ACCA P5 Advanced Performance Management Mock Exam Answers PDF

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ACCA Paper P5 Advanced Performance Management Mock Exam

Commentary, Marking scheme and Suggested solutions

Commentary Tutor guidance on improving performance on the exam paper The key to success in P5 is application of wide and varied syllabus knowledge, both flexibly and in enough depth in the time allowed.

Section A Question 1 Part (i) of this question provides you with actual and budgeted figures for a quoted company (Crown Oak), together with selected information an unquoted competitor (Henderson). Although you need to calculate some KPIs in part (a), the main focus of this question is an evaluation of the appropriateness of the CSFs and KPIs Crown Oak has chosen to measure, rather than detailed calculations. In parts (ii) and (iii) you are required to assess the relationship between CSFs and KPIs, but also how changing environmental and competitive conditions could affect the aspects of performance which are critical to Crown Oak's continuing success. In this respect, the calculations from part (i) could help to highlight some of the issues that Crown Oak is facing. Part (iv) requires you to consider whether comparing financial performance against Henderson (given the different strategies being pursued by the two companies, and in the context of the changing competitive conditions) is still worthwhile for Crown Oak. Part (v) requires a discussion of the potential problems the directors face in trying to manage short-run results and long-run results (for example, in relation to the expenditure needed to enable Crown Oak to move into a new market). Finally part (vi) requires you to consider the likely reaction of shareholders to the results that you have been working on.

Section B Question 2 This question considers the importance of non-financial performance indicators in modern performance measurement systems. In part (a) you need to consider why there is growing emphasis on NFPIs for service businesses such as GA. You are also provided with data which you must use in part (b) to create NFPIs. Explanation of usefulness and levels of performance must relate to the critical success factors and strategies of GA. Part (c) links back to part (a), but here the focus is specifically on the non-financial indicators within integrated (or 'multi-dimensional') performance measurement systems, such as the performance pyramid. The requirement doesn't specifically mention GA so you don't have to relate your answer to the scenario, but it could be helpful to use your answer to part (b) to provide some context.

Question 3 This question concerns decision-making in divisions, and the potential for dysfunctional behaviour. Part (a) requires some simple calculations to illustrate the problems of ROI and RI and EVA. Part (b) requires four reasons to separate the assessment of a divisional manager from assessment of the division itself. Part (c) considers the problems of comparing the performance of divisions in different countries and requires little application to GA to score well. Part (d) asks about the relevance of liquidity and gearing measures to divisional performance measurement.

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Question 4 This question looks at two different aspects of human resource management, in the context of an accountancy firm. Part (a) considers staff appraisals, and requires a practical application to the scenario to score high marks. Identifying the problems in G&C's current appraisal process should help you to think how a successful appraisal scheme should be organised and operated. Part (b) looks at the relationship between human resource management and corporate strategy – specifically in relation to the Building Block model. Again, it is important to relate your answer specifically to the scenario, rather than simply discussing the model in general terms. For example, what aspects of performance would be considered in the Building Block model which aren't considered under G&C's current performance management system? Finally, part (c) requires practical suggestions about how a firm of professional accountants may use performance measures to assess aspects of performance such as client service and productivity.

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SECTION A Question 1 Marking scheme Marks (a) Note: The verb requirement for part (i) was 'calculate' so marks are for calculation only. No analysis or evaluation was required for part (i), and no marks are available for them. Calculation of gross profit (contribution) and GP margins Average sales price per unit Contribution per unit Quality costs per unit Operational gearing (fixed vs variable costs) Return on capital employed

2 1 1 1 2 2 9

(b)

For evaluating how well the KPIs fit with the CSF to improve production rates – Up to 5 marks For evaluating how well the KPIs fit with the CSF to maximise profits within acceptable levels of risk – Up to 4 marks For evaluating how well the KPIs fit with the CSF to maintain customer satisfaction – Up to 3 marks

Up to 11 11

(c)

For identifying relevant environmental issues in the scenario (economic factors; new competitors; technology; social responsibility) – 1 mark for each relevant issue For evaluating the relevance of the CSFs to the environmental factors – Up to 2 marks for each environmental factor For general conclusion about the validity of the CSFs and possible dangers of ossification – 1 mark

Up to 10 10

(d)

For relevant comments about the potential benefit to Crown Oak of competitor benchmarking (with Henderson) – Up to 2 marks For relevant comments about the limitations and drawbacks of the current financial benchmarking – Up to 6 marks

Up to 7 7

(e)

General comments regarding short v long term – up to 3 Application to Crown Oak – up to 3

Up to 5 5

(f)

Importance of information available Importance of dividend signal Belief in long term growth

1 2 1 4

Professional marks – for style and structure of the report

4

4 50

Suggested solution REPORT To: From: Date: Subject:

Board of Crown Oak Accountant [today's date] Performance and performance measurement in Crown Oak

Introduction This report calculates the KPIs used by the board for measuring Crown Oak's performance, and then evaluates the effectiveness of the company's KPIs and CSFs in measuring the company's performance and addressing the issues it faces in its competitive environment. At summary level, the report compares Crown Oak's performance against Henderson's, although the report also raises some concerns about the value of that comparison. The report concludes on the potential issues facing the board in relation to managing both the short-term and longer-term performance of the company. (a)

Revenue and profitability The analysis which follows is based on the key performance indicators which the Board used to assess performance. The figures relate to the full year 20X5.

Units sold in year

Crown Oak Actual 40,360

Crown Oak Budget 41,000

Henderson Actual n/a

Gross profit % Average sales price per unit ($) Contribution per unit ($) Quality costs per unit ($)

23.2% 10,877 2,527 248

30.5% 11,024 3,366 195

31.8% n/a n/a n/a

Ratio of fixed: variable costs Return on capital employed (%)

0.23:1 4.5

0.23:1 13.3

0.19:1 22.0

3.7

4.0

n/a

Average customer satisfaction score

See Appendix 1 See Appendix 1 See Appendix 1 See Appendix 1

Details of calculations are given in Appendix 1. (b)

Value of performance report in addressing links between CSFs and KPIs Improved production rates Units sold – The number of units sold in a month provides some indication of Crown Oak's productivity, because the 'build to order' model means that Crown Oak needs to build each unit before it can sell it. However, there are several limitations with using 'Units sold' as a performance measure: The number of units sold will be influenced by customer demand as well as Crown Oak's own productivity. The measure does not taken account of the different types of unit being built, although a smaller unit (such as a car port) should take less time to build than a larger unit (such as a barn). In this respect, a potential alternative measure of productivity might be to compare the number of units built to the number of employees (ie units built per employee). This could indicate how productive Crown Oak's staff are, and what impact new equipment and new construction techniques are having on labour productivity. The actual number of employees for 20X5 (2,200) is higher than the budgeted number (2,000) despite the number of units sold in the year being below budget. It is not clear how many additional employees have been taken on in connection with the new development (pre-assembled housing), but nonetheless, falling revenues alongside increasing staff numbers may be an indicator of falling labour productivity.

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Nonetheless, these performance measures do not provide any information about the construction techniques being used. The fact that Crown Oak is moving into the pre-assembled house market, and is acquiring new assets to support this suggests that it is receptive to new ideas. However, it is difficult to assess how far these correspond to developments in construction techniques, or the impact those techniques are having on productivity. Gross profit % – It is possible that the gross profit margin obtained on each building could provide an indication of the effectiveness with which Crown Oak uses its resources in production. Again, however, there are potential limitations with using margin as an indicator of productivity: for example, Crown Oak may not be able to control raw material costs per unit, such as the price of timber used. Also it is not clear if any quality control work, for example, is undertaken by Crown Oak's permanent staff (whose costs are treated as fixed costs) as opposed to the work undertaken by the staff and sub-contractors, whose costs are included within gross profit percentage. Time periods – The Board report also only shows actual figures against budget. Whatever KPIs are chosen, in order to assess whether production rates are improving over time, it would be useful to compare actual performance against a prior period (for example, the equivalent month last year). Maximise profits within acceptable risk Gross Profit % – Including gross profit % as KPI, should encourage a focus on profits. Again, however, using a single figure across all products means the figure could be affected by product mix, rather than the underlying profitability of different products. Moreover, in terms of maximising profits, it may be more useful for the Board to monitor gross profit as an absolute value, rather than as a margin %. Contribution per unit – Although this indicator provides monetary values (rather than a %), it is providing very little additional information to that provided by the gross profit %. The way Crown Oak's figures are reported (revenue, less variable costs, less fixed costs) means that gross profit and contribution are the same thing; therefore there seems little value in including both of them as KPIs. Return on capital employed (ROCE) – ROCE indicates how efficiently Crown Oak is using its capital in order to generate profits. As such, this KPI should also encourage profit maximisation, although there could be concerns that using ROCE as a profit measure may encourage short-termist behaviour at the expense of longer term decisions. However, at the moment, the Board still appears willing to take decisions on the basis of the longer term (eg investing in the pre-assembled wooden house market) even though those decisions may reduce ROCE in the short term. Operational gearing – Although Crown Oak doesn't monitor financial gearing (which could be an indicator of financial risk), monitoring operating gearing should help it ensure the company keeps its level of business risk to an acceptable level. Using sub-contractors to do work which might otherwise be done by permanent full time staff helps to reduce the level of fixed to variable costs. Maintaining customer satisfaction and providing excellent customer service Customer satisfaction score – The customer satisfaction score, obtained through the customer survey, provides a good way of measuring how satisfied customers are with Crown Oak's products. Again, however, in order to judge whether satisfaction levels are being maintained, comparative figures from previous periods should be provided, to compare against the scores for the current period. Moreover, it is not clear exactly what customers are being asked to score – for example, whether it is the quality and design of their building itself, or the whole customer experience they have received throughout their dealings with Crown Oak. Both of these will be important in maintaining Crown Oak's position as a quality brand.

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Quality costs – Crown Oak appears to be pursuing a differentiation strategy based on the quality of its products, and the 'cost of quality' KPI gives an indication of how much the company has spent on quality management. However, it is not clear whether these costs are due to preventative actions (which should help to improve customer satisfaction) or whether they are the result of having to correct defective products (which could be the cause of customer dissatisfaction). In this respect, it could be useful to monitor the number of customer complaints received as well as the summary customer satisfaction score. (c)

Extent to which the CSFs reflect the competitive pressures Crown Oak is facing New entrants – Crown Oak's performance measures appear to have been designed when the market was relatively stable – with itself and Henderson sharing a large proportion of the market. However, recently, the dynamics of the market have changed, following the entry of the new, foreign competitor. Between 20X4 and 20X5 Crown Oak's market share fell from 27.4% (434/1,585) to 26.2% (439/1,670), and if the new entrant is successful, their presence could reduce Crown Oak's market share. However, currently, the CSFs do not directly refer to maintaining market share – or growing sales. Brand strength – As an established player in the market, Crown Oak's brand should hopefully be relatively well known. However, Crown Oak needs to ensure that it uses its brand strength so that potential customers choose one of its products in preference to the new competitor's products. The reference to customer satisfaction in the current CSFs could be seen as relevant here, but it could be useful to refer directly to the importance of developing brand loyalty in sustaining Crown Oak's competitive position. Technology and innovation – The new entrant appears to be taking advantage of new production techniques (eg pre-built housing), and Crown Oak appears to have responded to this by moving into the 'pre-built' market itself. Moreover, Crown Oak appears to have acknowledged the importance of technology and development, by identifying the need to use leading edge construction techniques as a CSF. Quality or cost – Historically, Crown Oak's business strategy appears to have been to compete on the basis of quality. However, the recent increase in interest rates, and uncertainty over the strength of the economy, mean that customers are becoming more price sensitive. (We have already seen evidence of this in the variances in the product mix for 20X5 compared to budget). If customers are becoming more price sensitive, then controlling costs (while maintaining quality) is likely to become a vital element of the company's future success. However, the CSFs do not directly mention anything about cost control, or quality. Sustainability – Another factor which distinguishes Crown Oak's products from the new competitor is that Crown Oak uses timber from sustainable sources, while its competitor doesn't. In this respect, Crown Oak might be able to use social responsibility as a means of differentiating itself from the competitor. Again, however, there is currently nothing about social responsibility in the company's CSFs. Conclusion – It is not clear when the current CSFs and KPIs were established, but given the changes in the external and competitive environment, it could be useful to re-assess whether Crown Oak's CSFs still truly reflect the aspects of performance which are critical to its competitive success. If not, there is a danger that Crown Oak's performance measurement system could suffer from ossification – an unwillingness to change a performance measure system once it has been set up.

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(d)

Benchmarking Financial benchmarking – By comparing its performance against Henderson's, Crown Oak is benchmarking its financial performance against a competitor. As with any benchmarking exercise, the benefit of this comparison is that it can help Crown Oak identify how well it is performing, with a view to improving performance in any areas in which it currently appears to be under-performing. More generally, comparing financial performance with a competitor can serve to remind management that external factors (competitors, and the wider external environment) can have an impact on the company's own performance, so it is important to consider these external factors as well as assessing internal performance. Limitations of the benchmarking However, despite the potential benefits of benchmarking in general, there are some significant limitations in the current comparisons we make between Crown Oak's performance and Henderson's. Compatability of companies – Crown Oak is looking to diversify its product portfolio and has been investing in new equipment and recruiting additional staff to help support its future growth. By contrast, Henderson's strategy is to focus only on its existing market, but to control costs and operate as efficiently as possible. As such, the two companies appear to be pursuing different competitive strategies, which means that comparing financial performance for a single year may have limited value. The fact that the current report only looks at summary financial data rather than any non-financial management information also limits its usefulness. For example, we don't know how many units Henderson sold in a year (or what mix of units they sold), which means the current comparison doesn't really provide any insight into why the two companies are performing as they are. Choice of competitor – In addition, the current benchmarking exercise only compares Crown Oak's performance against Henderson's. However, given the threat from the new competitor, and the fact that Crown Oak is starting to build pre-assembled houses in response to that threat, there is an argument that it might actually be more useful to compare Crown Oak's performance against the new competitor, rather than against Henderson. Market share – One useful way of assessing the relative performance of all three companies could also be to look at market share. We already record the total market size (in Note 1 to Appendix 1) and by obtaining the total revenue figure for the new competitor we could show a summary performance indicator comparing the market share of all three companies. Monitoring changes in market share over time would potentially provide the directors with more useful management information than the current comparison. We have already noted (in part iii) that Crown Oak's CSFs don't currently refer to market share or sales growth, although it could be instructive for them to do so. In this respect, including market share data in the monthly report could then provide management with an indicator to assess how well Crown Oak is performing against that CSF.

(e)

Short vs long-term performance In general terms, it could be argued that the directors of a company have a short-term in...