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ACCA – APM

ADVANCED PERFORMANCE MANAGEMENT

STUDY NOTES

CONTENTS Chapter #

Chapter Name

Page #

Tips to Pass the Exam 1

Introduction to Strategic Management

01

2

Environmental Influences

11

3

Performance Hierarchy and Budgeting

20

ACCA Questions Part 1 (Solution key provided by ACCA)

48

4

Business Structure and Management Accounting

61

5

The Environment Issue & Risk and Uncertainty

73

6

Management Accounting Information

100

7

Management Report

116

ACCA Questions Part 2

132

8

Financial Performance Measure in the Private Sector

138

9

Divisional Performance Appraisal

155

10

Performance Management in Not-For-Profit Organisation

173

ACCA Questions Part 3

179

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11

Non-Financial Performance Measurement

191

12

The Role of Quality in Performance Measurement

193

13

Human Resource Management Issues

206

14

Balance Scorecard and Performance Issues

224

15

Corporate Failure

237

ACCA Questions Part 4

248

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TIPSTOPASSTHEEXAM      

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Startthepreparationearly.Ideallyplan tospend 2hoursdailyonreading thenotesand studytext.Otherwiseyouwillbereallyfrustratedandexhaustedduringexamdays. Trytounderstandtheconceptsandunderstandhowtheyareapplied Thereisnosubstitutefor practice.Needtobeable tosolveatleast 5pastpaperssothat youareabletocomprehendtheexameasily. Trytosolvethe questionsinexamroom conditionandrecordthetimeyouaretakingto solveeachquestion.TimeManagementisthekey. Nevertrytostudyonthelastdaybeforeexam.Thisisyourdaytorelaxyourbrainbefore theBIGDAY. DONOTWORRY,ALWAYSBEHAPPY!YOUHAVETHEPOTENTIALTOPASSTHEEXAM

IntrotoStrategicManagementAccounting

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APM–StudyNotes

 INTRODUCTIONTOSTRATEGICMANAGEMENTACCOUNTING   LearningObjectives       

Explaintheroleofstrategicperformancemanagementinstrategicplanningandcontrol Discusstheroleofperformancemeasurementincheckingprogresstowardsthecorporateobjectives. Compareplanningandcontrolbetweenthestrategicandoperationallevelswithinabusinessentity. Discuss the scope for potential conflict between strategic business plans and short‐term localised decisions. Evaluate how models such as SWOT analysis, Boston Consulting Group, balanced scorecard, Porter’s genericstrategiesand5Forcesmayassistintheperformancemanagementprocess. Applyandevaluatethemethodsofbenchmarkingperformance. Assess the changing role of the management accountant in today’s business environment as outlined by BurnsandScapens.

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IntrotoStrategicManagementAccounting

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APM–StudyNotes

StrategicManagementAccounting Strategic management accounting is a form of management accounting in which emphasis is placed on information about factors external to the organisation as well as on nonfinancial and internally‐generated information.  Traditional management accounting is more concerned with the achievement of internal financial performance targets(e.g.budget).  Theaim ofstrategicmanagementaccountingistoprovideinformationthat isrelevanttotheprocess ofstrategic planningandcontrol.  TheStrategicPlanningProcess 

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External analysis involves consideration of developments and circumstances outside the organisation which may affect the organisation in the future. Relevant external factors include the law, politics, economics, culture,technologyandcompetition. Internal analysis involves consideration of the strengths and weaknesses within the organisation. Relevant internalfactorsincludetechnicalskills,know‐how,marketreputationandliquidity. SWOTanalysisinvolvessystematic considerationofthe strengthsandweaknesses oftheorganisationagainst thebackgroundoftheopportunitiesandthreatsitfaces. Gapanalysisinvolvesconsiderationofthedifferencebetween“whereweare”and“wherewewanttobe”  Page|2

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IntrotoStrategicManagementAccounting

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APM–StudyNotes

LevelOfManagement  Strategicmanagement  Tacticalmanagement  Operationalmanagement  Managementaccountingsystemshouldprovideinformationforstrategicmanagement,tactical managementand operationalmanagement  Inmanyrespects,strategicinformation,tacticalinformationandoperationalinformationareconcernedwiththe same things (business plans and actual performance) but are provided in different amounts of detail and with differingfrequency.ITsystemsareusedtoprovidethisinformation  Strategic management is concerned with the development and execution of long term plans. Strategic informationneedsaretypically:  Aboutthewholeorganisationandaresummarised  Relevanttolongtermandforwardlooking  Likelytobepreparedonanadhocbasisandmaybetakenfromexternalsources  Tacticalmanagementisconcernedwithefficientandeffectiveuseofresourcesintheimplementationofmedium termplans.Tacticalinformationneedsaretypically:  Aboutindividualdepartmentsanddetailed  Relevanttomediumtermandamixofbackwardandforwardlookingmaterial  Likelytobepreparedonasystematicandregularbasis  Operational management is concerned with the day to day running of the business. Operational information needsaretypically:  ‘taskspecific’andverydetailed,downtotransactionlevel  Relevanttotheveryshorttermperiodandtheyarebackwardlooking  Likelytobepreparedregularlyorcontinuouslyavailableon‐line  RoleofPerformanceinCheckingProgress Vigilant andeffective management systems ensure howwell a business and its investment and expansion plans succeedbutmanymanagersexperiencethatasabusinessgrows,theybecomemoreisolatedfromitsoperations. Thusitisnecessarytosetupasystemwhichcaneffectivelymanagetheprogressofabusiness.Here,performance measurementsystemsplayamajorrole.  Aperformancemeasurementsystemkeepstrackandupdatesthemanagerswithallcrucialinformationregarding the current performance of the business. The system also facilitates in importanttask of settingup targets that shapethestrategiesrequiredbythebusinesstogrow.  Calculatedmeasurementsandtargetdevelopmentmaynotbevitalforsmallbusinesses, butfor businessesthat arelookingtoexpandandgrow,theseperformancemeasurementsprovideessentialcontrols.Goodmeasurement systemsnotonlyupdateon howdifferentsectorsofabusiness are working,butalsoequipsmanagersto assess factorsthatmayaffecttheperformanceinanyway,whichinturnhelpsinmanagingperformancemoreefficiently. 

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IntrotoStrategicManagementAccounting

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APM–StudyNotes

It is important to carefully select what exactly the system needs to measure. The priority here is to focus on quantifiablefactorsthatareclearlylinkedtothedriversofsuccessinyourbusinessandyoursector.Thesefactors are known as Key Performance Indicators (KPIs). The factors selected for assessment should preferably be quantitativebutnotnecessarilyfinancialaseventhoughfinancialmeasuresseemdecisiveabouttheprogressofa business,somenon‐financialfactorsaretooimportanttoignore.E.g.Ifthesuccessandperformanceofabusiness depends on customer service, then the performance measurement system should assess the number of complaintsreceivedinsteadoffinancialmeasurement.  Once the key indicators are identified, a way to measure them should be set up. Following this, performance targetsshouldbesetuptopresentgoal clarityforeveryone.Businesseshave strategicvisionsbutit isnoteasyto make them clear for everyone so it is more suitable to break down the vision into understandable yet crucial targets so that it is easier for everyone to manage and achieve them. Through this strategy, daily operations throughoutthebusinessarefocusedonthesettargets.  It is of equal importance to effectively manage all the information being received through the system. Better managedinformationaboutKPIswillbeamoreeffectivemanagementtoolthatunorganizeddata.

 PlanningandControlbetweenStrategicandOperationalLevel Oneofthemostunderlyingandimportantactivities ofanybusinessistheplanning. Whenplanningalldifferent aspects of a business are taken into consideration including the vision, goals and objectives of the company. It requirescarefulthinkingandanalyzingaccordingtothepredictedfutureofthebusiness.Strategicplanningoccurs atcorporatelevelwhileoperationalplanningincludesallplanningprocessestakingplaceatthefunctionallevel.  Strategicplanningfocusesonthelong‐term objectives ofthecompanywhileoperationalplanning focusesonthe short‐termobjectives.Thisdefinitionofroleshelpsuseresourcesinabetterwaytoachieveallcompanygoals.  Strategiccontrolassesseswhetherthestrategies setarebeing implementedandwhethertheyareworkingoutas expected.Strategiccontrolis“thecriticalevaluationofplans,activities,andresults,therebyprovidinginformation forthefutureaction”.Operationalcontrolontheotherhandassessesthedailyoperationsandwhethertheyare inaccordancetothesetobjectives.Whereverperformancefailstomeetthesetstandards,actionstocorrectthem aretakeninstantly.Theseactionsusuallyinvolvetraining,motivation,leadership,discipline,ortermination.  ConflictBetweenStrategicBusinessPlansandShortTermDecisions  Top‐down approaches to managementmay lead to conflict in decision making in organisationswhere  divisionalautonomy&employeeempowermentispracticed.  Routine Strategic planning is normally made annually or for a longer period while localiseddecision cannot waitforsubsequentstrategicplanevenifinconsistentwithit  Decision flexibility of anorganisation may become limited due to imposition of strategic business plans.Organisationmaynotabletorespondtochangesinenvironmentattherighttime.  Rigidstrategicplansdiscouragescreativityinemployeedecisions

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IntrotoStrategicManagementAccounting

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APM–StudyNotes

SWOTAnalysis The SWOT analysis combines the results of the environmental analysis and the internal appraisal into one frameworkforassessingthefirm'scurrentandfuturestrategicfit.

  BCGmatrixtoassessbusinessperformance:  TheBostonConsultingGroupMatrix Thereisafundamentalneedformanagementto evaluate existingproducts and services in termsof their market development potential, and their potential to generate profit. The Boston Consulting Group matrix, which incorporatestheconceptoftheproductlifecycle(PLC),isausefultoolwhichhelps management teams to assess existinganddevelopingproductsandservicesintermsoftheirmarketpotential.Moreimportantly,themodelcan also be used to assess the strategic position of SBUs, and in this respect it is particularly useful to those organisationswhichoperateinanumberofdifferentmarkets.  Thematrixoffersanapproachtoproductportfolioplanning.Ithastwocontrollingaspects,namelyrelativemarket share (meaning relative to the competition) and market growth. Management must consider each product or servicethatismarketed,andthenposition itonthematrix.Thisshouldbe doneforeveryproductmanufactured orserviceprovided,andmanagementshouldthen plottheposition ofcompetitors’productsandservices onthe matrixinordertodeterminerelativemarketshare.

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IntrotoStrategicManagementAccounting

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APM–StudyNotes

Stars Starsareproductswhichhaveagood marketshareinastrongand growingmarket.Asaproductmovesintothis categoryit iscommonlyknownas a‘risingstar’.Whileamarket isstrongandstillgrowing,competition isnotyet fullyestablished.Sincedemandisstrong,andmarketsaturationandover‐supplyisnotanissue,thepricingofsuch products is relatively unhindered, and therefore these products generate very good margins. At the same time, manufacturing overheads are minimised due to high volumes and good economies of scale. These are great products, and worthy of continuing investment for as long as they have the potential to achieve good rates of growth. In circumstances where this potential no longer exists, these products are likely to fall vertically in the matrixintothe‘cashcow’quadrant(‘fallenstars’),andtheircashcharacteristics willchange.Itisthereforevital thatacompanyhas‘risingstars’ developingfromits‘problem children’inordertofillthevoidleftby thefallen stars.  Problemchildren ‘Problemchildren’havearelatively lowmarket shareinahigh‐growthmarket,oftenduetothefactthat theyare new products, or that they are yet to receive recognition by prospective purchasers. In order to realise the full potential of problem children, management needs to develop new business prudently, and apply sound project managementprinciplesifitistoavoidcostlydisasters.Grossprofitmarginsarelikelytobehigh,butoverheadsare alsohigh,coveringthecostsofresearch,development,advertising,marketeducation,andloweconomiesofscale. Asaresult,thedevelopmentofproblem childrencanbeloss‐makinguntiltheproduct movesintotherisingstar category,whichisbynomeansassured.Thisisevidencedbythefactthatmanyproblemchildrenproductsremain assuch,whileothersbecometomorrow’s‘dogs’.  Cashcows Acashcowhasarelativelyhighmarketshareinalowgrowthmarket,andshouldgeneratesignificantcashflows. This somewhat crude metaphor is based on the idea of ‘milking’ the returns from a previous investment that established good distribution and market share for the product. Activities to support products in this quadrant should be aimed at maintaining and protecting their existing position, together with good cost management, rather than aimed at growth. This is because there is little likelihood of additional growth being achieved.  Dogs A‘dog’ has a relatively low market share in a low growth market. It might be loss making, and therefore have negativecashflow.Acommon beliefisthatthere isnopoint indevelopingproducts orservicesinthisquadrant. Manyorganisationsdiscontinue‘dogs’,butbusinessesthat have been denied adequate funding fordevelopment may find themselves with a high proportion of their products or services in this quadrant.  LimitationsoftheBostonConsultingGroupmatrix Thepopularity ofthematrixhasdiminishedasmorecomprehensivemodels havebeendeveloped.Management shouldexerciseadegreeofcautionwhenusingthematrix.Someofitslimitationsaredetailedbelow:  Therate ofmarket growthisjustonefactorinanassessment ofindustryattractiveness,andrelativemarket share is just one factor in the assessment of competitive advantage. The matrix ignores many other factors thatcontributetowardsthesetwoimportantdeterminantsofprofitability.  Therecanbepracticaldifficultiesindeterminingwhatexactly‘high’and‘low’(growthandshare)canmeanin aparticularsituation.  Thefocusuponhighmarketgrowthcanleadtotheprofitpotentialofdecliningmarketsbeingignored.  The matrix assumes that each SBU is independent. This is not always the case, as organisations often take advantageofpotentialsynergies. Page|6

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IntrotoStrategicManagementAccounting

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APM–StudyNotes

The use of the matrix is best suited to SBUs as opposed to products, or to broad markets (which might comprisemanymarketsegments). Thepositionof‘dogs’isfrequentlymisunderstood,asmany ofthemplayavitalroleinhelpingSBUs achieve competitive advantage. For example, dogs may be required to complete a product range and provide a crediblepresenceinthemarket.Dogsmayalsoberetainedinordertoreducethethreatfromcompetitors.

 Notwithstanding these limitations, the Boston Consulting Group matrix provides a useful starting point in the assessment of the performance of products and services and, more importantly, of SBUs.  EXAMPLE Domestic Appliances Ltd (DAL) commenced trading in 1955, when it started to manufacture semi‐automatic washing machines. From 1965, DAL expanded its product portfolio. Core products now include fully automatic washingmachines,dishwashers,and cookers.Themarketindomesticappliances is extremelycompetitive.DAL’s principalcompetitoristheJarvisElectricalGroup(JEG),whichhasachievedthepositionofmarketleaderinmany similarareasofthemarket.Otherinformationisasfollows: 1. JEG is the market leader in dishwashers, having 48% of the market. DAL has only 30% of the market. Environmentalistpressuregroups,concernedaboutwaterconsumption, havecausedasignificantdiminution in the size of the market for dishwashers. However, the market remains profitable and this is expected to continue. 2. DAL continues to manufacture washing machines using a process which uses new materials for each unit. Legislationnowrequiresthat35%ofallmaterialsusedcompriserecycledmaterials,whichmeansthatDALwill nolongerbeabletosellitswashingmachinesincertainmarkets. 3. Both DAL and JEG have invested very heavily in the manufacture of steam ovens. DAL has 12% of the new market,whileJEGhasan18%shareofthenewmarket. 4. DALhasrecentlyproducedanew washing machine,the Celeribus, which washes three times faster than any other machine on the market. Market awareness of this machine is growing. The development costs of the Celeribusweresignificant.Atpresentthecompanyismakingheavylossesonproductionofthisproduct.  AnalysetheproductportfolioofDALusingtheBos...