ACCA Paper P5 – Advanced Performance management

1
ACCA Paper P5 Advanced Performance management

• Course slides

For exams in June 2008
2
Syllabus
3
Examiner Format of the Exam
Examiner Shane Johnson
4
The December 2007 exam
5
The BPP Learning Media classroom slides

• What do these slides cover?
• A selection of key areas of the syllabus
• Using the slides
• Use the slides as a point of reference
• Add detail by talking around the slides (eg using
  material from the corresponding Study Text
  chapter)
• Consider adding slides yourself to suit your
  course
• Recommend students attempt appropriate questions
  from the Practice Revision Kit

6
Chapter 1

• Introduction to strategic management accounting

7
Management Information Hierarchy

• Anthonys Hierarchy

STRATEGIC PLANNING
MANAGEMENT CONTROL
OPERATIONAL CONTROL
8
Roles of management accountant

• Information
• Control
• Targets
• Rewards

9
Strategic Planning

• Strategy
• A course of action to achieve a specific outcome
• Strategic Planning
• The formulation, evaluation and selection of
  strategies for the purpose of developing a
  long-term course of action.

10
Strategic Planning

• Scope
• Characteristics
• Information

11
Management Control

• Scope
• Characteristics
• Examples

12
Operational Control

• Scope
• Information

13
Rational model

• 3 main stages
• Strategic analysis
• Strategic choice
• Strategic implementation

• of our current position
• to get to our desired future position
• to make a success of our strategic choice

14
Key features of planning model

• Strategy to achieve objectives
• Formal process
• Led from top
• Drilled-down through organisation

15
The rational model
STRATEGIC CONTROL
POSITION AUDIT
MISSION OBJECTIVES
CORPORATE APPRAISAL
STRATEGIC OPTIONS
STRATEGIC CHOICE
STRATEGIC IMPLEMENT
ENVIRONMENT ANALYSIS
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The rational model

• Advantages
• Guides activities
• Provides a standard
• Communicates
• Legitimacy
• Identifies risks

• Problems
• Assumes formality
• Separate from operations
• Bureaucratic
• Inflexible
• Lack commitment

17
Environmental Analysis

• PEST
• Porters 5 forces
• Understand inherent attractiveness of industry
• Understand impact of individual forces

18
Corporate Appraisal

• Identify
• Strengths
• Weaknesses
• Opportunities
• Threats

INTERNAL ANALYSIS
MISSION OBJECTIVES
CORPORATE APPRAISAL
ENVIRONMENT ANALYSIS
19
Position Audit
INTERNAL ANALYSIS

• Identify
• Strengths
• Weaknesses

MISSION OBJECTIVES
CORPORATE APPRAISAL
ENVIRONMENT ANALYSIS
20
SWOT Analysis
INTERNAL RELATIVE TO COMPETITION
WEAKNESSES rectify
STRENGTHS exploit
OPPORTUNITIES seize
THREATS nullify
EXTERNAL PRESENT TO ALL INDUSTRY MEMBERS
21
Gap analysis fixed period
OBJECTIVE
SALES
GAP
FORECAST
TIME
22
Gap Strategies

• Efficiency

• Expansion

• Diversification

23
Product life cycle (PLC)
24
Lecture Example 1

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

25
Lecture Example 1

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

26
Lecture Example 1 cont..

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

27
Freewheeling opportunism
..should not bother with strategic planning..

• Advantages
• Short term opportunities grasped
• Reactive
• Encourages initiative
• Creative

• Disadvantages
• Control difficult
• Long term opportunities missed
• Purely profit driven
• Not Proactive

28
Benchmarking

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

29
Benchmarking

• Who
• Internal between SBUs
• Functional best in any industry
• Competitive direct competitors
• Strategic competitors strategies

30
Benchmarking why ?

• Advantages
• Position audit
• Identify CSFs
• Identify potential advantage

• Problems
• No best solution
• Reactive
• Information dependant

31
Risk Uncertainty

• Accounting for risk
• ROCE
• Payback
• NPV
• Cost-benefit

• Quantify risk
• Rule of thumb
• Probability
• Sensitivity
• Standard deviation

32
Question practice end of Chapter 1
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q1
Q2
Q3
Q4
33
Chapter 2

• Alternative approaches to budgeting for control

34
Budget Cycle
35
Budgeting and budgetary control - Summary

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

36
Budgeting and budgetary control - Summary

• Flexible budgets are ideal for planning, flexed
  for control
• Incremental budgets build in slack and
  inefficiency, ZBB uses efficient allocation of
  resources
• Rolling budgets are useful in time of uncertainty
• ABB looks at managing the causes of costs
• Beyond budgeting focuses on cashflow forecasts
  and KPIs

37
Fixed/Flexible/Flexed Budgets

• Fixed
• original budget based on single level of activity
• Flexible
• to cope with different levels of activity
• useful at planning stage
• Flexed
• necessary as a control device
• based on actual activity level

38
Alternative budget models

• Incremental v Zero Based Budgeting
• more efficient allocation of resources
• budgetary slack discouraged
• resistance
• time/effort
• Periodic v Rolling (continuous) Budgets
• producing more realistic budgets
• ABB
• Beyond Budgeting

39
Beyond Budgeting
Adaptive management process
Employee empowerment
40
Behavioural aspects of budgeting

• Impact of budgeting system on human behaviour
• unites employees against management
• possible negative results
• protective groups
• finding fault
• victimised
• express superiority

41
Question practice end of Chapter 2
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q5
Q6
Q7
Q9
Q10
42
Traditional v Modern Manufacturing

• Traditional
• focus was on manufacturing in long production
  runs
• any idle-time was adverse
• little product diversity
• Buffer inventory
• Production is priority
• Focus COST

• Modern
• produce in shorter production runs/producing on
  demand
• inventory is unacceptable will accept some
  idle-time
• complex/diverse product ranges
• Customer is priority
• Focus FLEXIBILITY

43
Quality management

• TQM
• Get it right first time
• Constant improvement
• Design for quality
• Quality costs defined
• Appraisal
• Internal failure
• External failure
• Prevention
• Abandon variances

• Traditional
• Not value adding
• Resource intensive
• Tolerance of waste within limits

44
Elements of TQM

• Work teams given responsibility for their area
• Clear identification of customer
• Clear identification of supplier
• Quality circles
• Any bonus paid on quality improvements

45
Implications of TQM

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

46
Functional organisation
47
Departments Divisions

• Department functional specialism
• Division semi-autonomous business unit

• Advantages
• Lower staff input
• Product comparisons
• Uses local knowledge
• Junior staff morale

• Disadvantages
• Co-ordination
• Loss of control
• Conflict

48
Divisionalisation approaches

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

49
Centralisation v Decentralisation

• Pro-centralisation
• Central decisions
• Wider view
• Resource allocation
• Cheaper management
• Crisis decisions

• Pro-decentralisation
• Management overload
• Junior managers morale
• Local decisions
• Faster decisions
• Develop junior managers
• Separate spheres of responsibility

50
Multi-Divisional
51
Network organisations
Outsourcing

• Functions

Line Authority
1 2 3
Clients
A B C
52
Porters Value Chain

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

53
Value Chain
Firm Infrastructure
Support Activities
Technology Development
Human Resource Management
Procurement
Inbound Logistics
Operations
Outbound Logistics
Marketing Sales
Service
54
Business Process Re-engineering

• Start from scratch
• Re-define business processes
• Add value to customers

• FUNDAMENTAL
• RADICAL/DRAMATIC

55
Steps in BPR

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

56
Activity Based Costing (ABC) and ABM
Examined Dec 2007
COST DRIVERS
57
Question practice end of Chapter 3
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q11
Q12
Q13
Q14
Q15
58
Chapter 4

• Effect of information technology on modern
  management accounting

59
Information needs and IT within organisations

• Traditional usage
• Internal processes focus
• Cost reduction
• Localised benefits
• Solving internal problems
• Technology led
• Total system development
• Exploitation limited by system

Strategic usage External customer focus Value
creation Shared benefits Solving customer
problems Business led Incremental
development Exploitation of information
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Intranets

• Internal network
• Hold centralised, digitised information
• Accessible by all

61
EDI

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

62
Extranets

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

63
Databases

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

64
Database Structure
Database Management System
65
Data Warehouse

• A separate database that stores current and
  historical data of potential interest to managers
  throughout the company
• (Laudon and Laudon)

66
Components of a Data Warehouse
67
Other Systems

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

68
Question practice end of Chapter 4
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q17
Q18
69
Chapter 5

• Impact of world economic and market trends

70
Lecture Example

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

71
Lecture Example

• Virgin Rail
• Government legislation (integrated transport
  policies, safety measures, etc.)
• The franchisers power and attitude
• Competition
• Level of service
• Pricing

72
Lecture example cont

• Performance
• Customer comments
• Media comment and adverse publicity
• Technology (availability of new rolling stock)
• Network Rail policies, programmes and plans

73
Cost plus pricing
Full Cost plus
Relevant cost approach
Marginal Cost Plus
Marginal costs plus mark up
Minimum price considering opportunity cost
All costs plus mark up
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Pricing Strategies

• Premium pricing
• Price discrimination
• By age
• By time
• By place
• Product bundling
• Psychological pricing
• Multiple products/loss leaders
• Discounts

75
Porters 5 Forces
Examined Dec 2007
POTENTIAL ENTRANTS
INDUSTRY COMPETITORS
SUPPLIERS
BUYERS
SUBSTITUTE INDUSTRIES
76
BCG Matrix
Star
Question Mark
Cash Cow
Dog
77
Ansoffs Matrix
PRODUCT
Present
New
Present
Withdrawal Consolidation Penetration
Product Development
MARKET

• Diversification
• Related
• Unrelated

Market Development
New
78
Question practice end of Chapter 5
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q19
79
Chapter 6

• Impact of national fiscal and monetary policy on
  performance

80
What should a company consider when assessing
performance?

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

81
Organisational culture

• Values
• Attitudes
• Norms
• Expectations
• the way we do things round here Handy

82
Levels of Culture

• Basic which guides behaviour within the
  organisation
• Overt expressed in the organisation and members
• Visible style of office and dress rules etc

83
Question practice end of Chapter 6
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q20
84
Chapter 7

• Other environmental and ethical issues

85
Stakeholders

• connected
• connected
• external
• internal
• external

• Customers
• Suppliers
• Competition
• Employees
• Local Community

86
Stakeholder mapping Matrix
Interest
Low
High
Low
Minimal Effort
Keep Informed
Power
Keep Satisfied
Key Players
High
87
Position in Matrix (Open to discussion)

• Customers High power, high interest
• Suppliers Low power, high interest
• Competition Low power, high interest
• Employees Low power, high interest
• Local Community Low power, high interest

88
Views on Stakeholders

• Strong View
• All stakeholders have legitimate claim on
  management
• Management should adopt a balanced approach

• Weak View
• Management should focus on enhancement of
  shareholder wealth
• Management should only consider other
  stakeholders if assisting the core objective

89
Ethics and the organisation

• Sources of pressure
• UK government
• EU
• Consumers
• Employees
• Pressure groups

• Scope
• Treatment of stakeholders
• Green issues
• Support for the disadvantaged
• Dealing with unethical entities

90
Corporate Ethics

• Considerations
• Who are stakeholders?
• Implications?
• Rights?
• Considered rights?
• Honest dealings?
• Compensation?
• Consequences?

• Two approaches
• Organisation exists to maximise shareholder
  wealth
• Organisation should benefit all stakeholders

91
Professional Ethics

• Objectivity
• Professional competence
• Professional behaviour
• Technical standards
• Integrity
• Confidentiality

92
Ethical codes

• Content
• Employee employer relationship
• Customer care
• Supplier relations
• Bribery

• Implementation
• Senior mgmt support
• Followers prosper
• Offenders punished
• Explained to staff
• Detail provided
• Staff have access

93
Question practice end of Chapter 7
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q21
94
Chapter 8

• Management accounting and information systems

95
Characteristics of management information
Strategic Planning
Tactical Mgt and control
Operational control
96
Information at different levels

• In the exam you must be able to identify the key
  features of information at different levels in
  the organisation
• The differences relate to
• The nature of the role/tasks
• The nature of the decision making
• The format, source and level of detail

97
Lecture example

• New outlets
• E-commerce strategy

Strategic

• Pricing
• Promotion strategies

Tactical

• Staff rota
• Inventory replenishment

Operational
98
Management Information Systems (MIS)

• In relation to the information issues raised in
  Chapter 1, organisations must develop a range of
  appropriate MIS
• The design and selection of the MIS system needs
  to take into account the information needs of the
  organisation

99
Question practice end of Chapter 8
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q22
100
Chapter 9

• Sources of management information

101
Information

• is data that has been processed in a way to be
  meaningful and useful to its recipients.
• Information is data with added business value.
• Information systems collect, process and provide
  information for use within the organisation.

102
Sources of organisational information

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

103
Sources of organisational information

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

104
The Internet

• The Internet an international network of
  networks, both commercially and publicly owned
• E-commerce the process of buying and selling
  using computer mediated communications

105
Question practice end of Chapter 9
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q23
Q24
106
Chapter 10

• Recording and processing methods and management
  reports

107
Lecture example Security 1

• Suggest ways in which computer facilities and
  equipment can be physically protected.

108
Answer

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

109
Lecture example Security 2

• How might unauthorised access to a computer
  system be prevented and, if it cannot be
  prevented (and 100 prevention is unlikely), how
  the offenders might be discovered and
  apprehended?

110
Answer

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

111
Viruses

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

112
Question practice end of Chapter 10
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q25
113
Chapter 11

• Performance hierarchy

114
The performance hierarchy

• Vision
• Mission
• Goals
• Objectives

115
Mission / mission statements

• Provides rationale as to why an organisation
  exists
• States long term direction
• Effective when all members work towards rather
  than against its main principles

116
An effective mission should contain

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

117
Mission Statement Examples

• Purpose
• Strategy
• Behaviour standards
• Values beliefs

Profit, service, to be the best Quality, cheap,
global Open door policy Animal testing, staff
welfare, environment
118
Mission statements

• Advantages
• Nature
• Common culture
• Focus
• Goal congruence

• Criticisms
• Vague/meaningless
• Not representative
• Implementation needed

119
The role of objectives

• S - specific
• M - measurable
• A - agreed
• R - realistic
• T - time bound

120
Objective setting
Mission
Horizontal Consistency
121
Gap analysis
Objective
Objective eg profit
GAP
Forecast
Time
122
Ansoffs Matrix
PRODUCT
Present
New
Present
Withdrawal Consolidation Penetration
Product Development
MARKET

• Diversification
• Related
• Unrelated

Market Development
New
123
Question practice end of Chapter 11
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q26
124
Chapter 12

• Scope of strategic performance measures in the
  private sector

125
Introduction

• Aim of private company is to maximise shareholder
  wealth
• Analysis can be performed across 4 areas
• Profitability
• Liquidity
• Gearing
• Shareholders ratios

126
Financial analysis
Examined Dec 2007

• Profitability and return
• Debt and gearing
• Liquidity
• Shareholders ratios

P/E, div cover, div yield, EPS, div cover
Receivables/payables/inventory days, current
ratio, acid test
127
Basis for comparison

• Over time
• Against other companies
• Same sector?
• Different sector?
• Industry averages
• Against other measures

128
Limitations/strengths of ratios

• Limitations
• Need a comparator
• Must be clearly defined
• Inflation effects
• Differing bases
• Historical

• Strengths
• Easier to understand than absolutes
• Changes over time can be seen
• Gives context
• Can help create targets
• Summary of results

129
Profit as a measure

• Advantages
• Simple
• Relates to shareholder wealth

• Disadvantages
• Easily manipulated
• Short term enhancement
• Absolute measure

130
ROCE/ROI

• Disadvantages
• Reliance on profit
• Which investment base to use?

• Advantages
• Relative measure
• Easily understood
• Relates to asset consumption

131
RI
Examined Dec 2007

• Advantages
• Fewer dysfunctional decisions
• Can account for risk

• Disadvantages
• Profit based absolute measure
• Investment base?
• Determining ROI?
• Inter-divisional comparisons difficult

132
NPV calculations

• Cashflows

• Exclude inflation
• Use current/real cashflows
• Discount at real rate, r

• Include inflation
• Use money/nominal cashflows
• Discount at money rate, m

1m (1r) x (1i)
133
Sensitivity analysis
Examined Dec 2007

• How much can NPV change before NPV is negative?
• Sensitivity NPV total
• PV cashflow
• NPV total 1,148
• PV of resale value 4,000 DF _at_12
• 4,000 0.636
• 2,544

134
Sensitivity

• 1,148
• 2,544
• 45
• If the chain sells for 45 less than our initial
  estimate the NPV of the project will be zero.
• If the estimate is further out than this, the
  project would return a negative NPV.

135
Question practice end of Chapter 12
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q27
Q28
Q29
Q30
Q31
136
Chapter 13

• Strategic performance issues in complex business
  structures

137
Porters 5 Forces
Examined Dec 2007
Competitive Rivalry
138
Lecture Example

• Using the model identify the forces and their
  strength for a clothing manufacturer

139
Lecture Example

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

140
Lecture Example

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

141
BCG Matrix
Star
Question Mark
Cash Cow
Dog
142
Uses of The BCG

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

143
Ansoffs Matrix
PRODUCT
Present
New
Present
Market Penetration
Product Development
MARKET

• Diversification
• Related
• Unrelated

Market Development
New
144
Question practice end of Chapter 13
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q34
Q35
145
Chapter 14

• Divisional performance and transfer pricing
  issues

146
EVA
Examined Dec 2007

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

147
Example

• Profit after tax 160, depreciation 30, tax
  rate 30,
• interest 20, WACC 15,
• replacement cost of net assets 1,100
• 20X8
• NOPAT 160 30 20 x 0.7
• 204
• Net Assets 1,100
• EVA 204 15 x 1,100
• 39

148
EVA

• Advantages ?
• Measures value added to Shareholders
• Cash based
• Easy to communicate

• Disadvantages X
• Lots of adjustments to profit
• Historic measure
• Relies on estimate of interest rate
• Difficult to make comparisons

149
Aims of Transfer Pricing System

• Controllability
• one product one price and easily agreed,
  simplicity
• Goal congruence
• divisional decisions benefit whole company
• Autonomy
• motivation
• Performance evaluation
• ensure reward goes where its due
• Remember Does the company want the transfer to
  take place?

150
A transfer pricing situation The Brewery Group
151
Avoiding dysfunctional behaviour

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

152
Methods of setting transfer price

• Market price
• Use external market price where there is an
  external market
• Adjusted market price to reflect savings
• Cost Based Approach
• Actual v Standard
• Standard full cost plus
• Standard variable cost plus

153
Selling Division transfers at MC

• When is this desirable?
• If there is no external market for Division S
• If there is an external market for S and it has
  spare capacity
• Who benefits?
• If there is spare capacity then the whole group
  should benefit
• Reaction of the Selling Division?
• S will be unhappy with a TP at MC

154
Methods of setting transfer price

• Dual pricing
• Use variable cost and transfer share of profits
  at end of year to supplying division
• If external market exists
• charge receiving division variable or marginal
  cost
• supplying gets market price
• Two Part Tariff
• Variable cost for transfer plus fixed costs at
  year end
• Opportunity Cost Based Approach

155
Opportunity Cost Based Approach

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

156
Opportunity Cost Based Approach

• Maximum TP (accepted by receiving division)
• Lower of
• External Market Price and
• Net revenue in receiving division
• Where net revenue
• final selling price LESS own divisional costs

157
Transfer pricing in practice

• Negotiation
• Head Office intervention
• Head Office cost allocations

158
International Transfer Pricing

• Global company with many subsidiaries around the
  world
• Taxation consideration
• Possibly manipulate pricing system to earn high
  profits in a low tax country
• But tax authority impose Arms length price

159
Question practice end of Chapter 14
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q36
Q37
Q38
Q39
Q40
160
Chapter 15

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

161
Not-for-profit organisations

• Prime goal for assessed by economic measures
• Profit making may be part of this activity
  however
• Examples
• Charities, Councils, Forces, Colleges, NHS

162
Public Sector bodies

• Citizens Charter
• Set and published standards
• Quality via privatisation
• League tables
• Complaints procedures
• User to consumer

163
Lecture Example

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

164
VFM

• example washing up liquid
• Economy more clean plates per
• Efficiency more clean plates per squirt
• Effectiveness plates as clean as they should
  be

165
Question practice end of Chapter 15
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q41
Q42
Q43
Q44
Q45
166
Chapter 16

• Behavioural aspects of performance measurement

167
Performance measurement and behaviour

• Accountability
• Agency theory
• Hard and soft accountability

• Controllability
• Variable costs
• Fixed costs

• Reward schemes
• Link to performance
• Group scheme

• Uncontrollable factors
• Factors beyond the control of the manager

168
Management styles and motivation

• Hopwoods management styles
• Budget-constrained
• Profit-conscious
• Non-accounting
• Motivation
• challenging but achievable
• goal congruence

169
Question practice end of Chapter 16
You should now be able to attempt the following
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Practice and Revision Kit.
Q46
Q47
170
Chapter 17

• Alternative views of performance measurement

171
Balanced Scorecard
172
Advantages of Balanced Scorecard

• Considers all strategic measures
• Holistic view
• Avoids short term arguments
• Considers business activity linkages
• Forces organisation to look externally
• Useful for risk assessment

173
Balanced Scorecard

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

174
The Performance Pyramid
Lynch Cross
Corporate Vision
Market
Financial
Customer Satisfaction
Productivity
Flexibility
Quality
Delivery
Waste
Cycle time
Operations
175
Performance pyramid

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

LINKAGES
176
Problems of PM in Service Businesses

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

177
Fitzgerald and Moons Building Blocks
Dimensions base measure on these areas
Dimensions Profit Competitiveness Quality Resourc
e utilisation Flexibility Innovation
Standards/Targets ensure equity/fairness
Standards Ownership Achievability Equity
Rewards Clarity Motivation Controllability
Rewards need to be clear
178
Question practice end of Chapter 17
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q48
Q49
Q50
Q51
Q53
179
Chapter 18

• Non- financial performance indicators

180
Problems with Financial Performance Indicators

• Only monetary terms
• Focus on past
• Not full picture
• Short term focus
• Solution NFPIs

181
Value of NFPIs

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

182
Problems of NFPIs

• Information overload
• Detail vs. big picture
• Out of date
• Must be linked to financial measures
• Balanced Scorecard

183
Lecture Example 1

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

184
Question practice end of Chapter 18
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q54
Q55
Q56
Q57
Q58
185
Chapter 19

• Predicting and preventing corporate failure

186
Predicting business failure
Examined Dec 2007

• Declining industries
• End game
• Product revitalisation
• Declining companies
• Slatters ten symptoms
• Measures
• Liquidity
• Z score
• Argentis A score

187
Strategies for improvement

• Identify the causes of decline and strategies to
  deal with them
• Strategic drift
• Counteracting
• Review leadership

188
Question practice end of Chapter 19
You should now be able to attempt the following
key question from the BPP Learning Media Practice
and Revision Kit.
Q59
189
Chapter 20

• Current developments in management accounting
  techniques

190
Changing role of the Management Accountant. Burns
and Scapens

• Provision of information that is
• Forward looking
• External
• Assists meeting of objectives
• Links to strategic core
• Planning and control
• Changes arose due to
• Technology
• Management structure
• Competition

191
Modern Japanese techniques

• TQM
• JIT
• Target costing
• Kaizen costing
• Continuous improvement

192
Just In Time
Supplier Base
JIT purchasing
Manufacturing Resources Planning (MRP 2) Advanced
Manufacturing Technology Total Quality
Management Computer Integrated Manufacturing
Raw material components
Work-in Progress
Finished Goods
Demand Pull
Customers
193
Target costing

• To reduce the life-cycle costs of new products
  through cost reduction
• Pre-production planning
• RD

194
Implementing target costing

• Define product spec sales volume
• Target selling price
• Required profit
• Target selling price Xless target
  profit (X)Target cost X
• Estimated cost
• Estimated cost target cost cost gap
• Reduce costs or negotiate with customer

195
Question practice end of Chapter 20
You should now be able to attempt the following
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Q60
Q61
Q62
196
Chapter 21

• Current issues and trends in performance
  management

197
Value-based management

• Value mind set
• Value drivers
• Any variable that affects the value of the
  company
• Management processes

198
Recently developed performance management
frameworks

• Six Sigma
• Define
• Measure
• Analyse
• Improve
• Control

• Performance Prism
• Stakeholders satisfaction
• Strategies
• Processes
• Capabilities
• Stakeholder contribution

199
Question practice end of Chapter 21
You should now be able to attempt the following
key questions from the BPP Learning Media
Practice and Revision Kit.
Q63
Q64
Q65
Q66