ACCA Paper P5 – Advanced Performance management Course slides For exams in June 2008.
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Transcript of ACCA Paper P5 – Advanced Performance management Course slides For exams in June 2008.
ACCA Paper P5 – Advanced Performance management
Course slides
For exams in June 2008
Slide 2
Syllabus
A Strategic planning and control
BEconomic, fiscal, market and environmental factors
CPerformance measurement systems and design
D Strategic performance measurement
EPerformance evaluation and corporate failure
FCurrent developments and emerging issues in performance management
Slide 3
Examiner & Format of the Exam
Examiner: Shane Johnson
Examiner: Shane Johnson
Format of the Exam Marks
Section A Two compulsory questions 60-70
Section B Two questions from a choice of three up to 20 marks each
30-40
Total 100
Slide 4
The December 2007 exam
Topics examined in the December 2007 exam
Question 1 Operating and financial performance measurement, performance comparisons
Question 2 Residual income, EVA
Question 3 Sensitivity analysis, CSF, ERPS
Question 4 ABM
Question 5 Porter’s five forces, corporate failure
Slide 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
Chapter 1
Introduction to strategic
management accounting
Study Text Chapter 1
Slide 7
Management Information Hierarchy
• Anthony’s HierarchySTRATEGIC PLANNING
MANAGEMENT CONTROL
OPERATIONAL CONTROL
Slide 8
Roles of management accountant
• Information
• Control
• Targets
• Rewards
Slide 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.
Slide 10
Strategic Planning
•Scope
•Characteristics
•Information
Slide 11
Management Control
•Scope
•Characteristics
•Examples
Slide 12
Operational Control
•Scope
•Information
Slide 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
Slide 14
Key features of planning model
• Strategy to achieve objectives
• Formal process
• Led from top
• “Drilled-down” through organisation
Slide 15
The rational model
MISSION &OBJECTIVES
CORPORATEAPPRAISAL
STRATEGICOPTIONS
STRATEGICCHOICE
STRATEGICIMPLEMENT’
STRATEGICCONTROL
ENVIRONMENTANALYSIS
POSITIONAUDIT
Slide 16
The rational model
Advantages
• Guides activities
• Provides a standard
• Communicates
• Legitimacy
• Identifies risks
Problems
• Assumes formality
• Separate from operations
• Bureaucratic
• Inflexible
• Lack commitment
Slide 17
• PEST
• Porter’s 5 forces
– Understand inherent attractiveness of industry
– Understand impact of individual forces
Environmental Analysis
Slide 18
Corporate Appraisal
Identify
• Strengths
• Weaknesses
• Opportunities
• Threats
MISSION &OBJECTIVES
INTERNAL ANALYSIS
ENVIRONMENTANALYSIS
CORPORATEAPPRAISAL
Slide 19
Position Audit
Identify
• Strengths
• WeaknessesMISSION &OBJECTIVES
INTERNAL ANALYSIS
ENVIRONMENTANALYSIS
CORPORATEAPPRAISAL
Slide 20
INTERNAL : RELATIVE TO COMPETITION
WEAKNESSES
rectify
STRENGTHS
exploit
EXTERNAL: PRESENT TO ALL INDUSTRY MEMBERS
OPPORTUNITIES
seize
THREATS
nullify
SWOT Analysis
Slide 21
Gap analysis – fixed period
OBJECTIVE
FORECAST
SALES
TIME
GAP
Slide 22
Gap Strategies
• Efficiency
• Diversification
• Expansion
Slide 23
Product life cycle (PLC)
Time
Sales Volume
Introduction Growth Maturity Decline
Profit
Sales
Slide 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 ?
Slide 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
Slide 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
Slide 27
Freewheeling opportunism
Advantages
• Short term opportunities grasped
• Reactive
• Encourages initiative
• Creative
Disadvantages
• Control difficult
• Long term opportunities missed
• Purely profit driven
• Not Proactive
“..should not bother with strategic planning..”
Slide 28
Benchmarking
How
• Understand your own business processes
• Establish who/what to benchmark
• Collect and analyse data
• Implement improvements
Slide 29
Benchmarking
Who
• Internal – between SBU’s
• Functional – best in any industry
• Competitive – direct competitors
• Strategic – competitors’ strategies
Slide 30
Benchmarking – why ?
Advantages
• Position audit
• Identify CSF’s
• Identify potential advantage
Problems• No best solution• Reactive• Information
dependant
Slide 31
Risk & Uncertainty
Accounting for risk
• ROCE
• Payback
• NPV
• Cost-benefit
Quantify risk
• Rule of thumb
• Probability
• Sensitivity
• Standard deviation
Slide 32
Question practice – end of Chapter 1
Q1
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q2 Q3 Q4
Chapter 2
Alternative approaches to budgeting for
control
Study Text Chapter 2
Slide 34
Budget Cycle
Determine Budget
Operate
Control Planning
Slide 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
Slide 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 KPI’s
Slide 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
Slide 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
Slide 39
Beyond Budgeting
Adaptive management
process
Adaptive management
processEmployee
empowerment
Employee empowerment
Move away from traditional budgeting
Slide 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
Slide 41
Question practice – end of Chapter 2
Q5
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q6 Q7 Q9 Q10
Chapter 3
Changes in business
structure and management
accounting
Study Text Chapter 3
Slide 43
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
Slide 44
Quality management
Traditional
• Not value adding
• Resource intensive
• Tolerance of waste within limits
TQM
• Get it right first time
• Constant improvement
• Design for quality
• Quality costs defined:– Appraisal– Internal failure– External failure– Prevention
• Abandon variances
Slide 45
Elements of TQM
• Work teams given responsibility for their area
• Clear identification of ‘customer’
• Clear identification of ‘supplier’
• Quality circles
• Any bonus paid on quality improvements
Slide 46
Implications of TQM
• Cross functional teams – new control systems
• Multiple measures for teams
• Resources required to implement improvements
• Management Accounting should be a quality circle (supplier/customer to/of other areas)
Slide 47
Functional organisation
Accounts Production
Company
PurchasingSales
Slide 48
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
Slide 49
Divisionalisation approaches
• Functional departments
• Geographic division
• Product/brand division
• Customer/market
Slide 50
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
Slide 51
Multi-Divisional
P ro du c t 1
F in an ce M a rke ting P u rcha s ing
P ro du c t 2 P ro du c t 3
C o m p a ny
Slide 52
Network organisations
Functions1 2 3
ClientsA
B
C
Line Authority
Outsourcing
Slide 53
Porter’s Value Chain
• Identifies specific points where a firm can organise and perform its activities most effectively to gain competitive advantage
• Benefits along the value chain can be achieved due to integration, automation and better information exchanges
Slide 54
InboundLogistics
Operations OutboundLogistics
Marketing& Sales
Service
Procurement
Human Resource Management
Technology Development
Firm Infrastructure Support Activities
Value Chain
Slide 55
Business Process Re-engineering
• Start from scratch
• Re-define business processes
• Add value to customers
•FUNDAMENTAL
•RADICAL/DRAMATIC
Slide 56
Steps in BPR
• Identify Business Objectives
• Identify specific processes to be redesigned
• Evaluate existing processes
• Identify Potential IT applications
• Design and build new processes and systems
• Implement
Slide 57
Activity Based Costing (ABC) and ABM
Examined Dec 2007
No. of machinehours
No. of labourhours
OAR
OAR
OAR
Production set up costs
Machine oil & Machine repairs
Supervisor’ssalary
ACTIVITIES COST DRIVERS
No. of production set ups
Slide 58
Question practice – end of Chapter 3
Q11
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q12 Q13 Q14 Q15
Chapter 4
Effect of information
technology on modern
management accounting
Study Text Chapter 4
Slide 60
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
Slide 61
Intranets
• Internal network
• Hold centralised, digitised information
• Accessible by all
Slide 62
EDI
• Electronic Data Interchange
– Computer to computer interchange– Standardised, agreed exchanges– Used between business partners
Slide 63
Extranets
• Allow external, authorised users access to internal information
• Use internet technology
• Help to link the supply chain
Slide 64
Databases
• Systems which hold collections of records and files, designed in such a way as to facilitate access to the whole user community
Slide 65
Database Structure
Store
Database Management System
Database AdministratorUser 1 User 2
Slide 66
Data Warehouse
A separate database that stores current and historical data of potential interest to managers throughout the company
(Laudon and Laudon)
Slide 67
Components of a Data Warehouse
Internaloperational
data
Internal historical
data
External data
sources
Extractionand
Transformation
DataWarehouse
Information directory
Data access
and analysis
•Queries
•Reports•OLAP•Data mining
Slide 68
Other Systems
• CRM Systems
– Facilitate the creation of a comprehensive customer profile giving everyone in the organisation one view
• SCM Systems
- Provide links across the supply chain to enhance efficiency and sharing of information
• ERP Systems
– Provide firm wide integration of processes and information
Slide 69
Question practice – end of Chapter 4
Q17
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q18
Chapter 5
Impact of world economic and market trends
Study Text Chapter 5
Slide 71
Lecture Example
Despite having a wide range of business interests Virgin have received wide and often negative press about the standard and value for money of its rail service.
Suggest environmental factors which Virgin management should consider and continuously monitor during their rail business planning process
Slide 72
Lecture Example
Virgin Rail
• Government legislation (integrated transport policies, safety measures, etc.)
• The franchiser’s power and attitude
• Competition
• Level of service
• Pricing
Slide 73
Lecture example cont…
• Performance
• Customer comments
• Media comment and adverse publicity
• Technology (availability of new rolling stock)
• Network Rail policies, programmes and plans
Slide 74
Full Cost plus
Relevant cost
approachMarginal Cost Plus
All costs plus mark
up
Marginal costs plus mark up
Minimum price
considering opportunity
cost
Cost plus pricing
Slide 75
Pricing Strategies
• Premium pricing
• Price discrimination
– By age– By time– By place
• Product bundling
• Psychological pricing
• Multiple products/loss leaders
• Discounts
Slide 76
SUPPLIERS
POTENTIALENTRANTS
BUYERSINDUSTRY
COMPETITORS
SUBSTITUTEINDUSTRIES
Porter’s 5 Forces Examined Dec 2007
Slide 77
BCG Matrix
Market or Industry Growth Rate
High
Low
Relative Market ShareHigh Low
Star Question Mark
Cash Cow Dog
Slide 78
Ansoff’s Matrix
MARKET
PRODUCT
Present
New
Withdrawal
Consolidation
Penetration
Product Development
Market Development
Diversification
• Related
• Unrelated
Present New
Slide 79
Question practice – end of Chapter 5
Q19
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Chapter 6
Impact of national fiscal and monetary
policy on performance
Study Text Chapter 6
Slide 81
What should a company consider when assessing performance?
• Culture
• Economics
• Competitive forces
• Politics
• Technology
• Funding
• Legal factors
Slide 82
Organisational culture
• Values
• Attitudes
• Norms
• Expectations
“the way we do things round here” Handy
Slide 83
Levels of Culture
• Basic – which guides behaviour within the organisation
• Overt – expressed in the organisation and members
• Visible – style of office and dress rules etc
Slide 84
Question practice – end of Chapter 6
Q20
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Chapter 7
Other environmental
and ethical issues
Study Text Chapter 7
Slide 86
Stakeholders:
• Customers
• Suppliers
• Competition
• Employees
• Local Community
– connected
– connected
– external
– internal
– external
Slide 87
Stakeholder mapping Matrix
Interest
Power
Low
Low
High
High
Minimal Effort Keep Informed
Keep Satisfied Key Players
(+)/(-) support/oppose new strategy
(+) (-)
(-) (-)
Slide 88
Position in Matrix: (Open to discussion)• Customers – High power, high interest
• Suppliers – Low power, high interest
• Competition – Low power, high interest
• Employees – Low power, high interest
• Local Community – Low power, high interest
Slide 89
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
Slide 90
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
Slide 91
Corporate Ethics
Two approaches• Organisation
exists to maximise shareholder wealth
• Organisation should benefit all stakeholders
Considerations• Who are
stakeholders?• Implications?• Rights?• Considered rights?• Honest dealings?• Compensation?• Consequences?
Slide 92
Professional Ethics
• Objectivity
• Professional competence
• Professional behaviour
• Technical standards
• Integrity
• Confidentiality
Slide 93
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
Slide 94
Question practice – end of Chapter 7
Q21
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Chapter 8
Management accounting and
information systems
Study Text Chapter 8
Slide 96
Characteristics of management information
Strategic PlanningStrategic Planning
Tactical Mgt and controlTactical Mgt and control
Operational controlOperational control
Slide 97
Information at different levels
• In the exam you must be able to identify the key features of information at different levels in the organisation
• The differences relate to:
– The nature of the role/tasks– The nature of the decision making– The format, source and level of detail
Slide 98
Lecture example
Strategic
Tactical
Operational
•New outlets•E-commerce strategy
•Pricing•Promotion strategies
•Staff rota•Inventory replenishment
Slide 99
Management Information Systems (MIS)
• In relation to the information issues raised in Chapter 1, organisations must develop a range of appropriate MIS
• The design and selection of the MIS system needs to take into account the information needs of the organisation
Slide 100
Question practice – end of Chapter 8
Q22
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Chapter 9
Sources of management
information
Study Text Chapter 9
Slide 102
Information
…is data that has been processed in a way to be meaningful and useful to its recipients.
Information is data with added business value.
Information systems collect, process and provide information for use within the organisation.
Slide 103
Sources of organisational information
Internal sources
Formal1. Management accounting information2. Control procedures, records and general
correspondence3. Appraisal systems
Informal1. Cross-departmental networking2. The “Grapevine”3. Social gatherings
Slide 104
Sources of organisational information
External sources
Formal1. Commercial data vendors2. Government and official authorities3. Trade associations and professional bodies
Informal1. Suppliers and other intermediaries2. Customers and their representatives3. The Internet
Slide 105
The Internet
• The Internet – an international network of networks, both commercially and publicly owned
• E-commerce – the process of buying and selling using computer mediated communications
Slide 106
Question practice – end of Chapter 9
Q23
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q24
Chapter 10
Recording and processing
methods and management
reports
Study Text Chapter 10
Slide 108
Lecture example – Security # 1
Suggest ways in which computer facilities and equipment can be physically protected.
Slide 109
Answera) Secure location
(i) locked doors, access cards, security guards, reception personnel, keypad access
b) Personnel controls(i) ID cards – including photograph(ii) sign in/out procedure
• IT(i) alarm systems
• Portable equipment
(i) register to include booking out procedures, barcoding/postcode marking
• Checking
(i) equipment audits
Slide 110
Lecture example – Security # 2
• How might unauthorised access to a computer system be prevented and, if it cannot be prevented (and 100% prevention is unlikely), how the offenders might be discovered and apprehended?
Slide 111
Answera) Hardware
(i) card access to rooms,(ii)firewall computers,(iii) CCTV
• Software(i) passwords,(ii)virus checkers(iii) computer access logs(iv) file access logs
• Organisational arrangements(i) internal audit(ii)division of duties
Slide 112
Viruses
• A virus is a piece of software which may damage the software and data held on the computer.
• Writing, distributing or planting viruses is an offence under the Computer Misuse Act.
• Cheap, commercial, anti-virus software is available from many sources.
• Many organisations also install firewalls on computers connected to the internet.
Slide 113
Question practice – end of Chapter 10
Q25
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Chapter 11
Performance hierarchy
Study Text Chapter 11
Slide 115
The performance hierarchy
•Vision
•Mission
•Goals
•Objectives Timebound
Timeless
Specific
Vague
Slide 116
Mission / mission statements
• Provides rationale as to why an organisation exists
• States long term direction
• Effective when all members work towards rather than against its main principles
Slide 117
An effective mission should contain:
• Campbell et al
– Purpose– Strategy– Policies & Behaviour Standards– Values & Beliefs
Slide 118
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
Slide 119
Mission statements
Advantages
• Nature
• Common culture
• Focus
• Goal congruence
Criticisms
• Vague/meaningless
• Not representative
• Implementation needed
Slide 120
The role of objectives
• S - specific
• M - measurable
• A - agreed
• R - realistic
• T - time bound
Slide 121
Objective setting
Mission
Vertical consistency
Horizontal Consistency
Slide 122
Gap analysis
Objective
Forecast
Objective
eg profit
Time
GAP
Slide 123
Ansoff’s Matrix
MARKET
PRODUCT
Present
New
Withdrawal
Consolidation
Penetration
Product Development
Market Development
Diversification
• Related
• Unrelated
Present New
Slide 124
Question practice – end of Chapter 11
Q26
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Chapter 12
Scope of strategic
performance measures in the
private sector
Study Text Chapter 12
Slide 126
Introduction
• Aim of private company is to maximise shareholder wealth
• Analysis can be performed across 4 areas:
Profitability
Liquidity
Gearing
Shareholders’ ratios
Slide 127
Financial analysis
• Profitability and return
• Debt and gearing
• Liquidity
• Shareholders ratios
Must compare
Different firms and time periods
ROCE, margins, asset turnoverDebt/equity, interest cover
Receivables/payables/inventory days, current ratio, acid test
P/E, div cover, div yield, EPS, div cover
Examined Dec 2007
Slide 128
Basis for comparison
• Over time
• Against other companies
– Same sector?– Different sector?
• Industry averages
• Against other measures
Slide 129
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
Slide 130
Profit as a measure
Advantages
• Simple
• Relates to shareholder wealth
Disadvantages• Easily
manipulated• Short term
enhancement• Absolute
measure
Slide 131
ROCE/ROI
Advantages
• Relative measure
• Easily understood
• Relates to asset consumption
Disadvantages• Reliance on
profit• Which
investment base to use?
Profit before interest and tax
Average capital employed. x 100%
Slide 132
RI
Advantages
• Fewer dysfunctional decisions
• Can account for risk
Disadvantages• Profit based
absolute measure• Investment base?• Determining ROI?• Inter-divisional
comparisons difficult
Controllable divisional profit – notional interest charge
(Head Office Investment x ROI)
Examined Dec 2007
Slide 133
NPV calculations
Cashflows
Must be • Future • Incremental • Cash
Exclude inflation
• Use current/real cashflows
• Discount at real rate, r
Include inflation
• Use money/nominal cashflows
• Discount at money rate, m
1+m = (1+r) x (1+i)
Slide 134
Sensitivity analysisHow much can NPV change before NPV is negative?
Sensitivity = NPV total
PV cashflow
NPV total = 1,148
PV of resale value = 4,000 * DF @12%
=4,000 * 0.636
=2,544
Examined Dec 2007
Slide 135
Sensitivity
= 1,148
2,544
= 45%
If the chain sells for 45% less than our initial estimate the NPV of the project will be zero.
If the estimate is further out than this, the project would return a negative NPV.
Slide 136
Question practice – end of Chapter 12
Q27
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q28 Q29 Q30 Q31
Chapter 13
Strategic performance
issues in complex business
structures
Study Text Chapter 13
Slide 138
Porter’s 5 Forces
Competitive Rivalry
Bargaining Power ofSuppliers
SubstituteIndustries
Bargaining Power of
Customers
Threat of New
Entrants
Examined Dec 2007
Slide 139
• Using the model identify the forces and their strength for a clothing manufacturer
Lecture Example
Slide 140
Lecture Example
• Buyers – retail stores, strong
• Suppliers – staff (labour), manufacturers (fabric and equipment) weak
• Substitutes – Other manufacturers, strong
• New Entrants – Easy to set up on basic level (China currently entering market), strong
• Competition – Brands, strong
Slide 141
Lecture Example
• Buyers – Value adding activities, keeping up with trends
• Suppliers – Single supplier deals regularly reviewed
• Substitutes – Build reputation (no subs for clothing!)
• New Entrants – Build reputation
• Competition – Branding or niche products
Slide 142
BCG Matrix
Market or Industry Growth Rate
High
Low
Relative Market ShareHigh Low
Star Question Mark
Cash Cow Dog
Slide 143
Uses of The BCG
• Internal balance
• Assess trends
• Evaluate competitors
• Evaluate risk
Slide 144
Ansoff’s Matrix
MARKET
PRODUCT
Present
New
Market Penetration
Product Development
Market Development
Diversification
• Related
• Unrelated
Present New
Slide 145
Question practice – end of Chapter 13
Q34
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q35
Chapter 14
Divisional performance and transfer
pricing issues
Study Text Chapter 14
Slide 147
EVA
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
Examined Dec 2007
Slide 148
ExampleProfit after tax = 160, depreciation = 30, tax rate = 30%, interest = 20, WACC = 15%, replacement cost of net assets = 1,100
20X8
NOPAT = 160 + 30 + 20 x 0.7
= 204
Net Assets= 1,100
EVA = 204 – 15% x 1,100
= 39
Slide 149
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
Slide 150
Aims of Transfer Pricing System
• Controllability– one product one price and easily agreed,
simplicity
• Goal congruence– divisional decisions benefit whole company
• Autonomy– motivation
• Performance evaluation– ensure reward goes where it’s due
Remember: Does the company want the transfer to take place?
Slide 151
A transfer pricing situation – The Brewery Group
BeerBeer
Rooms
Slide 152
Avoiding dysfunctional behaviour
• Set price to earn a return in one division and incur cost in another
• Enable profit centres are measured commercially
• Allow profit centre managers to agree on transfer
Slide 153
Methods of setting transfer price
• Market price
– Use external market price where there is an external market
– Adjusted market price to reflect savings
• Cost Based Approach
– Actual v Standard– Standard full cost plus % – Standard variable cost plus %
Slide 154
Selling Division transfers at MC
• When is this desirable?
– If there is no external market for Division S– If there is an external market for S and it
has spare capacity
• Who benefits?
– If there is spare capacity then the whole group should benefit
• Reaction of the Selling Division?
– S will be unhappy with a TP at MC
Slide 155
Methods of setting transfer price• Dual pricing
– Use variable cost and transfer share of profits at end of year to supplying division
– If external market exists• charge receiving division variable or marginal cost• supplying gets market price
• Two Part Tariff
– Variable cost for transfer plus fixed costs at year end
• Opportunity Cost Based Approach
Slide 156
Opportunity Cost Based Approach
MinimumTP (accepted by transferring division)
• If external market for intermediate product– if S is at full capacity, then it may have
to forego income from the external market and the opportunity cost will be lost contribution
– if S has spare capacity - it will not be forgoing any income and hence the transfer price will be at MC
• No external market – no opportunity cost - transfer at MC
Slide 157
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
Opportunity Cost Based Approach
Slide 158
Transfer pricing in practice
• Negotiation
• Head Office intervention
• Head Office cost allocations
Slide 159
International Transfer Pricing
• Global company with many subsidiaries around the world
• Taxation consideration
• Possibly manipulate pricing system to earn high profits in a low tax country
• But tax authority impose ‘Arm’s length’ price
Slide 160
Question practice – end of Chapter 14
Q36
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q37 Q38 Q39 Q40
Chapter 15
Scope of strategic
performance measures in not-for-profit
organisations
Study Text Chapter 15
Slide 162
Not-for-profit organisations
• Prime goal for assessed by economic measures
– Profit making may be part of this activity however
• Examples
– Charities, Councils, Forces, Colleges, NHS
Slide 163
Public Sector bodies
• Citizens Charter
– Set and published standards– Quality via privatisation– League tables– Complaints procedures– User to consumer
Slide 164
Lecture Example
• Highlight problems that may occur when using league tables
– Tunnel Vision– Lack of true comparability– Creative accounting– Self fulfilling prophecy
Slide 165
VFM
example – washing up liquid
Economy – more clean plates per $
Efficiency – more clean plates per squirt
Effectiveness – plates as clean as they should be
Slide 166
Question practice – end of Chapter 15
Q41
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q42 Q43 Q44 Q45
Chapter 16
Behavioural aspects of
performance measurement
Study Text Chapter 16
Slide 168
Controllability– Variable costs– Fixed costs
Accountability– Agency theory– Hard and soft
accountability
Uncontrollable factors– Factors beyond the
control of the manager
Performance measurement and behaviour
Reward schemes– Link to
performance– Group scheme
Slide 169
Management styles and motivation
• Hopwood’s management styles
– Budget-constrained– Profit-conscious– Non-accounting
• Motivation
– challenging but achievable– goal congruence
Slide 170
Question practice – end of Chapter 16
Q46
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q47
Chapter 17
Alternative views of
performance measurement
Study Text Chapter 17
Slide 172
Balanced Scorecard
CustomerCustomer Internal Internal
FinancialFinancialInnovation & Learning
Innovation & Learning
Slide 173
Advantages of Balanced Scorecard
• Considers all strategic measures
• Holistic view
• Avoids short term arguments
• Considers business activity linkages
• Forces organisation to look externally
• Useful for risk assessment
Slide 174
Balanced Scorecard
• Features– Broad outlook– internal & external matters– financial & non-financial– Identifies customer needs
• Development– Specific to company– Can be created at all levels of
management
Slide 175
The Performance Pyramid
Market Financial
CustomerSatisfaction
Flexibility Productivity
Quality Delivery Cycle time Waste
Operations
Corporate Vision
Lynch & Cross
Slide 176
Performance pyramid
• Derives from the idea that the organisation operates at different (management) levels
• Each of these levels has different concerns
• But they should support each other in achieving business objectives
LINKAGES
Slide 177
Problems of PM in Service Businesses
• S imultaneity
• H eterogeneity
• I ntangibility
• P erishability
Slide 178
Fitzgerald and Moon’s Building Blocks
Standards Ownership
AchievabilityEquity
Standards Ownership
AchievabilityEquity
RewardsClarity
MotivationControllability
RewardsClarity
MotivationControllability
DimensionsProfit
CompetitivenessQuality
Resource utilisationFlexibilityInnovation
DimensionsProfit
CompetitivenessQuality
Resource utilisationFlexibilityInnovation
Dimensionsbase measure on
these areas
Dimensionsbase measure on
these areas
Standards/Targets
ensure equity/fairness
Standards/Targets
ensure equity/fairness
Rewards
need to be clear
Rewards
need to be clear
Slide 179
Question practice – end of Chapter 17
Q48
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q49 Q50 Q51 Q53
Chapter 18
Non- financial performance
indicators
Study Text Chapter 18
Slide 181
Problems with Financial Performance Indicators
• Only monetary terms
• Focus on past
• Not full picture
• Short term focus
Solution = NFPIs
Slide 182
Value of NFPIs
• Quick
• Anything can be measured
• Easy to calculate
• Not as easy to manipulate
• Qualitative or quantitative
• Can focus on key areas like customer satisfaction, quality
Slide 183
Problems of NFPIs
• Information overload
• Detail vs. big picture
• Out of date
Must be linked to financial measures
Balanced Scorecard
Slide 184
Lecture Example 1
• In the role of coffee shop manager, suggest some NFPI for your business
– Returning customers– Comments– Occupancy– Knowledge of staff– New product take up– Stock outs
Slide 185
Question practice – end of Chapter 18
Q54
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q55 Q56 Q57 Q58
Chapter 19
Predicting and preventing corporate
failure
Study Text Chapter 19
Slide 187
Predicting business failure
• Declining industries
– End game– Product revitalisation
• Declining companies
– Slatter’s ten symptoms
• Measures
– Liquidity– Z score– Argenti’s A score
Examined Dec 2007
Slide 188
Strategies for improvement
• Identify the causes of decline and strategies to deal with them
• Strategic drift– Counteracting
• Review leadership
Slide 189
Question practice – end of Chapter 19
Q59
You should now be able to attempt the following key question from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key question from the BPP Learning Media Practice and Revision Kit.
Chapter 20
Current developments
in management accounting techniques
Study Text Chapter 20
Slide 191
Changing role of the Management Accountant. Burns and Scapens
• Provision of information that is;
– Forward looking – External– Assists meeting of objectives
• Links to strategic core
– Planning and control
• Changes arose due to
– Technology– Management structure– Competition
Slide 192
Modern Japanese techniques
• TQM
• JIT
• Target costing
• Kaizen costing
• Continuous improvement
Slide 193
Supplier BaseSupplier Base
JIT purchasingJIT purchasing
Raw material & components
Raw material & components
Work-in ProgressWork-in Progress
Finished GoodsFinished Goods
Demand Pull Demand Pull
CustomersCustomers
Manufacturing Resources Planning (MRP 2)
Advanced Manufacturing Technology
Total Quality Management
Computer Integrated Manufacturing
Just In Time
Slide 194
Target costing
To reduce the life-cycle costs of new products through cost reduction:• Pre-production planning• R&D
Slide 195
Implementing target costing
a) Define product spec & sales volume
b) Target selling price
c) Required profit
d) Target selling price Xless: target profit (X)Target cost X
e) Estimated cost
f) Estimated cost – target cost = cost gap
g) Reduce costs or negotiate with customer
Slide 196
Question practice – end of Chapter 20
Q60
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q61 Q62
Chapter 21
Current issues and trends in performance
management
Study Text Chapter 21
Slide 198
Value-based management
• Value mind set
• Value drivers
– Any variable that affects the value of the
company
• Management processes
Slide 199
Recently developed performance management frameworks
• Six Sigma
– Define– Measure– Analyse– Improve– Control
• Performance Prism
– Stakeholders satisfaction
– Strategies– Processes– Capabilities– Stakeholder
contribution
Slide 200
Question practice – end of Chapter 21
Q63
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
You should now be able to attempt the following key questions from the BPP Learning Media Practice and Revision Kit.
Q64 Q65 Q66