)
(d)
Discuss FOUR advantages of using Earnings Before Interest, Taxation, Depreciation
and Amortisation (EBITDA) as a measure of financial performance.
(4 marks)
(20 marks)
E
Question 28 TALIESIN CO
PL
Taliesin Co manufactures a range of ice-cream based confectionery products, which it sells to national
supermarket chains that market the products under their own brand labels. The board of directors is
committed to a policy of achieving growth. However because the company is a relatively small player
in the industry the board of directors is focused solely on internal development as opposed to growth by
acquisition and has further agreed that it wishes to confine operations to the home market.
Summary financial statements for the year ended 31 May 20X2 together with prior year comparative
figures are as follows:
Income statement
SA
M
Sales (note 1)
Cost of sales (note 2)
Gross Profit
Operating expenses
Interest
Depreciation
Net Profit
20X2
$000
48,000
28,800
––––––
19,200
10,200
1,000
4,000
––––––
4,000
––––––
20X1
$000
40,000
24,000
––––––
16,000
8,000
0
4,000
––––––
4,000
––––––
20X2
$000
42,000
24,000
––––––
66,000
10,000
––––––
56,000
––––––
20X1
$000
40,000
12,000
––––––
52,000
–
––––––
52,000
––––––
30,000
26,000
––––––
56,000
––––––
30,000
22,000
––––––
52,000
––––––
Statement of financial position
Noncurrent assets (net book value)
Net Current Assets
Total Assets less Current Liabilities
Loan Finance
Net Assets
Capital Employed:
Ordinary Share Capital ($1 each)
Retained Earnings
Capital Employed
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 23
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Other information relating to Taliesin Co is as follows:
Sales information in respect of the years ended 31 May 20X2 and 20X1 is as follows:
Sales revenue
1 June–30 November
1 December–31 May
(2)
20X1
$000
26,000
14,000
20X2
$000
9,360
4,620
14,820
––––––
28,800
20X1
$000
7,800
4,200
12,000
––––––
24,000
Cost of sales information:
Materials
Labour
Manufacturing overheads
Cost of sales
Other Information:
PL
(3)
20X2
$000
33,300
14,700
E
(1)
Number of employees:
Permanent
Temporary
Number of customers
Number of new products introduced
20X2
20X1
204
288
5
6
200
240
6
5
Temporary employees are hired on a full-time basis between 1 June and 30
November in each year. They were paid at the same rate as permanent employees.
(ii)
Six new product lines were launched during the year ended 31 May 20X2. The
manufacture of each new product line required an investment in capital equipment
of $1 million.
SA
M
(i)
Required:
(a)
Using the above information, appraise the performance of Taliesin Co during the year
ended 31 May 20X2 and evaluate the extent to which the objective of growth has been
achieved.
(11 marks)
(b)
Explain the major benefits of pursuing a policy of internal development.
(4 marks)
(c)
Explain how the use of activity-based techniques may benefit Taliesin Co.
(5 marks)
24
(20 marks)
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Answer 1 ANTONIO
(a)
Assessment of Antonio’s performance against the industry
Antonio is right to be concerned about the performance of his business. After adding a
notional cost for Antonio’s time to labour costs, the business has a total expense to revenue
ratio of 98%, compared to an industry benchmark of 88% (see Appendix).
E
The biggest concern appears to be the gross profit margin, which for Antonio is only 56%
compared to the industry average of 68%. If Antonio were to achieve a margin of 68%, his
gross profit would rise to $170,000, an increase of $30,000. A higher profit margin could be
achieved either by increasing the selling price of the ice creams, or reducing the cost of
manufacturing. Given that the ice cream is homemade, it may be possible to increase the
selling price and market it as a premium product. It would be necessary to assess the impact
that this would have on demand.
PL
As far as reducing cost of sales, there may be ways that Antonio could make his production
more efficient. Being freshly made, there may be high levels of waste for unsold ice cream,
for example, so a more accurate forecasting model could help to ensure that he does not
overproduce.
Labour cost as a percept of revenue is higher than benchmarks. Antonio should consider
whether he could reduce the amount of time that he uses an assistant for. Similarly, the rent
as a portion of turnover appears high. This may be because he is paying higher rent per
square metre than the benchmarks. It may not be possible to do much about this, as it is
important to have well positioned premises to attract customers. The high ratio may also
reflect poor level of sales per square metre. It would be useful to have information about the
industry average for this.
Usefulness of the benchmarking exercise
SA
M
(b)
The exercise has been a useful preliminary exercise in benchmarking, and has identified that
there may be a performance gap between Antonio and the industry. However, the information
is not sufficiently detailed, and does not therefore identify the cause of the gaps. In the case
of the gross profit margin for example, information about industry prices and costs per litre of
ice cream would help to identify why Antonio’s gross profit margin is low.
Benchmarking should be more than an exercise in comparing metrics – it can also provide an
opportunity for organisations to learn how best practice organisations achieve superior
performance. This important aspect of benchmarking is missing from the exercise carried out
above.
Benchmarking may not take into account differences in the organisations being compared.
For example, demand for ice cream in Camberwick Bay may be very different from the
industry average, and will also be affected by the level of demand. Similarly, rent and labour
costs will vary from location to location, so the comparison with industry averages may not
be a valid one.
As a next step, Antonio could consider finding a successful ice cream retailer in another
location, which is not therefore a competitor of Antonio’s, and obtain their agreement to
benchmark his performance against theirs. Not only would more detailed information be
obtained, both organisations could learn best practices from each other which would enable
them to identify how to improve – for example better ways of forecasting demand.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1001
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
On a local level, Antonio could visit his competitors’ shops and find out what prices they are
charging. He should also consider experimenting with his own price – finding out what
impact an increase in his prices would have on demand.
Appendix
In order to make Antonio’s business more comparable with the benchmarks, a notional salary of
$45,000 has been added to labour costs, in respect of Antonio’s own time. The income statement now
becomes:
$
250,000
110,000
–––––––
140,000
60,000
60,000
15,000
–––––––
5,000
–––––––
E
Revenue
Cost of sales
Profit before tax
PL
Gross profit
Labour costs
Rent
Other expenses
Calculating the relevant metrics and comparing them to the benchmark gives the following:
Antonio
56%
98%
24%
24%
Industry average
68%
88%
19%
16%
SA
M
Metric
Gross profit margin
Total expenses/ revenue
Labour cost/ revenue
Rent/ turnover
Answer 2 ST MARGARET’S HOSPITAL
(a)
Stakeholder objectives and key performance indicators
(i)
Patients
Objective
Key performance indicator
Successful operations
Number of remedial operations (as a percentage of total
operations)
Number of patients readmitted for recurring problem
within three months (as a percentage of patients treated)
1002
Low waiting time
Waiting time (measured as number of days from being
referred to the hospital until the operation is performed)
Cleanliness of hospital (hygiene)
Ranking by inspectors
Responsiveness of staff
Patient surveys
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(iii)
Objective
Key performance indicator
Reasonable working hours
Average hours worked per week
Appreciation from patients and
managers
Rankings from staff surveys
Competitive remuneration
Salary benchmarking against average for industry
E
(b)
Medical staff
Statement of the accountant
From a financial point of view, the accountant may be correct. However, his statement fails
to recognise that the hospital’s objectives are far broader than simply making a financial
surplus.
PL
The mission of the hospital is “To provide high quality health care to all patients”, which
suggests that all patients deserve this care, regardless of how their treatment is financed.
While it is true that the hospital has reached capacity, and that it is necessary to find a way of
rationing the services of the hospital, management need to identify a more appropriate method
of doing this – perhaps based on how serious the conditions of the patients are.
Answer 3 INA CO
(a)
Benchmarking
SA
M
Benchmarking has been defined as “the establishment, through data gathering, of targets and
comparators through whose use relative levels of performance (and particularly areas of
underperformance) can be identified. By the adoption of identified best practices it is hoped
that performance will improve.”
A major problem facing the management of INA lies in the accessing of information
regarding the activities of a competitor firm that may be acknowledged to display best
practice. Internal benchmarking (i.e. using another function within the same firm as the
standard) can help in the avoidance of the problems of information access, but that clearly
limits the scope of what can be achieved. The most common approach is process
benchmarking, where the standard of comparison is a “Best Practice” firm which may be
entirely unconnected with the benchmarking organisation and not even operating within the
same industry.
In this case the company is concerned with the processes by which its purchasing department
establish and achieve targets. It is highly probable that the best yardstick for comparison
would appear to be another organisation that is highly regarded for its management of such
activities.
The objective is to improve performance. This is best achieved by means of the sharing of
information which should prove of mutual benefit to both parties to the benchmarking
programme. As a result of receiving new information each party will be able to review their
policies and procedures. The very process of comparing respective past successes and
failures can serve as a stimulus for greater innovation within each organisation.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1003
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
To evaluate the operational performance of the purchasing department team the main
contribution of benchmarking will be to establish a basis for targets which reflects the
performance of an organisation which displays “Best Practice” with regard to purchasing
activities. As a direct consequence of a comparison of existing standards with the “Best
Practice” organisation, managers can focus upon areas where improvements can be achieved
and evaluate measures to help attain those improvements.
(b)
Benchmarking the purchasing department
E
A principal benefit that will be derived by INA as a result of undertaking a successful
programme of benchmarking will be the identification of areas where cost savings are
possible. Hence the levels of cost of sales and operating expenses can be reduced leading to
increased profitability. Another benefit will be the setting of more realistic purchasing targets
that will result in improved budgeting. The improved performance of the purchasing
department personnel will serve as a better platform for the introduction of initiatives such as
performance related pay for the personnel within the purchasing department.
PL
It is critical that detailed planning of the work to be undertaken takes place if the programme
of benchmarking is to be successful. In order to collectively benchmark the purchasing
department as a whole, the company must first review and assess current practices. Of
fundamental importance to the programme is the need to define measurable targets and
determine how those targets are going to be measured in quantitative terms. This is critical
since benchmarking will be ineffective without a reliable form of measurement. Appropriate
targets for use within INA might relate, for example, to the cost of sales as a percentage of
turnover, costs of inventory, amount of discounts obtained, the number of stock-outs, the
number of “emergency” orders placed, the costs per order, the overall costs of the purchasing
department.
SA
M
At the outset it should be acknowledged that there is a need to incur significant costs in terms
of management time that needs to be invested in the benchmarking programme. However it is
quite possible that considerable benefits will be realised as a result of the comparison of the
activities of the purchasing department with that of an organisation that exhibits “Best
Practice” in terms of purchasing efficiency and effectiveness. During the preliminary stages
of the programme, the company will need to give detailed consideration as to how the
benchmarking exercise is to be conducted. The fundamental aim of the programme will be to
obtain comparative information in order that performance indicators may be developed. In
turn, these will be used to identify areas in which improvements can be obtained with
resultant cost savings.
With all this preparation complete, the company will then need to not only identify a “Best
Practice” firm against which to benchmark, but having done so it must be able to persuade
that firm to collaborate in the benchmarking programme and in particular to share
information. This is not an easy task to accomplish, as many organisations are reluctant to
reveal confidential information to present or potential competitors.
Once the exercise is complete INA will benefit from improved levels of efficiency and
effectiveness within the purchasing department, via better management information. In
particular, improved visibility of costs incurred by the company will facilitate better decisionmaking.
1004
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(c)
Problems inherent in benchmarking
PL
E
There are a number of potential problems inherent in undertaking a programme of
benchmarking. There needs to exist a sufficient incentive for the respective parties to share
information to their mutual benefit, as the success of the benchmarking programme is
dependent upon obtaining accurate information about the comparator organisation.
Moreover, it is essential that the business functions being benchmarked are similar enough to
facilitate meaningful comparisons. The value of the exercise must be sufficient to justify the
cost involved. Also, it is inevitable that behavioural issues will need to be addressed in any
benchmarking programme. This is especially the case if incentive schemes are in existence
and management may measure members of the purchasing department against each other.
Tactful management of the introduction of a benchmarking programme is essential.
Management should give priority to the need to communicate the reasons for undertaking a
programme of benchmarking in order to gain the full co-operation of the personnel within the
purchasing department whilst reducing the potential level of resistance to change.
Management need to handle the ethical implications relating to the introduction of
benchmarking in a sensitive manner and should endeavour, insofar as is possible, to provide
reassurance to the members of the purchasing department that their status, remuneration and
working conditions will not suffer as a consequence of the benchmarking programme.
Answer 4 ZBB – FOUR STATEMENTS
(a)
ZBB is purely theoretical
Generally it seems unjust to discuss zero-base budgeting (ZBB) as a theoretical idea in two
senses:
The technique is clearly documented;
(2)
There is evidence that it has been successful in practice.
SA
M
(1)
ZBB, it is largely agreed, was introduced initially in the United States by Peter Pyrrh of Texas
Instruments, who has subsequently written at length on the subject. Its essential feature is that
there is a departure from the status quo concept, in which the level of current spending is
taken as justifying the activity which is in receipt of the allocated resources.
Departmental managers are required to describe the nature, purpose and goals of their
departments in such a way that outside observers can understand the importance of the
department to the company. Alternative ways of providing the service in question should
then be considered, and the possibility of providing a lower level of service, or a lower quality
of service, should be envisaged. Finally, priorities will need to be considered, and
authorisation will be given for relevant activities with a view to necessary goal achievements
and the available resources.
Thus the technique, albeit a different approach from the usual assumption that the current
level of spending is acceptable and only increases need to be justified, is certainly not a
theoretical idea, and when considering its practical use it has proved of some benefit to the
businessman.
Admittedly the level of utilisation in the UK is limited, but the technique has permeated to the
highest levels of the United States government. Around twenty US states make use of the
technique, and ex-President Carter, whilst the Governor of Georgia, introduced such a system
there and subsequently brought the idea to the White House. Stanford University is another
significant advocate of ZBB.
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ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
In this country an experiment at an English polytechnic reportedly yielded significant
benefits. A London-based pharmaceutical company has also resolved to identify areas for
ZBB implementation. However, it must be said that so far there has been nothing more than
scattered examples.
In conclusion, it seems unjust to suggest that ZBB is a theoretical idea, of interest to
academics but of no practical use to businessmen of today. The technique is tried and tested
in the practical world, and has generally proved to be at least a qualified success wherever it
has been introduced.
(b)
Implementing ZBB wastes resources
E
It seems rather dubious to argue that the moment when management’s time and costs are
consistently under review is the wrong time to introduce ZBB. Indeed, considering that the
technique is specifically designed to assign priorities and assess the desirability of the level of
spending, it could be argued that this would be the best time to introduce such a system.
PL
In terms of opposition to ZBB, the introduction of such a system is bound to impose
considerable strains on management’s time, and implementing such a system will inevitably
cost money. However, in an area where management cannot afford to waste resources, a
system which intends to assess priorities for those resources, and which forces managers to
justify their activities would be a desirable development.
Indeed, times of economic recession are the best occasions for considering ZBB, for such
times force companies to examine themselves and their activities in any event. Companies
which streamline and consider carefully their strategy, as regards hopefully better times
ahead, may emerge stronger and better placed to take advantage of opportunities in the future.
SA
M
In conclusion, the statement seems to misinterpret ZBB in assuming that it is likely to be a
drain on resources. Initially this may prove to be the case, but the long-term gains may well
have much more to offer.
(c)
ZBB is no use in private industry
In a practical sense ZBB has been most to the fore in central and local government. Cynics
might argue that this is because they are the only organisations with the time and resources to
devote to such projects, whilst suggesting that they are the areas where spending for
spending’s sake, and the assumption that the current level of spend is per se justified, are rife.
In the private sector it is obvious that the influence of the market is more prominent, and this
will impose its limitations. However, particularly in non-productive departments, studies
have suggested that there is a tendency towards mushrooming of costs, along with managers
engaging in empire-building. Additionally, there is often an over-emphasis on the quality of
the service provided, and a lack of awareness of the needs of the enterprise. Certainly in
many instances a less extensive more cost-effective service may give greater benefit to the
organisation as a whole, even if not, at least at first sight, to the departmental manager
involved.
Overall it can be said that ZBB has been and is likely to be most regularly encountered in the
public sector, but this is not to say that it cannot be of use, particularly on a selective basis, in
the private sector.
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(d)
ZBB will not replace flexible budgeting
This comment is based on a fundamentally wrong assumption: that ZBB is intended to
replace the flexible budget. Indeed, flexible budgeting will remain, and will be used after the
ZBB exercise has been carried out.
It is unquestionably true that a well-set flexible budget does concentrate on the practical
realities of the present, although the flexible element in itself is designed to react to changes
in that situation. Equally, however, ZBB is also based on the present, and even tries to ignore
the past by beginning from a zero base, therefore perhaps resulting in a more objective
approach to the subsequent flexible budgeting process.
E
Overall this comment cannot be said to be justified, showing a lack of understanding of the
use of ZBB and greatly underestimating its practicability.
Answer 5 MASTER BUDGET
(1)
PL
Tutorial note: Steps in preparation of master budgets including the main budgets normally prepared.
Company objectives and policies
These should already exist because they tend to be medium or long term in nature. It is
necessary to check that they are valid and do not need updating. If objectives or policies do
not exist, then it is an essential prerequisite to budgetary planning that they are established –
preferably in writing.
(2)
Up-to-date organisation chart
SA
M
The current organisation structure should be reflected in organisation chart(s) and an
organisation manual. Responsibilities attached to the positions in the structure need to be
clearly defined so that managers are aware of the scope of the budgets that they are setting for
the next budget period.
(3)
Establish principal (limiting) budget factor
The principal or limiting budget factor is one that predominates to such an extent that all
budgets are influenced by it. Finance may limit the extent of the company’s activities, or the
level of sales likely to be attained in the budget period. The sales forecast is a common
starting-point in the budgetary planning process.
(4)
Sales forecast
This would be issued by the marketing function and would be broken down into:
(i)
(ii)
(iii)
Major products or product groups;
Geographical sales areas;
Months or quarters over the budget period.
All other elements in the process of developing master budgets either exist to support sales or
are a consequence of the level of sales.
(5)
Production budget
The production budget would be developed to meet the sales forecast period by period in the
year, taking into account stock-holding policies for both work in progress and finished goods
inventory. This would be done in terms of the physical units involved at this stage.
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ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
(6)
Material purchases budget
This budget would be developed, in physical unit terms, from the input requirements into the
manufacturing cycle and from the raw material stock-holding policy. This would be the area
of responsibility of the purchasing manager.
(7)
Factory cost budgets
From the production budget in unit terms, budgets would be developed separately for all
manufacturing cost elements – materials, labour and the range of factory overheads.
(8)
Cost of goods sold budget
(9)
E
This budget is developed from the previous steps and involves the valuation of inventory.
Selling, administration and other expenses budgets
(10)
PL
Budgets would be developed separately for all service function costs. These would cover
such activities as personnel and training, finance and accounting, management services
including computer service department, marketing and administration.
Capital expenditure budget
This budget is not directly related to operating activities within the budget period. The
expenditure on fixed assets needs to be very carefully controlled.
(11)
Research and development (R&D) budget
SA
M
This is another area of budgetary planning that needs careful control, because the expenditure
on R&D activities in the budget period will not relate directly to the operating activities in the
factory at the same time.
(12)
Master budgets
The master budgets developed for the whole company from the main budgets previously
described would be:
(i)
(ii)
(iii)
Cash budgets;
Budgeted profit and loss account;
Budgeted balance sheet.
These would be broken down over the sub-periods within the budget year as appropriate. In
the case of cash budgets, these would be prepared for each month or even each week within
the budget period showing the forecast cash balance or overdraft position at the period end.
Cash management is an important element in the overall control of working capital within a
manufacturing company.
The steps and procedure outlined which lead to the preparation of master budgets would be contained in
a budget manual, which would include detailed instructions and pro-forma documentation. Budgets
should be set by the appropriate managers throughout the company and this process needs to be very
carefully co-ordinated by a budget committee and/or a budget controller. In addition, the budget
accountant will have a co-ordinating and evaluative role at all stages in the budgetary planning cycle.
Tutorial note: As with all discussion questions, planning is important. This plan is often assisted by
“chopping up the question”. It asks for (a) steps taken (with reasons) and (b) main budgets that would
be prepared. It is also important to look for any practical context in which a question has been set; in
this case the wording merely includes “... in a manufacturing company ...” which serves to make
preparation of an answer easier.
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Answer 6 USEFULNESS OF BUDGETING
(a)
Usefulness management accounting technique
Budgeting may be viewed as of use in planning, co-ordination, control, motivation and
performance evaluation.
E
As a planning aid, the budgeting process allows for the quantification of the business plan.
Alternative planning scenarios may be examined and a “what-if” analysis applied. This feedforward view will enable a proposed plan to be compared with the level of achievement
which is required in order to provide the level of return required by the organisation. If
necessary amendments can be made in order that the agreed plan will achieve the required
level of return.
PL
The co-ordination of business activities will be aided through the budgeting process. Areas
of imbalance (e.g. between production capacity available and that required to satisfy demand)
may be identified and investigated. The co-ordination process will also avoid individual
members of management making planning decisions which are sub-optimal for the business
as a whole.
The control of business activities will be aided through the comparison of actual results
against the budget plan. The variances may be investigated and corrective action taken. This
process may be enhanced through the application of a flexible budgeting approach.
The budget should act as a motivating device. This should be enhanced through the feeling
of involvement which participation in the budgeting process will promote. Management is
more likely to identify and work toward achieving, targets which it has agreed in advance.
SA
M
Budgets may be used as a base against which to measure actual performance. The measures
may be quantitative in both monetary and non-monetary terms. Examples might be the
monitoring of cash flow or the percentage of material losses incurred. The trend of variances
between budget and actual may be monitored to help identify whether an “in control” or “out
of control” situation exists.
Tutorial note: Alternative relevant uses and comment would be accepted.
(b)
Activity based budgeting
Advantages claimed for the use of activity based budgeting include the following:

Resource allocation is linked to a strategic plan for the future, prepared after
considering alternative strategies. Traditional budgets tend to focus on resources
and inputs rather than on objectives and alternatives.

New high priority activities are encouraged, rather than focusing on the existing
planning model. Activity based budgeting focuses on activities. This allows the
identification of the cost of each activity. It also allows the ranking of activities
where financial constraints limit the range of activities which may be achieved.

There is more focus on efficiency and effectiveness and the alternative methods by
which they may be achieved. Activity based budgeting assists in the operation of a
total quality philosophy.

It avoids arbitrary cuts in specific budget areas in order to meet the overall financial
targets. Non-value added activities may be identified as those which should be
eliminated.
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ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK

(c)
It tends to increase management commitment to the budget process. This should be
achieved since the activity analysis enables management to focus on the objectives
of each activity. Identification of primary and secondary activities and non-value
added activities should also help in motivating management in activity planning and
control.
Reasons why annual budget preparation may not be an effective use of resources
Current investigation of budgeting indicates that some organisations claim that they have
abandoned the major annual budget preparation exercise. Arguments are put that a number of
adverse impacts resulting from the budget process may be stated.
E
Examples of such impacts are:
Annual budgeting adds little value and takes up too much valuable management
time.

Too heavy reliance on budgetary control in managing performance has an adverse
impact on management behaviour.

The use of budgeting as a base for communicating corporate goals, setting
objectives, assisting continuous improvement, etc. is seen as contrary to its original
purpose as a financial control mechanism.

Most budgets are not based on a rational causal model of resource consumption and
are, therefore, of little use in determining strategy.

The process has insufficient external focus from which to derive targets or
benchmarks.
PL

SA
M
The argument may be put that increased focus on knowledge or intellectual capital through
competent managers, skilled workforce, effective systems, loyal customers and strong brands
is more likely to yield improved business effectiveness.
Tutorial note: This answer is more detailed than that expected from the average student. An
awareness of the problem and debate would suffice.
Answer 7 INHERENT WEAKNESSES
(a)
1010
Weaknesses of traditional budgeting processes

Many commentators, including Hope and Fraser, contend that budgets prepared
under traditional processes add little value and require far too much valuable
management time which would be better spent elsewhere.

Too heavy a reliance on the “agreed” budget has an adverse impact on management
behaviour which can become dysfunctional having regard to the objectives of the
organisation as a whole.

The use of budgeting as base for communicating corporate goals, setting objectives,
continuous improvement, etc is seen as contrary to the original purpose of
budgeting as a financial control mechanism.

Most budgets are not based on a rational causal model of resource consumption but
are often the result of protracted internal bargaining processes.

Conformance to budget is not seen as compatible with a drive towards continuous
improvement.

Budgeting has an insufficient external focus.
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(b)
Implementing strategic change
(i)
Benchmarking
Balanced scorecard
PL
(ii)
E
Benchmarks enable goals to be set that may be based on either external measures of “best
practice” organisations or internal cross-functional comparisons which exhibit “best practice”.
A primary aim of the traditional budgeting process is the setting of realistic targets that can be
achieved within the budget period. The setting of realistic targets means that the extent of
underperformance against “best practice” standards loses visibility, and thus short-term
financial targets remain the predominant focus of the traditional budgeting process. It is
arguable that because the budgetary reporting system purports to give managers “control”,
there is very little real incentive to seek out benchmarks which may be used to raise budgeted
performance targets. Much depends upon the prevailing organisational culture since
benchmarking may be viewed as an attempt by top management to impose impossible targets
upon operational managers. The situation is further exacerbated where organisations do not
measure their success relative to their competition.
The Balanced scorecard is often misunderstood as a consequence of the failure by top
management to ensure that it is implemented effectively within the organisation. Thus it may
be viewed as the addition of a few non-financial measures to the conventional budget. In an
attempt to overcome this misperception many management teams now establish a
performance-rewards linkage based upon the achievement of Scorecard targets for the
forthcoming budget period. Unfortunately this can precipitate dysfunctional behaviour at
every level within the organisation.
SA
M
Even in situations where the Scorecard has been well-designed and well-implemented it is
difficult for it to gain widespread acceptance. This is because all too often there exists a
culture which places a very high value on the achievement of the fixed annual targets in order
to avoid the loss of status, recognition and rewards.
A well-constructed Scorecard contains a mix of long-term and short-term measures and
therefore drives the company in the direction of medium-term strategic goals which are
supported by cross-functional initiatives. On the other hand, the budgeting process focuses
the organisation on the achievement of short-term financial goals supported by the initiatives
of individual departments. Budgets can also act as an impediment to the acceptance of
responsibility by local managers for the achievement of the Scorecard targets. This is often
the case in situations where a continued emphasis exists on meeting short-term (e.g. quarterly)
targets.
(iii)
Activity-based models
Traditional budgets show the costs of functions and departments (e.g. staff costs and
establishment costs) instead of the costs of those activities that are performed by people (e.g.
receipt of goods inwards, processing and dispatch of orders, etc). 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 that are not visible
to the managers. The annual budget also tends to fix 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 are used to dealing with such problems, however their tasks would be
much easier to perform and their results made more reliable if these problems were removed.
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ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Answer 8 2B VALUE CHAIN
(a)
Porter’s value chain analysis
Porter developed his value chain to help enterprises analyse their resources to see which
activities contribute to the firm’s competitive advantage and in what way – whether they gave
rise to cost or quality advantages.
The value chain groups activities into primary and support activities:
SUPPORT
ACTIVITIES
HUMAN RESOURCE MANAGEMENT
M
A
R
TECHNOLOGY DEVELOPMENT
E
FIRM INFRASTRUCTURE
G
I
PROCUREMENT
PL
N
INBOUND OPERATIONS OUTBOUND SALES AND SERVICE
LOGISTICS
LOGISTICS MARKETING
PRIMARY ACTIVITIES
Applying this model to 2B, the company’s competitive strategy of differentiation can be seen
to be supported by the following activities:
SA
M
Inbound logistics

Procurement – good relationships with suppliers allow 2B to offer a wider range of
products than competitors.

Technology development – the computerised inventory system ensures that staff can
verify availability of goods quickly to be able to give customers accurate
information about how long it will take to source items not in that particular shop.
Operations

HRM – the policy of only recruiting sporting enthusiasts gives a quality advantage
through excellent customer service.

HRM – staff training results in very knowledgeable staff, again improving customer
service.

The store design allows customers to find products very easily, giving a quality
advantage.
Marketing and sales
1012

Market research – the recent survey by store managers is indicative of a strong
customer focus.

Technology development – the current website is very basic and does little more
than tell customers where stores are located and some details of products stocked.
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STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(b)
The main way e-retail investment will affect the value chain
Inbound logistics

Procurement – the existing good relationships with suppliers will become even more
important as 2B will want to offer a wide range of products on its website.

Technology development – the computerised inventory system will become more
important as 2B will want a facility on its website that allows customers to see
whether an item is “in stock” and estimated delivery times.
E
Operations
HRM – the existing policy of recruiting sporting enthusiasts will not add any value
to online customers unless a help facility is available on the website for customers
to ask questions.

With many websites, customers’ buying decisions are more likely to be influenced
by online product reviews by other customers and links to trade reviews. When
buying online, choice and price will become the new critical success factors.

It may be that 2B can make some use of staff expertise by getting them to write
detailed descriptions of products and their suitability for use on the website.

HRM – existing staff training will not add value to online sales, except where staff
need to be trained to process website inquiries.

The store design will be of little relevance to online sales.

Overall the operations value drivers will thus effectively contribute less to 2B’s
margin.
SA
M
PL

Marketing and sales

Market research – the recent survey by store managers is indicative of a strong
customer focus. This will continue to be important as feedback will be needed on
the website. The website itself can be used to gain information on customers
through the use of customer histories, profiling, cookies and surveys.

Technology development – the greatest improvement will occur with the website for
obvious reasons.
Summary
The main problem facing 2B is that its competitive advantage of differentiation through
enhanced customer service and choice will count for little on the website.
Customers will compare prices between websites and buy the cheaper goods, once they know
what they want. Even if 2B offers a very helpful online diagnostic service to help customers
decide what to buy, there is nothing to stop customers then buying the product from a cheaper
website.
2B will thus be under pressure to drop prices on the website to be competitive. This could
seriously undermine shop sales as customers might go into the shop for advice and then
expect 2B to match its web prices in store.
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ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Answer 9 BANK OPERATIONS
Intangibility: in a service business it is less likely that there will be a single measurable
output object. In the bank example, the helpfulness of employees or the speed of response to
enquiries may influence the customer perception of the output quality and quantity.
(ii)
Heterogeneity: the standard of performance in providing the service may vary. This is
particularly so where there is a high labour input as in the bank example. It may be difficult
to compare the performance of employees through time or with each other. Efforts should be
made to specify a standard of performance which should be aimed for in both tangible and
intangible aspects of the service. For example reply to written queries within 48 hours or
telephone call-back within one hour for awkward telephone queries.
(iii)
Simultaneity: this refers to the production and consumption of a service being at the same
time. There is no opportunity to check it before delivery to the customer. In the bank
example this applies to the telephone queries. Responses to written queries could be checked,
however, before being sent out.
(iv)
Perishability: services cannot be stored. This causes problems where there is a fluctuation in
demand. A surge in telephone enquiries may swamp the system. A surge in written queries
could probably be overcome through overtime working of the employment of temporary staff.
Answer 10 CAET-IT
(a)
PL
E
(i)
Potential benefits
SA
M
Six potential benefits are listed below. The first three benefits are obvious from the case
study and should be described by most competent candidates. The last three benefits require a
more careful consideration of the case study information and an understanding of order
processing and accounts systems.
Information will only have to be held once
For example, information on products and customers is stored in both the Sales and Dispatch
departments. There is evidence that the information between the two departments is
inconsistent, hence the need for Dispatch to produce a regular print-out of the current stock
position so that Sales can check and update its stock details. In the integrated system, all
departments will share the same information. This should ensure that data will be consistent
and unnecessary duplication will be eliminated.
Inter-communication between departments will be reduced
Many of the current inter-department data flows are caused by the need to provide
information for the department to update its own records. For example, the Sales department
receives the Daily Dispatch List from Dispatch in order to enter the dispatch data of the order
in its own computer system. This would not be necessary in an integrated system where
every department shares the same order file details. Thus many inter-department flows will
be eliminated and data entry will be reduced, resulting in fewer transcription errors.
1014
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Integrated hardware and software environment
The company currently has three different operating environments. Sales have a Linux-based
minicomputer, Accounts a three user Linux network and Dispatch a single user Windows
machine. Hence there are three different Operating Systems with different commands and
interfaces. The software also comes from different sources and there is a mixture of a
bespoke system (in Dispatch) and standard packages. The integration project provides the
opportunity to standardise on hardware and software, providing an up-to-date, consistent
operating environment.
Better operational information
PL
E
The information necessary to make appropriate operational decisions is currently distributed
between the departments. For example, in the current system the order confirmation is
dispatched if the product is in stock (according to the information held in the Sales
department). It is possible that the order, once it is received in Dispatch, cannot be fulfilled
because the actual stock figure is different and is insufficient to fulfil the order. It is also
likely that, on some occasions, orders are not processed because the product appears to be out
of stock (according to Sales department figures) when it is actually not.
Improved cash flow
SA
M
In the current system, orders cannot be invoiced until they have been dispatched. This may be
because there is some inconsistency between Sales and Dispatch stock figures and hence the
invoice is only raised for actual dispatched goods. In the integrated system the Sales
department will have access to the same (up-to-date) information as the Dispatch department
and hence can reserve stock against the order. This should guarantee that the stock is
available and so an invoice can be raised on receipt of order. This should lead to earlier
payment and hence improved cash flow.
Faster service to customers
In the current system Dispatch receives the Daily Sales List at the end of the day and so they
cannot pick and dispatch the goods until the next working day. In the integrated system
goods can be dispatched on the same day. This will provide faster customer service and may
lead to increased orders from satisfied customers.
(b)
Cost-benefit
(i)
Additional information
To undertake the cost-benefit analysis required by the company the IS manager will have to
determine:
The initial set-up costs of the project
The costs (e.g. maintenance and other operational costs) for each year of the project. The
benefits (in financial terms) for each year of the project
The net cash flow for each year of the project
The discount factor used by the company and the discount rates for each year of the project.
The discounted cash flows for each year of the project
The cumulative cash flow for each year of the project (as this will determine the payback
period).
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1015
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
The following example shows a cost-benefit analysis using these principles. It is shown to
help the reader. It was not required in the examination.
Example (with a discount rate of 10%)
DCF
1 000
Cumulative
$200,000 –200,000
0.909
0.826
0.751
0.683
45,450
57,820
52,570
54,640
–154550
–96730
–44160
+10480
E
Year 0
(Initial set-up costs of the project) $200,000
Costs
Benefits
Net cash flows
Year 1
20,000
70,000
50,000
Year 2
20,000
90,000
70,000
Year 3
20,000
90,000
70,000
Year 4
10,000
90,000
80,000
In this example, the project pays back in Year 4 of the project. Hence, using the criteria used
by CAET-IT, this project would not be sanctioned.
(ii)
Disadvantages
PL
The problem of valuing benefits
Some of the benefits may be relatively easy to quantify (e.g. time and paper savings).
However, other benefits (particularly those arising from better management information and
management control) may be more difficult to quantify accurately. For example, what is the
value of orders not confirmed by Sales because they believed that goods were not in stock?
Similarly, what is the cost of Dispatch having to apologise to Customers for the non-delivery
of goods promised by Sales?
Does not take into account cash flows beyond the end of the payback period
SA
M
The time to payback method does not consider cash flows after the payback period. Using the
discounting principle in conjunction with the payback method means that projects will be
difficult to justify. Most costs will occur at the beginning of the project, while significant
benefits will only accrue in later years and these may be heavily discounted (depending on the
discount rate). This appears to be the case in the integration project where annual benefits
and costs are fairly stable.
Answer 11 D LOGGING
(a)
CSR
(i)
Ethics and CSR
Ethics is the study of determining right from wrong behaviour. Business ethics relates to the
application of ethical values to business behaviour. In the same way that individuals have
ethical values and are expected to follow those values, so organisations are now also expected
to have ethical values.
As with individual ethics, business ethics goes beyond legal requirements indicating a higher
moral standard than simply “following the law”. There will be situations where an
organisation follows the law, but ethical action means doing something more than this. This
indicates that ethical actions are to some extent discretionary, in that the organisation does not
have to take ethical action. However, expectations on the organisation from other sources
(e.g. customers, suppliers and employees) also indicate that ethical action is normally
expected of a company.
1016
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Many ethical dilemmas involve a conflict of interest between stakeholder groups. For
example, a firm could increase profits for shareholders by exploiting the workforce in a third
world country where human rights legislation is less stringent. This may not be illegal but
would be considered by many to be unethical.
Corporate social responsibility is one aspect of business ethics and is concerned specifically
with the ways in which an organisation exceeds the minimum obligations to stakeholders
specified through regulation and corporate governance. Organisations are encouraged to
produce a CSR report detailing their behaviour in this respect.
(ii)
D’s CSR issues
E
The Chief Executive of D is wrong to suggest that as long as D operates within the law, then
this means that it is acting ethically. The main CSR issues relating to D are as follows:
Deforestation
Deforestation can have a dramatic negative effect on local wildlife, the lifestyle and
livelihood of indigenous tribes as well as increasing the risk of mudslides when it
rains.

On a global level the loss of tropical rainforest reduces the planet’s ability to absorb
C02, thus increasing the rate of global warming.

It is thus unethical for D to make profits at the expense of local residents without
making any attempt to clean up or rectify the mess created.

Even though D may be acting within the law it could suffer from the adverse
publicity being generated, so should implement plans for some regeneration postlogging (e.g. working with the local government to replant areas).
SA
M
PL

Use of hardwoods

While the use of hardwoods is not illegal, there is widespread concern that forests
will not have time to recover and that, ultimately species will be lost.

D should investigate which hardwood trees are considered most at risk and see if it
is feasible to leave them unfilled when logging an area.
Use of rivers for transportation

The use of rivers for transporting the logs could cause pollution and erosion,
threatening riverside settlements and local wildlife.

D should investigate the impact of different volumes of logs on local rivers and
consider staggering moving the logs if necessary.
Winning contracts

While making large initial payments to Governments may be normal business
practice, some may consider this to be tantamount to bribery and thus unethical.

D should disclose amounts paid to ensure full transparency.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1017
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
(b)
Logging strategies
Arguments in favour of switching to the underwater approach
D’s ethical reputation will be greatly enhanced if it is seen to be taking a moral lead
in this respect.

At some stage in the future legislation regarding logging may be tightened. A move
into underwater logging counters this threat and starting to switch now allows D to
develop expertise and gain critical mass ahead of competitors.

Once the machinery has been bought, operating costs will lower. In any case the
machinery can potentially be used for up to twenty years in which to generate a
return.

There will be less damage to local wildlife, other than perhaps to fish.

There will be considerably less disruption to local citizens as any major
environmental damage would have already occurred when the reservoir was created
in the first place.

There will be a reduced impact on global warming as the trees concerned are no
longer removing greenhouse gasses from the atmosphere.
PL
E

Arguments in favour of continuing with land-based logging
The existing method is probably much cheaper. A switch to underwater logging
may make D’s wood too expensive unless an environmental premium can be
charged.
SA
M


Only a limited range of woods may be available underwater. The current scheme
allows D to meet all market needs.

A switch to underwater logging would necessitate considerable investment in the
required machinery and training.

The outflow of water from many reservoirs is carefully controlled. It may not be
feasible to try to transport the volume of logs involved downstream via controlled
gates and sluices.
Recommendations

1018
It is recommended that D takes a lead in investigating underwater logging and starts
to switch methods where particularly exposed to negative criticism, such as the
felling of tropical hardwoods.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Answer 12 NEWS FOR YOU
(a)
Relevance of the economic data
Economic opinion on the effect of an interest rate change upon NFY may vary. Keynesian
economists believe that if base rate (and other interest rates) fall then the demand for money
will rise, and this will in turn lead to an increase in consumer demand. Unfortunately,
however, even if NFY accept the argument that the recent drop in the base rate will increase
demand, it is unlikely to have any significant impact on their particular business. Sales are
likely to remain unchanged because newspapers and small confectionery items are low cost
purchases, often bought on impulse. Interest rate movements will not make such items
suddenly affordable where before they were not.
E
Monetarists believe that the level of demand in the economy is unaffected by interest rates.
As already suggested, in the case of this particular business, this is likely to be true. NFY
needs to think about other ways in which the interest rate change might affect their business,
and particularly its impact on business costs.
PL
If the company has an overdraft facility, then the cost of borrowing will have been reduced.
At the same time the expansion plans require the business to raise $2 million, and changes in
interest rates affect the cost of all types of capital-loans and equity. Corporate borrowing
rates are generally linked to the prevailing base rate, with companies paying a premium above
base for the loan. The drop in rates will therefore affect the return that may be earned on the
proposed expansion. If NFY appraise their investment by the use of Discounted Cash Flow
analysis, then the fall in the cost of capital which has resulted from the drop in the base rate,
will mean that a lower discount rate can be applied to the forecast cash flows. A lower rate of
discount, ceteris paribus, will result in a higher Net Present Value for any given proposal.
SA
M
Keynesian economists do not, however, agree that changes in interest rates affect corporate
investment decisions. They argue that investments are dependent more upon the level of
business confidence. It may be possible to suggest that NFY see the fall in the base rate as
stimulating general economic confidence, and hence they are more confident about the future
of their particular business, and so regardless of any changes in the cost of capital, they are
more willing to undertake the expansionary investment.
The figures on the rate of inflation are useful to NFY because they can directly affect profit
and cash flow forecasts. A rise in the rate of inflation can indirectly lead to a rise in interest
rates in order to curb demand, resulting in the business being affected on two fronts. The cash
and profit impact of inflation will be to a large degree dependent on the relative rates of
increase in wages, the cost of wholesale supplies for the shop, and the prices that NFY can
charge its customers. The quoted rate of inflation is very low at just over 1% per year, and
although the rate is not expected to fall any further, its current level is unlikely to have a
dramatic effect on the ability of the business to trade profitably. The greater risk for the
business may come from the problem that because inflation is so low, customers are not
prepared to tolerate any price rises at all, and NFY may become more vulnerable to loss of
business to the large food stores which can draw away customers via price cutting campaigns.
Personal and corporation tax rates are relevant to the owners of NFY because they will affect
the net gain to the business that may be generated by expansion. As with interest rates, tax
rates can affect personal spending patterns, and therefore affect the turnover of a particular
business. NFY, however, is unlikely to have a business which is sensitive to tax rates,
because its products are basic essentials and low cost items. Nonetheless, the information that
tax rates will remain unchanged is useful because it allows the business to be certain of the
amount of tax relief that may be available on loan finance, and the relief that equity investors
may claim for investing in a small unquoted company. This information may be useful in
deciding whether or not to go ahead with the expansion, because it may affect the relative cost
and availability of capital.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1019
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
The changes in taxes on tobacco may be expected to have had a significant effect on NFY
because it is one of the relatively high value products sold by the stores. The question
indicates that tobacco sales have been falling, but it is unclear whether this drop is linked to
the 10% rise in tax over the last twelve months, or simply a result of the population becoming
more health conscious and so buying fewer cigarettes. If customers are price sensitive in their
purchasing of tobacco, NFY may once again find itself vulnerable to competition from the
food retailers which can exercise greater buying power and sell similar products at lower
prices. The high cost of these items also means that stocking costs are high, and if stock
turnover is reduced because of tax increases, then the amount of working capital required by
NFY will rise.
(b)
PL
E
The investigation into the food sector may prove to be detrimental to NFY if it serves to
initiate a price war amongst the retailers, all of whom will be anxious to prove that they look
after their customers. The business grew very quickly between 2001 and 2003 but since then
turnover has increased by just 2% per year, and the owners must be concerned that further
growth potential is limited, at least within the existing outlets. Moving into the sale of basic
foodstuffs has been used as a strategy to compensate for loss of sales in other products such as
tobacco, but these days in many countries a large proportion of people do their food shopping
in large retail outlets. By expanding their product range, NFY has also created for itself
another set of competitors in the form of food retailers. The only way in which the business
may gain from this investigation is if it also covers food wholesaling, and the result is a drop
in the prices that NFY have to pay for their stock.
Arguments in favour of the expansion
The figures on turnover suggest that there is only limited opportunity for the
business to continue to grow organically. The business is seeking to replace sales of
tobacco and newspapers with sales of foods, but as suggested in answer to (a), the
potential of this side of the business may be limited. NFY may be advised to grow
their sales via the acquisition of new outlets instead.
SA
M


If NFY are being forced into paying relatively high prices for supplies from a local
wholesaler, then expansion may allow them to gain more bargaining power, and
purchase at reduced rates from a national wholesale chain. Increased size will offer
the opportunity to take advantage of possible economies of scale via bulk ordering.
In this way, margins could be widened and the overall business made more
profitable.

With a larger number of stores covering a wider geographic area, NFY will be able
to broaden the nature of their business base, so that they are less vulnerable to
regional economic trends.
Arguments against any expansion

1020
The potential to increase sales substantially via food sales is very limited. The
majority of people purchase most of their food from larger stores, and will only use
a local shop for small low cost items where it is not worthwhile making a special car
journey to the supermarket for just one or two products. It is unlikely that it is
possible to run a profitable business based on this type of sales.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
The widespread ownership of televisions and access to differing forms of mass
media communications is likely to mean that fewer people will purchase
newspapers on a daily basis. This is particularly true of those papers which are also
published in electronic form. Many newspaper stands are dependent for the bulk of
their sales upon customers who come into the shop to buy a newspaper and then
purchase additional items at the same time. If customers do not come in for the
paper, then the associated sales income will also be lost. Expanding a business
where there is such a risk of demand falling away may be regarded as very risky.

The information in the text suggests that the competitive environment for NFY is
becoming much tougher on a number of different fronts simultaneously, with rising
excise duties, powerful food retailers and a reduction in tobacco and newspaper
purchases. Expansion usually occurs because a business is very confident of the
future, but in this case it is questionable whether NFY has much about which to be
confident.
E

Answer 13 MONOPOLY
PL
It would therefore seem to be advisable for NFY to postpone their expansion plans, and
perhaps look at ways of using their existing outlets to sell very different products thereby “reinventing” their business, perhaps by moving completely away from confectionery and into,
for example, video rental.
Many governments consider it necessary to prevent or control monopolies
A pure monopoly exists when one organisation controls the production or supply of a good that has no
close substitute. In practice, legislation may consider a monopoly situation to occur when there is
limited competition in a particular market. For example, UK legislation considers a monopoly to occur
if an organisation controls 25% or more of a particular market.
SA
M
Governments consider it necessary to act against an existing or potential monopoly because of the
economic problems that can arise through the abuse of a dominant market position. Monopoly can lead
to economic inefficiency in the use of resources, so that output is at a higher cost than necessary.
Further inefficiency can arise as a monopoly may lack the incentive to innovate, to research
technological improvements, or to eliminate unnecessary managers, since it can always be sure of
passing on the cost of its inefficiencies to its customers. Inefficiencies such as these have been seen as
major problems in state-owned monopolies and have fuelled the movement towards privatisation in
recent years. It has been expected that the competition arising following privatisation will lead to the
elimination of these kinds of inefficiency.
Monopoly can also result in high prices being charged for output, so that the cost to customers is higher
than would be the case if significant competition existed, allowing monopolies to generate monopoly
profits.
The government can prevent monopolies occurring by monitoring proposed takeovers and mergers, and
acting when it decides that a monopoly situation may occur. This monitoring is carried out in the UK
by the Office of Fair Trading, which can refer takeovers and mergers that are potentially against the
public interest to the Competition Commission for detailed investigation. The Competition
Commission has the power to prevent a proposed takeover or merger, or to allow it to proceed with
conditions attached (e.g. disposal of a portion of the business) in order to preserve competition.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1021
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Answer 14 NEWCO
(a)
Compatibility with shareholders’ interests
At first glance the statement of the chief executive of Newco would appear to indicate a
preoccupation with customer satisfaction. Certainly the aim of the business can be seen to
have a strong marketing orientation. The Chartered Institute of Marketing has defined
marketing as being “The management process that identifies, anticipates and supplies
customers’ requirements efficiently and profitably”.
E
However, whilst the business aim has a distinct marketing orientation, it is a means to an end
as opposed to an end in itself, since the cornerstone upon which financial management theory
is founded is that maximisation of shareholders’ wealth is principal among the objectives of a
profit-seeking organisation.
PL
Presumably the chief executive will have given due consideration to the possible problems
which can arise when a marketing orientated objective, such as that contained in his public
statement, draws management attention away from the end objective of maximisation of
shareholders’ wealth. It will often be the case that in public utilities such as Newco,
shareholders will also be customers, and thus it is important to reconcile the interests of these
two groups.
Where expenditure is incurred to raise levels of service quality within Newco, customers will
arguably be more satisfied than previously. However, unless this cost increase is passed on to
the customer, this enhancement of service quality will be detrimental upon the profitability of
the organisation and lead to a lowering of the return earned on shareholders’ funds, which
may cause varying degrees of dissatisfaction amongst the shareholders.
SA
M
Where a well-conceived and properly executed cost reduction programme is utilised, both
shareholders and customers should derive benefits. However, management must bear in mind
that both good planning and execution are essential if such a scheme is to prove mutually
beneficial to both parties, since, for example, excessive cost cutting may reduce levels of
service offered by Newco with the result that customers seek an alternative source of supply.
In circumstances where high quality service is provided to customers at “the cheapest possible
price”, it is likely that a “win-win” relationship will be enjoyed by both shareholders and
customers alike.
(b)
Management accountant’s role in assessment
Management accounting systems should collect and analyse strategically significant
information on a regular basis. In facilitate the evaluation of progress towards established
business objectives, management accounting systems need to be able to satisfy a wide range
of information needs.
This is particularly the case in organisations such as Newco where the objectives, as stated by
the chief executive, can be seen to be non-quantifiable.
The management accountant should endeavour to ensure that the management accounting
system of Newco meets the needs of its users. With reference to the stated objectives, the
management accountant should seek to make available information regarding the competitive
standing of Newco within the marketplace in which it operates.
1022
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Wherever possible the management accountant should attempt to ensure that quantifiable
goals are set, since their attainment or otherwise is readily apparent, whereas by way of
contrast the extent to which non-quantifiable goals are accomplished is by definition (or lack
thereof!) inherently more difficult to evaluate.
The management accountants within Newco will need to give due consideration as to what
constitutes the most appropriate indicators of the extent to which the stated objectives have
been achieved.
E
Certainly, as regards the “greatest number of customers”, market share is a useful indicator of
the degree to which this objective has been attained. The rate of growth in Newco’s customer
base should be compared with that of the total market within which Newco operates (i.e. the
energy market) to ascertain whether the growth in the number of Newco’s customers
compares favourably or otherwise with that of its competitors.
PL
To evaluate progress against supplying “the best possible service”, Newco’s management
accountants should use a range of information which the management accounting system
needs to be able to produce on a regular basis.
Newco’s management accounting system should be capable of capturing information
concerning the costs of service quality which will normally entail two sets of costs.
The first is the cost of quality assurance the total of which will increase as the activities and
functions concerned with the attainment of quality increase.
The second concerns the costs of the provision of a failed or “inferior” service such as repairs
to customers’ equipment and, in the extreme example, reduced further sales.
SA
M
The management accountants within Newco can assist in the decision-making processes
concerned with striking what can often prove to be a delicate balance between the cost and
value of quality assurance.
To evaluate quality measures such as customer satisfaction the management accountants
should utilise information such as the number of complaints received during specified
periods.
In addition, well-designed customer feedback reports sent direct to Newco’s customer
services department would provide a useful indication as to the customers’ perception of the
quality of the service with which they had been provided.
The assessment of whether Newco is able to supply “the best possible service ... at the
cheapest possible cost” is difficult to perform (if not impossible!) in the absence of previously
determined standards which would serve to provide a useful indication as to what level of cost
can be justified as appropriate to the circumstances of Newco. Hence, it would appear that
the Newco’s management accountants should seek to ensure that such indicators are
established in order to provide a more sophisticated approach to the evaluation of the extent to
which this objective has been attained.
(c)
Evaluation of the success of Newco
The success of Newco will be evaluated by those who have purchased shares in the recently
privatised company. Both private and institutional investors will be particularly interested in
the level of profitability achieved by Newco, as well as being eager to satisfy themselves that
Newco has a healthy financial position.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1023
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
To this end shareholders will use ratio analysis with a primary focus upon profitability and
liquidity in order to evaluate the performance of the company.
The financial community will also closely monitor the performance of Newco. This
interested group will be keen to obtain information regarding the profitability of the
organisation as well as details of its cost base.
Recent privatisations within the United Kingdom have given rise to greater public awareness
of (and interest in!) the views of those who both support and oppose privatisation.
E
Whilst profitability remains a primary concern of such groups, there is also strong regard for
levels of service quality. Such groups will also be keen to gain information regarding the
number of jobs created or lost as a direct consequence of the privatisation of Newco.
Service levels and their related costs will be the main interest of the customers of Newco. It
is likely that a public body analogous to OFTEL in regard to the telecommunications industry
will be formed to monitor the quality of service offered by organisations such as Newco.
PL
The government, in advocating such privatisations, will wish to see that wider share
ownership and increased profitability via a more economic cost base feature among the
benefits which accrue from a privatisation, such as that in question.
Finally, those firms involved within the energy industry as a whole will be interested in the
post-privatisation fortunes of Newco, since the privatisation may well have spin-off effects
across the industry, in particular, those which supply energy to others.
The management accountant should seek to ensure that information which is made available
to the aforementioned groups is pertinent to their needs.
SA
M
To satisfy a diverse range of information needs it is essential that suitable performance
measures are utilised by the management accountant.
Where appropriate, a range of statistical information should be used to supplement the
“standard” information contained within contemporary financial reports of reporting entities.
Indicators of levels of service quality available from organisations such as Newco should be
provided to facilitate an assessment of the non-financial performance of the company.
To this end the number of complaints received and the number of equipment failures, together
with mean waiting times after notification of the occurrence of such a failure, would be
extremely useful.
Tutorial note: Your answer should indicate an appreciation of the conflict of interests which
may exist when shareholders and consumers are often one and the same! You should suggest
which performance measures would be appropriate to the circumstances of Newco and briefly
state why this is the case. You should avoid any over-emphasis regarding the interests of any
one particular interested party.
1024
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Answer 15 HEALTHFOODS CO
(a)
Pay-off table
E
Purchase options
Demand Prob
Contract A
Contract B
Contract C
Contract D
Kgs
Contribution EV Contribution EV Contribution EV Contribution EV
000
$000
$
$000
$
$000
$
$000
$000
160 0.20 1,008 201,600
72
14,400
(504) (100,800) (1,656) (331,200)
234 0.40 1,008 403,200
2,403 961,200 1,827 730,800
675
270,000
360 0.40 1,008 403,200
2,592 1,036,800 3,276 1,310,400 4,644 1,857,600
–––––––––
–––––––––
–––––––––
–––––––––
1,008,000
2,012,400
1,940,400
1,796,400
–––––––––
–––––––––
–––––––––
–––––––––
PL
On the basis of expected values HFL should select Contract B under which 240,000
kilograms will be supplied during the forthcoming year which would give an annual expected
value of $2,012,400.
Note 1: Example of workings for the Pay-off table in part (a):
Assuming that Contract B was selected and subsequent demand was for 160,000 kilograms
the resultant contribution would be calculated as follows:
(160,000 × $5.50) – (240,000 × $3.70) = -$8,000
-$8,000 + (80,000 × $0.25) = $12,000
$12,000 × 6 = $72,000
(b)
The minimum contribution for each possible decision
SA
M
Contract
A
B
C
D
Minimum contribution
$000
1,008
72
(504)
(1,656)
Applying a maximin approach to this decision would result in the selection of Contract A
under which 160,000 kilograms of organic mushrooms would be supplied to HFL.
Applying a minimax regret approach, the regret matrix would appear as follows:
Contract type
Demand per outlet
160,000
234,000
360,000
Maximum regret
A
160,000
$000
0
1,395
3,636
–––––
3,636
–––––
B
240,000
$000
936
0
2,052
–––––
2,052
–––––
C
280,000
$000
1,512
576
1,368
–––––
1,512
–––––
D
360,000
$000
2,664
1,728
0
–––––
2,664
–––––
Therefore, to minimise the maximum regret, Contract C, under which 280,000 kilograms of
organic mushrooms would be supplied to HFL, would be chosen.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1025
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
(c)
Reasons for selecting Contract D
The directors might select Contract D under which 360,000 kilograms of organic mushrooms
would be supplied to HFL for each outlet. This is the entire capacity of HFL which would
ensure that competitors would not be able to supply the same product and hence the
competitive advantage held by HFL might be preserved.
Answer 16 EQUINE MANAGEMENT ACADEMY
(a)
Budgeted net profit or loss for the current year
$
$
Operating costs
Student category:
Surgery
Dentistry
Business Management
4,536,000
3,150,000
3,402,000
–––––––––
(6,760,000)
–––––––––
4,328,000
Budgeted profit of Equine College
Riding School
Fee income
Rider category:
Beginner
Competent
Advanced
1,843,200
2,027,520
3,379,200
–––––––––
SA
M
Operating costs
11,088,000
PL
Fee income – (W1)
E
Equine College
7,249,920
(6,095,000)
–––––––––
1,154,920
–––––––––
5,482,920
–––––––––
Budgeted profit of Riding School
Budgeted profit of EMA
WORKINGS
(1)
Equine College fee income
E.g. Surgery
Number of students (30% × 1,200)
Fee per student 12,000 × 1·05 ($)
Budgeted fee income ($)
(2)
360
12,600
4,536,000
Riding School fee income
Number of
lessons
240 horses × 4 per day × 320 days × 80% = 245,760
Beginner (50%)
122,880
Competent (25%)
61,440
Advanced (25%)
61,440
1026
Charge
per lesson
$
Fee income
15
(30 × 1·1) = 33
(50 × 1·1) = 55
$
1,843,200
2,027,520
3,379,200
–––––––––
7,249,920
–––––––––
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
(b)
(i)
Summary of possible outcomes
Net profit Expected
value of
net profit
$
$
6,389,160
127,783
5,482,920
657,950
4,576,680
274,601
5,280,360
316,822
4,374,120 1,574,683
3,467,880
624,218
4,171,560
83,431
3,265,320
391,838
2,359,080
141,545
––––––––
4,192,872
––––––––
(ii)
PL
E
Probability
Probability
% change in
Lesson
Combined Equine
Riding
Total
fee income
capacity
probability College
School
costs
revenue
revenue
$
$
$
90%
0·10
0·02 11,088,000 8,156,160 12,855,000
No change 0·20 80%
0·60
0·12 11,088,000 7,249,920 12,855,000
70%
0·30
0·06 11,088,000 6,343,680 12,855,000
Decrease
90%
0·10
0·06 9,979,200 8,156,160 12,855,000
by 10%
0·60 80%
0·60
0·36 9,979,200 7,249,920 12,855,000
70%
0·30
0·18 9,979,200 6,343,680 12,855,000
Decrease
90%
0·10
0·02 8,870,400 8,156,160 12,855,000
by 20%
0·20 80%
0·60
0·12 8,870,400 7,249,920 12,855,000
70%
0·30
0·06 8,870,400 6,343,680 12,855,000
–––––
1·00
Expected value of profit =
–––––
Comment on use of expected values
The use of expected values takes into account the relative likelihood of each of the possible
outcomes occurring. The expected value of $4,192,872 is not one of the potential outcomes
in the table, but is the weighted average of those outcomes. The use of expected values by the
management of EMA implies that they have a risk-neutral attitude. A risk neutral decisionmaker will ignore the variability in the range of potential outcomes and will be concerned
only with the expected value of outcomes.
Reasons for opening an academy
SA
M
(iii)
Possible reasons why the government of Hartland has decided to open an academy
comprising an equine college and a riding school are as follows:
EMA operated the only Equine College in Hartland and operated at full capacity during the
year just ended. This could well be an indication that the demand for equine specialists in
Hartland exceeds the available supply.
Much transportation in Hartland is provided by horses and this might therefore account for
the fact that the Equine College operated by EMA is currently operating at full capacity. It is
reasonable to assume that the more that horses are used for transportation then the greater will
be the need for specialists such as equine veterinary surgeons.
The government of Hartland “actively promotes environmental initiatives” and therefore it
might well be the case that it discourages the use of petrol and diesel propelled vehicles for
both social and business purposes.
Hartland is a developing country which has a large agricultural sector and therefore it is
probable that horses are used in day-to-day operations (e.g. farming).
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1027
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Answer 17 MANAGEMENT INFORMATION SYSTEMS
Unitary to divisionalised structure
Each division will now require its own accounts.

There is now a need to assess the financial and non-financial performance of every division.

Internal and external income will have to be identified – a cross charging/transfer pricing
system will have to be devised that ensures corporate goal congruence.

Information concerning the various external markets is required to permit the performance of
a manager to be distinguished from the performance of the business unit managed.
Central direction to empowerment
E

There may be a need to separate the transmission of strategic and operational information.
The empowered team leaders will not require strategic information, but principally, data
concerned with the day-to-day management of the business. Whereas the senior management
may now be able to dispense with information concerned with operational details.

This may also require the development of new reporting formats that are understandable to
the team leaders. They may need even more detailed information at more frequent intervals
than was available previously.

New control systems will be required to meet the needs of the newly empowered team leaders
and the senior management. The shift from a few too many decision makers will necessitate
control systems to ensure standardisation and consistency throughout the company.
SA
M
Shift to outsourcing
PL


New information systems will be needed to facilitate access to the external providers of
services (e.g. approved contractor lists).

Authorisation/approval systems need to be developed to ensure procedures are being adhered
to.

Systems to monitor the price and quality of work undertaken by contractors will be needed.

Financial appraisal systems may be installed to compare the “life” costs of alternative
suppliers in comparison with internal resourcing. If internal suppliers are permitted to bid for
work and compete against contractors, then there is a need for the costing systems to clearly
identify the activities driving costs.
Expansion in part-time and temporary employees

The traditional personnel systems will need to adapt to the new situation.

The employment of part-time staff to replace full timers will result in greater numbers of
employees, perhaps by a factor of two or three times. Can the existing system cope? Is there
sufficient storage and memory capacity?

Part-timers and temporary staff tend to stay in jobs for shorter periods and hence creating
more activity within the personnel department. Once again can the system cope with the
additional workload?
1028
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)

Long serving full-time employees will have more opportunity, and perhaps more incentive to
understand and use effectively a complex MIS. On the other hand, part-timers and temporary
staff will have less opportunity to “come to grips” with a complex system, therefore it may be
necessary to modify/simplify the systems to suit the new staffing situation.
Customers adopting JIT systems
The company could previously operate with low or zero stocks, and therefore a small/simple
stock holding system might suffice. The advent of JIT for customers puts the onus on the
company to replenish stocks immediately. This will necessitate the installation of a larger,
accurate and responsive inventory system. The system adopted will need to provide
information concerning minimum stock levels, re-order cycles and Economic Order
Quantities. None of this information may have been required previously because stock levels
were not so business critical.
E

Long print runs to high value low volume
The new customers will have more complex, individualistic and diverse requirements. The
established ordering and printing systems will need to be modified to manage the
heterogeneous business activity.

High value business normally permits lower margins of error and deficiencies in quality
standards. This may entail close monitoring and low tolerance control systems being
installed.
PL

Tutorial note: This list of issues is not exhaustive and therefore other considerations mentioned by the
candidates should be credited. The crucial requirement is to assess whether the examinees are thinking
coherently about the consequences on the organisation of the change in the business environment.
SA
M
Answer 18 MANAGEMENT ACCOUNTING SYSTEM
(a)
Consideration of behavioural consequences
The role of a management accountant is to provide information which can be used to assist
and guide management in the pursuit and achievement of organisational objectives. The
management information provided is read, interpreted and responded to by people within the
organisation, and their responses will determine the quality of the decisions made and the
extent to which corporate objectives are achieved. Management accountants should be aware
of this relationship and endeavour to ensure that the information that they supply is used in a
way that benefits their organisation. The design and operation of a management accounting
system should anticipate the behavioural consequences that are likely to arise as a result of its
activities. A management accountant who fails to consider these repercussions or denies
responsibility for them is likely to operate a dysfunctional system. This is most likely to
manifest itself in a failure to secure goal congruence between the interested parties. The
management accounting system will need to consider the particular culture of the
organisation, whether it has a hierarchical or democratic structure, its attitude towards
employee empowerment and the extent of delegated team decision making.
(b)
Performance monitoring
There is a general acceptance of the idea that an organisation that monitors performance and
rewards individuals for “good performance” is more likely to encourage behaviour that is
consistent with the objectives of the organisation. This involves the organisation
“transmitting signals” to its people as to what it deems desirable activities and outcomes in
the workplace. This approach has resulted in such terms and activities as performance
monitoring, performance related pay, payment by results, bonus systems.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1029
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
The reward for the achievement of desired outcomes could be money, promotion, job
security, preferred work activities, alternative work environments. Unfortunately this is a
very complex task and problems are likely to arise in a number of areas:
It is very difficult in many work environments to measure individual performance –
and if you resort to team performance, it is difficult to gauge the contribution from
individual members.

It is difficult to ensure that individual targets are not inconsistent with other
individuals or corporate objectives.

Current measured performance may discourage consideration of longer term issues
that may have adverse repercussions.

Can a performance monitoring system comprehensively measure the key variables?
For example, the desire to achieve greater volume/activity may be at the cost of
quality that is more difficult to identify and appraise.

Measure fixation – concentrating on the measurement process and not on what
needs to be achieved.

Misrepresentation – “creative” responses that give a favourable view of activities.

Myopia – short sighted viewpoint with limited consideration to long term issues.
PL
E

Tutorial note: Candidates would be given credit for illustrating these issues with specific
references to a work environment.
SA
M
The problems highlighted above can be managed if the following points are considered:

Do not underestimate the scale of the task in designing a performance monitoring
system.

Consider the expectations and likely responses of all the parties concerned – take a
broad view.

Ensure that the people designing and operating the system have a comprehensive
understanding of the organisation’s activities and the interrelationship between all
of the stakeholders.

Ensure that all parties involved believe that they will be beneficiaries of the system.

Be prepared to reappraise and modify – it is unrealistic to believe that it can be
perfected at the first attempt.
Budgeting
Adverse behavioural consequences of budgeting can arise from insufficient consideration
being given to the task during the planning stage. The targets set may be perceived as:






1030
Imposed;
Complicated;
Unfair;
Irrelevant;
Easy;
Unachievable.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
This is likely to foster the “them and us” syndrome and the consequential failure to achieve
goal congruence. These undesirable consequences may be avoided by consulting with all
interested parties, setting challenging but achievable targets, considering other people’s
perception of the targets and anticipating their likely responses. On the other hand, if budget
holders are given complete autonomy or are permitted to have a significant influence on
budgetary targets, they may be tempted to build in “slack” to give them an easy life which is
not in the interests of their organisation.
Having implemented the planning stage, attention is drawn towards control. Behavioural
problems can arise from:
A failure to distinguish between controllable and non-controllable factors for each
particular budget holder – people will feel aggrieved for being accountable for what
they do not control.

A failure to account for the changing circumstances that have arisen since the budget
was determined may require budget adjustments and/or a flexible budget approach.

Failure to reward favourable variances – budget under spending that automatically
results in cuts in future budget provision merely encourages spending of the entire
budget, not something that should be encouraged.

Budget constrained approach – a requirement to conform to budget may stifle
attempts at improvement.

Insufficient participation in budgetary control and poor communication of the
reasons for change decisions may alienate staff.
Transfer pricing
PL
E

SA
M
Transfer pricing is primarily concerned with ensuring that semi-autonomous business units
behave in a way that contributes towards the achievement of corporate and not merely
divisional objectives. An effective transfer pricing system encourages divisional managers
with autonomous decision making authority to pursue the interest of the corporation
automatically whilst endeavouring to maximise the performance of their own business unit.
Their decisions are made with self (divisional) interest as the driving factor, but coincidentally
benefit the entire company. Effective transfer pricing systems consciously endeavour to
harness selfish divisional behaviour to induce decisions that foster goal congruence.
Problems can arise when inappropriate prices are set that result in “wrong signals” being sent
and non-optimal decisions being made:

Too high a price may result in unused capacity, lost contribution, reduced incentive
to find external markets and unnecessary external sourcing from the buying division.

Too low a price may result in “excessive” internal trading and a loss of valuable
external business.
To avoid these pitfalls the transfer pricing determination should consider:

The cost behaviour (fixed and variable) of the different divisions.

The adequacy of the information available to the divisions concerning both internal
and external prices.

Both the short and long run consequences of the prices set – internal and external
markets and capacity levels.

The degree of autonomy given to the divisions.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1031
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
Answer 19 POLYSIDE UNIVERSITY
Structure
Reports are not frequent enough.

In terms of the quantity of reports there are not enough of them.

There is not enough provision of local school information to the central decision
making bodies, and reports are not timely enough.

The seven schools should report directly to the finance committee. This will allow
full financial information to be made available for decision making.

The central administration currently reports to no one. It should report to the
finance committee the state of overheads control.

Meetings of the academic board and finance committee should be at least monthly.
In August/September the meetings should be more frequent. This will allow more
up to date information to be addressed.
E

SA
M
PL
(a)
1032
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Management reports
Marking
guide
Report/Information
Preparer
Income determination
(i)
LEA grant analysis (@ $27.5m)

















* Students on a course × Termly grant


Monthly
(October
July)
To identify shortfalls on
quotas
Weekly
(August +
September)
To establish the accuracy of
grant income received/
receivable
Postgraduate tuition fee analysis (@ $18.5m)
SA
M
(ii)
Individual
schools
Usefulness
PL

Details of grants received/receivable by course*
No of existing students (Years 2–3)
No of new students (Year 1)
– accepted a place
– currently on a course
Quota per course
% of quota filled by current students
Dropouts/vacant places by course
Frequency
E
(b)



Details of fees received/receivable
No of existing post grads
No of post grads by course × Termly tuition fee
Individual
schools
Monthly
To establish the level of fees
received/receivable for
comparison with
targets/budgets
Analysis of income by source
–
–
local sponsorship
research income from external companies
©2014 DeVry/Becker Educational Development Corp. All rights reserved. Central
accounting
function
Preparer = ½
Frequency = ½
Usefulness = 1
Reports = 1
Preparer = ½
Frequency = ½
Usefulness = 1
Reports = 1
Other income analysis (@ $4m)

Reports = 2
Preparer = ½
Monthly
To identify and analyse the
various sources of income –
to compare with budgeted
levels
Frequency = ½
Usefulness = 1
1033
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
(iii)
Preparer
Student admission analysis
By course








(iv)
Government quotas
No of students accepting places
For courses with spare places
– no of unfilled places
– no of enquiries to date
– no of application forms sent/received
Debtors (postgraduate) analysis
Analysis of all fees due but unpaid by post grads




1034
Monthly
To clarify the up to date
situation on course
availability
Focused marketing of poorly
attended courses can be
undertaken
Central
accounting
function
SA
M
name of student
course
amount outstanding
action taken for recovery
Individual
schools
Usefulness
PL

Frequency
E
Report/Information
Monthly
To identify level of
outstanding debt and action
undertaken to recover debts
Marking
guide
Reports = 1½
Preparer = ½
Frequency = ½
Usefulness = 1
Reports = 1½
Preparer = ½
Frequency = ½
Usefulness = ½
————
Part (b)
Max 10 marks
————
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
Answer 20 ROCKINGHAM HOSPITAL CO
(a)
Discussion of the behavioural effects of the performance report
The following features of the way in which the budget was prepared, and the form and
content of the performance report, might give rise to an adverse response from the laundry
supervisor.
Lack of participation – the supervisor was not consulted over the preparation of
the budget and did not know that one was being prepared.
(ii)
Unflexed budget – no attempt has been made to adjust budgeted costs in the
light of the increase in volume, presumably because the fixed and variable
elements of costs have not been established.
(iii)
Uncontrollable costs included – the memorandum’s references to
“responsibility accounting” and “expenses of running your department” have
been ignored when producing the report which includes “allocated
administration costs” and “equipment depreciation”.
(iv)
Fixed percentage for investigation – this may not be an ideal system for
deciding which variances should be investigated and which should not. It
seems an arbitrary figure and one which is being applied to all costs.
(v)
Aggressive style – the memorandum has been presented in a somewhat
authoritarian style based solely on accounting information.
PL
E
(i)
The effects that this might have on the behaviour of the supervisor include the following.
Creating a negative attitude – a phrase which encompasses a whole range of
behavioural problems, such as dampening initiative (possibly leading to wrong
decisions such as not recruiting staff when needed), reducing co-operation and
communication between departments (particularly with the hospital
administrator), reducing morale within the department and giving rise to a lack
of commitment to the hospital.
SA
M
(i)
(ii)
Reduced performance – with the lack of co-operation mentioned it is less likely
that the supervisor will try to control or reduce costs. More effort will be put
into finding excuses for poor cost control or even attempting to falsify data
where possible.
(iii)
Budget pressure – management could be said to be adopting a style of
management where obsession with the quarterly targets could lead to impaired
performance. Steps might be taken to ensure not that costs do not exceed a
budget, but rather to ensure that they do not fall below the budget – lest the
budget is pruned in the next quarter.
(iv)
Wrong decisions – the possibility of wrong decisions being made through
“dampened initiative” has already been mentioned. However, the use of a fixed
percentage rule for investigating variances could also lead to wasted time
looking at variances. Such variances might be small in absolute terms, caused
by a poor budget, poor recording of costs or due to random fluctuations, and
such variances might not be worth investigating.
Research into these various behavioural effects and their possible causes has grown over
the years following earlier papers based more on surmise and opinion. It has been a
feature of much of the empirical work into the relationship between accounting and
behaviour that the results have produced conflicting conclusions on matters such as
management style, budgetary pressure, design of accounting measures and participation.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1035
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
(b)
Redrafted report and memorandum
Rockingham Private Patients Hospital Co
Memorandum
To
From
Date
Mrs A Brown, Laundry Supervisor
BC Smith, Hospital Administrator
30 April 20X1
E
As you know, the hospital has adopted a responsibility accounting system in order to ensure that each
department runs as efficiently as possible. To help the operation of such a system it will be useful for
you to receive some form of performance report each quarter, and I have attached my version of such a
report for the first quarter.
PL
This first report is something of a trial run, since the first quarter was expected to be a settling-in period
and as such not typical, and this report, having been produced without consultation with department
heads or supervisors, may need modification. It will, when fully operational, act as a useful aid to cost
control and I am very keen that we should meet as soon as possible to discuss the form and content of
future reports.
This report shows the actual costs of running the department together with a budget based on the weight
of laundry processed. Variations from budget have been calculated and some marked as requiring your
attention. Such variations will be those which are large in terms of the total cost of the department and
of the actual cost incurred, bearing in mind expected variations in certain costs.
SA
M
I will expect a quick response to such reports by way of an explanatory memorandum but any queries
over this or subsequent reports could be most easily sorted out by coming to my office.
Performance report – Laundry department
Three months to 31 March 20X1
Actual
Patient days
Weight of laundry processed (kgs)
Wages (W1)
Supervisor salary
Washing materials (W2)
Heating and power (W3)
Equipment maintenance
Flexed Variation Action
budget (over)/ needed
under
8,000
———–
101,170
———–
$
$
4,125
3,833
1,490
1,495
920
959
560
572
10
45
——— ———
7,105
6,904
——— ———
$
(292)
5
39
12
35
——–
(201)
——–
None
None
None
None
None
Comment: Congratulations on coping with the unexpected rise in volume. However, we must sort out
these budgets properly, particularly the wages budget.
1036
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – ADVANCED PERFORMANCE MANAGEMENT (P5)
The memorandum has been toned down a little, made more personal and an attempt made
to justify the purpose of the report and encourage co-operation in establishing a system of
cost control.
The report itself has been modified by eliminating uncontrollable elements (budgeted
activity levels and certain costs). The budget has been flexed by assuming that
(i)
(ii)
(iii)
Wages are variable subject to staff being employed for whole weeks;
Materials are variable, and
Heating and power are 50% fixed and 50% variable (these arbitrarily proposed
figures would need to be established properly).
E
The report could have been less formally drawn up with the original budget shown,
together with calculations to indicate how it was flexed to take into account the actual
weight of laundry processed and variations laid out. In either case the hospital
administrator should highlight which variations are to be investigated and, with the flexed
budget, no such investigation is needed for the first quarter.
WORKINGS
(1)
Wages
PL
The performance report could also show various figures to assess efficiency, such as total
labour hours and number of washing loads. With additional information, price and usage
variances could be found for washing materials. Details of the use of laundry capacity
could be established by noting how much laundry was presented and how much processed,
as opposed to being sent outside.
SA
M
$3,450  10/9 = $3,833
(2)
$770 
(3)
Materials
101,170
= $959
81,250
Heating and power
101,170
= $(255 + 317) = $572
81,250
Variable
$255 + $255 
Fixed
Answer 21 TDM CO
REPORT
To
From
Date
Subject
The Managing Director
The Management Accountant
Today
Corporate mission statements
The corporate mission embodies the overall purposes of an organisation. A corporate mission
statement is formulated to express the company’s philosophy and should answer fundamental questions
such as Why does the company exist? Who will be served by and benefit from the company? What
products or services will be provided? The majority of mission statements are presented using general,
rather than detailed, concepts.
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1037
ADVANCED PERFORMANCE MANAGEMENT (P5) – STUDY QUESTION BANK
In order to prepare an effective strategic plan, the management must first address the organisation’s
mission. There is a certain amount of controversy regarding the point in the planning process at which
the mission statement is best formulated.
One view is that the mission statement is of such a fundamental nature that the strategic plan cannot be
prepared without reference to it.
Another view is that the mission statement is the end result of the strategic-planning process.
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These opinions demonstrate how difficult it can be to differentiate between an organisation’s mission
and its objectives. The mission is a wide-ranging statement which presents the organisation’s raison
d’être in terms of its ability to satisfy some of society’s needs, whilst its objectives are the company’s
broad goals.
The mission statement is likely to be formulated by the company’s board of directors. Although it will
not be quantitative in nature, it will usually highlight several areas, including the following:
The kinds of products and services the company aims to provide;
The customers to be served;
The markets in which the company anticipates operating;
An overview of the company’s philosophy and the broad expression of its policies;
The company’s attitude towards matters encompassing social obligations;
The manner in which management wishes the firm to be perceived by the public.
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(a)
(b)
(c)
(d)
(e)
(f)
The company would gain several benefits from the formulation of a mission statement. It would greatly
assist the decision-makers and those responsible for implementing the firm’s policies. The mission
statement also has an important role to play in helping management focus on fundamental issues in
terms of strategic planning, and in ensuring that the strategic plans do not conflict with the basic
purpose of the organisation.
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The usefulness of a mission statement may be summarised as follows:
(a)
All staff will gain an understanding of the firm’s purpose and philosophy.
(b)
Expectations and attitudes within the firm will be expressed in terms of a long-range vision.
(c)
The organisation will benefit from having a clear purpose, which should result in decisions
advantageous to the purpose of the company.
(d)
The boundaries within which the company operates will be clearly laid down. This will assist
in developing co-ordinated plans.
(e)
An unambiguous statement regarding the overall directions of the company should lead to
enhanced allocation of resources.
Answer 22 SQUEEKY CLEAN
Option 1 – calculation of operating profit in Year 5
Sales (kgs)
Contribution per kilo
Total contribution ($000)
Fixed costs
Operating profit
1038
Powder
10,000,000
$6
60,000
Supertablets
5,512,500
$7
38,588
Total
–
98,588
(20,000)
––––––
78,588
––––––
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