Ex P ACCA APM 21 v101 - APM EXP NOTES PDF

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APM EXP NOTES...

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The ExP Group

ACCA APM

ExPress Notes

Advanced Performance Managment

SBL

BT

MA

SBR

FA

AFM

LW

APM

PM

ATX

TX

AAA

FR

AA

FM

Valid for September 2020, December 2020, March 2021 and June 2021 exam sittings

ACCA APM

ExPress Notes

The ExP Group

Page Welcome to your ExPress notes

3

1.

Strategic Planning and Control

4

2.

External Influences on Organisational Performance

14

3.

Performance Measurement Systems and Design

18

4.

Strategic Performance Measurement

21

5.

Performance Evaluation and Corporate Failure

34

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ACCA APM

The ExP Group

ExPress Notes

Thank you for downloading a copy of these ExPress notes and I hope you find them useful for your studies.

Steve Crossman CEO The ExP Group

We provide these ExPress notes free of charge to individual students as part of our CSR initiatives. The notes are designed to help students assimilate and understand the most important areas for the exam as quickly as possible. A word of warning though in that they have not been designed to cover everything in the syllabus so you should only use these notes for either an overview of the key areas before you start your main studies or as part of your final revision in the run up to your exams. Importantly though, we want you to be successful in your exams so good luck with your studies and please do let us know how you get on. All the best, Steve

About The ExP Group We were born with one passion, with one aim, with one desire. To use technology the way it should be used. To use technology to open up education, and in particular financial education, to whoever needs it regardless of their income, wealth, race, sex, religion or location. We wanted to use technology to empower individuals to develop themselves through financial expertise, organisations to improve their performance through enhanced human capital and ultimately communities and families to benefit as a result.

We’re on target and since our birth we have had the privilege of working with and learning from inspirational individuals and organisations from all 4 corners of the world in countries as varied as the UK in the north, Singapore in the east, South Africa in the south and the Cayman Islands in the west. We’re only part way through our journey but we’re doing better than we expected. The best is yet to come though, Education + Technology = Ethical Empowerment.

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Disclaimer : © 2020 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission needs to be obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means for any other purpose is prohibited. These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

Page 3

Strategic Planning and Control

The Big Picture This Paper is concerned with management accounting issues at a strategic level. It is built on issues and methods contained in Paper PM (formerly F5). The main idea is that management accounting has experienced an upgrade in importance and status, given that its approach can be applied at a “total company” level with a time frame that extends well beyond the next financial/accounting/budgeting period. It is therefore vital that all levels of management are well acquainted with these issues and that the senior management accountant is present at the strategy-planning process from the outset. The management accounting discipline is therefore inseparable from the corporate planning processes at a company. Here is a review of key concepts of the strategy-planning process: Strategy: Various definitions exist but a straightforward view is “Strategy is a plan of action designed to achieve a particular goal”. Strategic planning: An organisation’s process for ascertaining the strategy it should adopt, taking into account what they want to do, how they are going to do it and what resources they will need. Strategic planning covers where the organisation is planning on going, impacts on the whole organisation and involves the long-term view. Note the distinction in what is meant by “long term” (for example the “long term” is different when comparing the airline industry with the fashion industry.)

Strategy is made at different levels of the organization (recall Anthony’s hierarchy):

Page 4

Corporate Business Functional

Corporate strategy: covers the “big view” of the organisation. It answers the question “What business or businesses should we be in? Business strategy: the strategy of a single business organisation or the strategies of strategic business units (SBUs) Functional (or operational) strategy: the functional strategies involving items such as marketing, IT and HRM that support the business strategy.

It is useful throughout this Paper to keep in mind the financial implications of strategic choices: • • • • •

Efficiency ratios (e.g. asset turnover, debtor days and creditor days); Gearing ratios (e.g. debt equity ratio); Liquidity ratios (e.g. current ratio and quick ratio); Profitability ratios (e.g. gross margin, operating margin and ROCE); Interest ratios (e.g. interest coverage).

Other analytic techniques covered in earlier papers (PM) are relevant to this one:

Key Knowledge – SWOT analysis Strengths (internal)

Weaknesses (internal)

e.g. resources and capabilities

e.g. lack of certain resources or capabilities

Opportunities (external)

Threats

e.g. arrival of new technology

e.g. arrival of substitute product

Page 5

Key Knowledge – Benchmarking Definition Systematic analysis of own performance against that of another organisation, with a view of improving own performance by learning from others’ experience

Typology •

•

External: o Competitive: against a “best in class” competitor o Functional: against “best in class” functions Internal (against a “best in class” similar business unit within the organisation)

Steps • • •

Researching and identifying best-in-class performance (as recognised by the market and the authorities in the field) Selection, measurement, and analysis of key outputs against best-in-class Identification of key-causes for the ascertained performance gaps and of the key-actions necessary to reduce such gaps.

Usefulness • • •

Targets set by benchmarking are seen as realistic and achievable, as they were already achieved by others It provides early warning of competitive disadvantages It stimulates cross-functional interaction and learning

Limitations • •

Identifying activities to meaningfully benchmark Identifying best-in-class performance and (for external benchmarking) obtain relevant information regarding that organisation

Key Knowledge – Boston Consulting Group (BCG) Matrix This matrix helps organisations analyse their product lines or business units. It helps identifies priorities and where resources should be allocated. Items are allocated to the various quadrants according to how attractive the market is (measured as the growth rate) and how strong a position they hold within the market (their market share)

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Stars

Question marks

Cash Cows

Dogs

High

Growth Rate Low

High

Low

Market Share

A balanced portfolio would have: 1. Stars to ensure the future. 2. Question marks to convert to Stars. 3. Cash Cows to provide funding to develop the Stars and Question Marks. In APM, the model is used to determine the style of management that would be appropriate. For the starts and question marks, an entrepreneurial style of management that is always experimenting with product offerings in an attempt to gain market share would be appropriate. In cash cows and dogs, a more stable style of management, focussing on controlling costs might be appropriate.

Key Knowledge – Structural analysis of industries (Porter) Porter’s Generic Strategy Porter identified 3 generic strategies that are commonly used by businesses to create and maintain competitive advantage: • • •

Differentiation Cost leadership Focus

Page 7

Selling price Higher profit due to higher selling price

Profit

Selling price

Selling price

Profit Profit

Cost

Cost

Cost

Differentiation

"In the middle"

Cost leadership

Higher profit due to lower cost

1. Differentiation This involves a product or service that is considered to be “different” or unique within its industry. Due to these unique characteristics, the organisation can charge a premium. The uniqueness of the item could be based on a variety of things such as the design, technical features, support service, branding, etc. Examples of companies that have used the differentiation strategy include: • •

Apple computers, iphones and ipod. Land Rover off-road cars.

2. Cost leadership This is where an organisation can produce goods or services at a lower cost than the industry average. Importantly, note that this does not mean lower quality. Low cost production can be obtained by way of economies of scale, preferential access to raw materials or labour, access to extensive distribution channels, etc. The “cost leadership product” is often a basic good or service, which is made available to a large customer base. Examples of companies that have used cost leadership strategies include: •

Dell computers

•

Wall mart stores

Page 8

3. Focus This is where an organisation concentrates on a small number of niche markets. Differentiation focus – an example would be a specialist holiday or tour operator (e.g. specialising in Skiing holidays). Cost focus – an example would be a small chain of retailers that create their own label range of products. See also Porter’s five forces model in the section on environmental analysis.

Key Knowledge – Alternative budgeting models Alternative budgeting models The strengths and weaknesses of the various models in existence should be considered:

Fixed •

A fixed budget is not adjusted to the actual volume of output (activity level)

Flexible vs. Flexed •

The distinction is sometimes overlooked: Flexible: designed to change according to actual volumes of output; usually done before the start of the budgetary period as a sort of scenario planning;

•

Flexed: This is done “after the fact” and is based on the actual level of activity achieved.

Rolling A rolling budget is one that is revised on an on-going basis by comparing actual results with the original budget when one period has expired, while simultaneously adding a new period to the budget period. Example An annual budget which is kept rolling on a quarterly basis, for example, may start with an (original) January – December forecast. At the end of March, the entire budget is revised on the basis of the first quarter, and a new set of forecasts relating to April (current year) – March (next year) are prepared, i.e. always with a 12-month range into the future.

Zero-based (ZBB) • •

Each year, budget owners must justify the entire budget (build it from zero) At odds with incremental budgeting (where only changes need justification, hence encouraging the “spend it or lose it” mentality)

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•

A three-step approach to ZBB: 1. Define “decision packages” (i.e. activities that result in costs or revenues), distinguishing between “mutually exclusive packages” (alternative activities to achieve the same result) and “incremental packages” (base level of input needed + additional inputs) 2. Evaluate and rank packages (based on the benefit to the organisation) 3. Allocate resources across packages, considering ranking and seniority of responsible managers

Activity-based (ABB) • • •

No budget owners (departments, functions), but budgeted activity cost (ABC costing) Budgeted activity cost = demand for activity * unit cost of activity More detailed and accurate than traditional budgets, especially regarding indirect costs

Incremental Such budgets are based on what went on during the period before. Typically, this approach results in modest changes and adjustments to the earlier budget. At worst, they retain and perpetuate inefficiencies and old assumptions. This might be termed the “lazy man’s budget”.

“Beyond” budgeting: The future of budgets and alternatives to budgeting Business structure and management accounting Management accounting systems must be appropriate to the structure of the businesses they serve. We have seen that that “beyond budgeting” is based on the recognition of the limitations of traditional management accounting techniques, particularly in rapidly changing business environments. The way in which a business is organized – e.g. a functional, divisional or network form – has implications for the way in which performance is managed and measured. Modern approaches to business structure are “integrative” in nature, as they explicitly take into account the linkages between people, operations, strategy and technology. One example is: Porter’s value chain

Page 10

Support

Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure

Support Activities

Human Resource Management Technological Development

Service

Marketing & Sales

Outbound Logistics

Operations

Inbound Logistics

Primary

Procurement

Primary Activities

The value chain was introduced by Porter and represents an approach to looking at the development of competitive advantage within an organisation. All organisations consist of activities which “link” together to develop the value of a business. Together these activities represent the value chain. The value chain represents a series of activities that both create and build value. Combined they represent the total value delivered by an organisation. The “margin” in the diagram is the added value (the difference between the total value of the activities and the cost of performing them). Primary activities: related with production. Support activities: provide the background for the effectiveness of the organisation (e.g. HRM) Business Process Reengineering (BPR) BPR is a cross-departmental effort of innovation, aimed at elimination of non-value-added activities within key business processes. •

Non-value added activity: increases the time spent on a product or service but do not increase its worth to the customer (e.g. inspection, transfer, storage

The Business Process Reengineering (BPR) Cycle: Identify Processes

Review, Update Analyze AsIs

Test & Implement To-Be

Design To-Be

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Running a full BPR cycle usually involves substantial investment in information technology and retraining Effects of adopting BPR •

If successful, it brings dramatic improvement in operating performance, operating versatility and customer service.

•

Process teams replace functional departments

•

More multi-skilled staff needed

•

More staff empowerment, flatter organization structures

www.theexpgroup.com/students/acca

Page 12

McKinsey 7S Model The organisation can be understood as the sum of the following parts: • • • • • • •

Structure Systems Strategy Shared values Style Skills Staff

Key Knowledge – Mendelow’s Matrix

Level of influence

This gives an indication of how directors of a business should prioritise their time and give relative weighting to different stakeholder claims in the event of stakeholder conflict. Level of interest Low

High

Low

Minimal effort required

Keep informed

High

Keep satisfied

Key players (core stakeholders)

Ethical Issues An ethical approach to doing business is not just a matter of personal virtue, but needs to be addressed by policy (and action) at the company level as well. Ethical frameworks are not merely “nice to have”, but are considered crucial to building long-term professionalism. Their absence can undermine motivation and the sense of purpose a company must have in order to succeed.

Page 13

External Influences on Organisational Performance

The Big Picture Because the business environment is changing so rapidly, it is important to be able to assess the effectiveness of traditional management accounting techniques and their relevance to business organisations in particular circumstances.

Key Knowledge – Risk and Uncertainty Risk, whichever way it is defined, is a quantification of probability. In other words, it is susceptible to measurement, statistically or mathematically. Risk may be viewed as relating to objective probabilities. Uncertainty, in contrast to risk, is not capable of being quantified. It has also been referred to as subjective probability (or unmeasurable uncertainty). Expected Value Expected Profit/(Loss) Probability Value 340 766 278 450 (230)

10% 20% 50% 18% 2% 100%

34.0 153.2 139.0 81.0 (4.6) 402.6

Key Knowledge – Maximax, maximin and minimax regret In the absence of (numerical) probabilities, a decision maker may act based on his attitude toward uncertainty. Here are examples of three techniques as they relate to the following choices ...