ACCA - P5 Advanced Performance Management - Passport ATC 2009
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Accountancy Tuition Centre (International Holdings) Ltd 2009 (i)
ATC
INTERNATIONAL
ACCA
PAPER P5
ADVANCED PERFORMANCE MANAGEMENT
PASSPORT
Accountancy Tuition Centre (International Holdings) Ltd 2009 (ii)
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These are condensed notes focusing on key issues for those of you who lead busy, mobile
lives or for those of you who want to revise in a more focused fashion.
CONTENTS
Accountancy Tuition Centre (International Holdings) Ltd 2009 (iii)
CONTENTS
Page
Introduction (iv)
Summary of key theory 0101
Articles 0201
Past question analysis 0301
Examiner comments 0401
Exam Technique 0501
These are condensed notes focusing on key issues and offering a limited
number of examples and exercises for those of you who lead busy, mobile
lives or for those of you who want to revise in a more focused fashion.
Be Warned: These notes only offer guidance on key issues. On their own they
are not enough to pass the examination.
INTRODUCTION
Accountancy Tuition Centre (International Holdings) Ltd 2009 (iv)
CORE TOPICS Tick when completed
Strategic management accounting
Strategic planning
SMA in multinationals
Life cycle issues
SWOT analysis
Risk and uncertainty
Budgeting for control
Changes in business structure
Effectiveness of traditional techniques
Business Process Reengineering
Activity based management
Effect of IT on management accounting
Environmental factors
Stakeholders/ethical issues
Pricing
Performance measurement systems
Tick when completed
Corporate strategy
Performance hierarchy/ mission
Porter’s five forces
Boston consulting group matrix
Ansoff’s product market matrix
Performance measurement
Further aspects of performance measurement
Balanced scorecard
Performance pyramid
Service industries
Non profit organisations
Remuneration schemes
Potential problems with PM
Corporate failure
INTRODUCTION
Accountancy Tuition Centre (International Holdings) Ltd 2009 (v)
Tick when completed
Divisional performance evaluation
ROI/Residual income
Economic value added
Transfer pricing
Current developments in performance evaluation
Current developments
Value based management
Six sigma
Performance prism
Contemporary issues
INTRODUCTION
Accountancy Tuition Centre (International Holdings) Ltd 2009 (vi)
Format of the examination
The examination is a three-hour paper constructed in two
sections.
The Section A questions will contain a mix of computational
and discursive elements.
Section B questions will comprise at least one question that is
purely discursive and other(s) will incorporate both
computational and discursive components.
Section A: Two compulsory questions worth 60 marks
(no single question will exceed 40 marks)
Section B: Choice of 2 from 3 questions (20 marks each)
SUMMARY OF KEY THEORY
Accountancy Tuition Centre (International Holdings) Ltd 2009 0101
INTRODUCTION TO STRATEGIC MANAGEMENT
ACCOUNTING
Strategic management is usually taken to mean a broader
view of management accounting which may include:
External as well as internal information
Non financial as well as financial information.
Information to help develop the organisation’s strategy,
and information to monitor how well the organisation is
performing against the strategy.
Corporate planning
This involves developing the strategy of the organisation.
This is then used to develop a long term corporate plan. A
modern approach to corporate planning may follow the
following steps:
Analyse the environment within which the organisation
exists, and analyse the organisation’s own strengths and
weaknesses- possibly using SWOT analysis.
Deciding on the objectives of the organisation. These
objectives may be organised into a hierarchy- the
performance hierarchy.
Identifying the gap between where the company is and
where it wants to be?
Developing strategies to narrow the gap.
Planning and control at the strategic and operational
level
Strategic planning involves setting plans and goals for an
organisation over the long term. Operational planning
involves managing the day to day operations of the business.
The differences can be summarised as follows:
Strategic planning is not routine. Operational planning
will be.
Strategic planning requires more judgement, and will be
performed in situations of uncertainty. Operational
plans involve more programmed decisions, such as
ordering inventory.
Strategic decisions will be based on external
information. Operational planning will be based on
mainly internal information.
Lifecycle issues and survival
Most product lifecycles are becoming much shorter than they
were even 50 years ago. Management must consider product
lifecycles in order to survive since:
New products must be developed to replace existing
ones- otherwise the company will become obsolete.
SUMMARY OF KEY THEORY
Accountancy Tuition Centre (International Holdings) Ltd 2009 0102
Cash flow must be managed- so that products in the
development phase are paid for by products in the
maturity phase.
Strategic management accounting in Multi Nationals
Issues for strategic management accounting in multi
nationals
Providing information about countries/markets for
potential new investments
Managing the additional risks involved in investing in
foreign countries
Additional complexities of performance measurement
in multi national companies.
Additional risks involved in investing in foreign countries
Cultural risk- not appreciating local customs/ values
Economic risk- due to less stable economic climate in
some countries
Political risk- less friendly government attitudes
towards multi nationals
Technological risks
Foreign exchange risk
Control risk
Performance measurement issues
Comparison of the performance of divisions in different
countries will be made more complex by:
Transfer pricing
Different cost bases/ economic conditions
Exchange rate fluctuations
Different tax rates
SWOT Analysis
SWOT analysis may be used during the planning stage. The
benefits of this are:
Organisation will only undertake opportunities for
which it has the required abilities.
Focuses management on the external environment as
well as the internal.
May identify new opportunities.
SUMMARY OF KEY THEORY
Accountancy Tuition Centre (International Holdings) Ltd 2009 0103
Benchmarking
Definition
Organisations compare various aspects of their processes
with best practice organisations in an attempt to improve
their own performance.
Benefits
Identifies opportunities for improvement
Establishes best practice- for realistic performance
measurement
Should lead to long term improvement in profits
Difficulties
Requires organisations who are willing to share
information about their own processes
Time consuming/ complexity of data
Resistance within the organisation to change
Time lag between investigation of best practice and
implementation may mean that best practice is never
achieved.
BUDGETING FOR CONTROL
Objectives of a system of budgeting:
C- Coordination
R- Responsibility
U-Utilisation
M-Motivation
P-Planning
E-Evaluation
T-Telling
Alternative systems of budgeting
Fixed v Flexible v Flexed
A fixed budget is prepared once, and remains
unchanged when used for comparison with actual
results.
Under flexible budgeting, several budgets are prepared
using the same budget assumptions, but based on
different activity levels (sales/production units). At the
end of the year, the budget with the activity level
closest to the actual is used for comparison.
SUMMARY OF KEY THEORY
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A flexed budget system involves “flexing” the original
budget at the end of the year to reflect the actual
activity levels, based on the original budget
assumptions.
Rolling Budgets
Rather than preparing the budget once a year, the
organisation continually updates the budget. Typically
the budget will be prepared for the next twelve months.
At the end of each month, another month’s budget is
added. Intervening months’ budgets may also be
changed, if factors outside the control of the company
have made the original budgets inappropriate.
Activity based budgeting
Budgets are based on activity based principles.
Incremental v Zero Based Budgeting
Incremental budgeting is performed by taking the
previous years actual or budgeted figures and adding
adjustments for inflation and other factors that have
changed.
Disadvantage of incremental budgeting is that it accepts
costs simply because they were there last year without
questioning whether they are really necessary.
Zero based budgeting
Managers identify the activities they wish to perform.
(E.g. making particular products, training.)
Managers produce a decision package for each activity,
showing costs and revenues, as well as qualitative
factors.
Budget committee reviews decision packages and
selects those it wishes to accept. These form the budget.
Advantage is that budget process examines each cost,
and relates it to the activities the company will perform,
rather than just accepting costs because they were in
previous year.
Disadvantage- very time consuming.
Budgeting in not for profit organisations
Differences compared to non profit organisations
“Output” cannot be measured in monetary terms.
“Demand” for the service is not predictable e.g. number
of homeless people needing shelter cannot be predicted
in advance.