Publishing P5 Study Text Advanced Performance Management ACCA ACCA Paper P5 Advanced performance management Welcome to Emile Woolf‘s study text for Paper P5 Advanced Performance Management which is: Written by tutors Comprehensive but concise In simple English Used around the world by Emile Woolf Colleges Publishing Third edition published by Emile Woolf Publishing Limited Crowthorne Enterprise Centre, Crowthorne Business Estate, Old Wokingham Road, Crowthorne, Berkshire RG45 6AW Email: info@ewiglobal.com www.emilewoolfpublishing.com © Emile Woolf Publishing Limited, April 2011 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior permission in writing of Emile Woolf Publishing Limited, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organisation. 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ISBN: 978‐1‐84843‐156‐0 Printed and bound in Great Britain Acknowledgements The syllabus and study guide are reproduced by kind permission of the Association of Chartered Certified Accountants. ii © Emile Woolf Publishing Limited Paper P5 Advanced performance management c Contents Page Syllabus and study guide DCF tables v xvii Chapter 1: Strategic management accounting Chapter 2: Strategic planning techniques 31 Chapter 3: Budgets and beyond 45 Chapter 4: Changes in business structure and management accounting 77 Chapter 5: External factors on organisational performance 95 Chapter 6: Performance measurement systems and design 119 Chapter 7: Strategic performance measurement 227 Chapter 8: Decentralisation and divisional performance 247 Chapter 9: Transfer pricing 267 Chapter 10: Japanese business practices and management accounting techniques 295 Chapter 11: Role of quality 311 Chapter 12: Performance measurement and strategic HRM issues 331 Chapter 13: Strategic models and performance measurement 375 Chapter 14: Alternative views of performance measurement 387 Chapter 15: Current developments and emerging issues in performance management 375 Appendix 1: Revision: ABC and other accounting methods 387 Appendix 2: Accounting for decision-making 411 Appendix 3: Decision-making with risk and uncertainty 431 Appendix 4: Budgeting and quantitative techniques in budgeting 447 © Emile Woolf Publishing Limited iii iv Appendix 5: Discounted Cash Flow (DCF) and long-term decisions 473 Appendix 6: Pricing and life cycle issues 495 Practice questions 517 Answers to practice questions 557 Index 619 © Emile Woolf Publishing Limited Paper P5 Advanced performance management S Syllabus and study guide AIM To apply relevant knowledge, skills and exercise professional judgement in selecting and applying strategic management accounting techniques in different business contexts and to contribute to the evaluation of the performance of an organization and its strategic development MAIN CAPABILITIES On successful completion of this paper, candidates should be able to: A Use strategic planning and control models to plan and monitor organisational performance B Assess and identify relevant macroeconomic, fiscal and market factors and key external influences on organisational performance C Identify and evaluate the design features of effective performance management information and monitoring systems D Apply appropriate strategic performance measurement techniques in evaluating and improving organisational performance E Advise clients and senior management on strategic business performance evaluation and on recognising vulnerability to corporate failure F Identify and assess the impact of current developments in management accounting and performance management on measuring, evaluating and improving organisational performance Rationale The Advanced Performance Management syllabus further develops key aspects introduced in Paper F5, Performance Management, at the skills level and draws on aspects of the material covered from a more strategic and operational planning perspective in Paper P3, Business Analysis The syllabus introduces candidates to the strategic role of management accounting as a discipline for planning and controlling performance so that strategic objectives © Emile Woolf Publishing Limited v Paper P5: Advanced performance management can be set, monitored and controlled It also covers the impact of external factors on strategic management issues, such as macroeconomic, fiscal, market and environmental impacts on performance From appreciating the strategic context of performance management and the impact of wider factors, the syllabus examines, at an operational level, the issues relating to performance measurement systems and their design The syllabus then moves from performance management systems and their design to the scope and application of high-level performance measurement techniques in a variety of contexts, including not-for-profit organisations and multinational businesses Having covered the strategic aspects of performance management and operational systems for the measurement and control of performance in a variety of contexts, candidates are then expected to synthesise this knowledge in the role of an advisor to senior management or independent clients on how to assess and control the performance of an entity, including the recognition of whether a business is facing difficulties or possibly failure Finally, the syllabus deals with current developments in performance management and with emerging issues as they might affect or influence the management of performance within organisations Detailed syllabus A B C D vi Strategic planning and control Introduction to strategic management accounting Performance management and control of the organisation Changes in business structure and management accounting Effect of Information Technology (IT) on strategic management accounting Other environmental and ethical issues External influences on organisational Performance Changing business environment Impact of external factors on strategy and performance Performance measurement systems and design Performance management information systems Sources of management information Recording and processing methods Management reports Strategic performance measurement Performance hierarchy Strategic performance measures in private sector © Emile Woolf Publishing Limited Syllabus and study guide E F Divisional performance and transfer pricing issues Strategic performance measures in not-for-profit organisations Non- financial performance indictors The role of quality in management information and performance measurement systems Performance measurement and strategic human resource management issues Performance measurement and the reward systems Other behavioural aspects of performance measurement Performance evaluation and corporate failure Alternative views of performance measurement and management Strategic performance issues in complex business structures Predicting and preventing corporate failure Current developments and emerging issues performance management Current developments in management accounting techniques Current issues and trends in performance management Approach to examining the syllabus Paper P5 builds on paper F5, Performance Management, and candidates are expected to have a thorough understanding of the paper F5 syllabus In addition, candidates will also be required to apply the principles and techniques covered in paper F2, Management Accounting Paper P5 has a link with Paper P3, Business Analysis, in the areas of strategic planning and control and performance measurement Examination structure The examination will be a three hour paper in two sections: Section A Section A will comprise two compulsory questions comprising between 50 and 70 marks in total Each question will comprise of between 25 and 40 marks Section B In section B candidates will be asked to answer two from three questions comprising of between 15 and 25 marks each Total 100 marks © Emile Woolf Publishing Limited vii Paper P5: Advanced performance management Study Guide This study guide provides more detailed guidance on the syllabus You should use this as the basis of your studies A STRATEGIC PLANNING AND CONTROL viii Introduction to strategic management accounting a) Explain the role of strategic performance management in strategic planning and control b) Discuss the role of corporate planning in clarifying corporate objectives, making strategic decisions and checking progress towards the objectives c) Compare planning and control between the strategic and operational levels within a business entity d) Assess the use of strategic management accounting in the context of multinational companies e) Discuss the scope for potential conflict between strategic business plans and short-term localised decisions f) Evaluate how SWOT analysis may assist in the performance management process g) Evaluate the methods of benchmarking performance Performance management and control of the organisation a) Evaluate the strengths and weaknesses of alternative budgeting models and compare such techniques as fixed and flexible, rolling, activity based, zero based and incremental b) Assess how budgeting may differ in not-for-profit organisations from profit-seeking organisations c) Evaluate the impact to an organisation of a move beyond budgeting Changes in business structure and management accounting a) Identify and discuss the particular information needs of organisations adopting a functional, divisional or network form and the implications for performance management b) Assess the influence of Business Process Re-engineering on systems development and improvements in organisational performance c) Discuss the concept of business integration and the linkage between people, operations, strategy and technology d) Identify and discuss the required changes in management accounting systems as a consequence of empowering staff to manage sectors of a business © Emile Woolf Publishing Limited Answers In the table below, ‘success rate’ is the percentage of customer enquiries by telephone that result in an actual examination or treatment, for which a fee is charged New business Enquiries Examinations/treatments Success rate Repeat business Enquiries Examinations/treatments Success rate Budget Actual 5,000 3,000 60% 9,000 4,000 44% 18,000 16,000 89% 15,000 14,000 93% The Centre has not been as successful as expected (budgeted) at converting enquiries from new customers into ‘sales’, but has been more successful than expected in converting calls from ‘repeat’ customers into sales (b) Quality Quality of service can be measured by complaints A useful measure might be the number of complaints as a percentage of examinations and treatments Complaints Examinations/treatments Percentage rate of complaints Budget 380 19,000 2% Actual 540 18,000 3% It would be useful to analyse complaints according to the type of animals treated in each case, but the data is not available The rate of complaints is higher than expected, suggesting that the quality of service is not up to the expected standard Resource utilisation The key resource at the Centre is probably the time of the full-time vets A useful measure of performance would therefore be average revenue per fulltime vet Ideally, income from the treatment of exotic animals should be excluded from revenue, but we not know how much income was earned from treating exotic animals Revenue Number of full-time vets Average revenue per vet Budget Actual £2,520,000 $2,820,000 10 10 $252,000 $282,000 Average revenue per vet was $30,000 (nearly 12%) above budget, although some of this increase must be due to the higher-than-budgeted quantity of treatments of exotic animals Flexibility A key aspect of flexibility is probably the ability of the Vet Centre to respond to requests to treat exotic animals A suitable measure of performance might © Emile Woolf Publishing Limited 613 Paper P5: Advanced performance management therefore be the percentage of revenue that comes from the treatment of exotic animals The budget might state the minimum required percentage Total number of treatments Treatments of exotic animals Budget 19,000 120 0.6% Actual 18,000 400 2.2% The Centre has possibly demonstrated its flexibility in its ability to treat more exotic animals than provided for in the budget However, this still remains a low proportion of the total annual work done by the Centre Innovation There is no data for measuring innovation in a satisfactory way, although the amount spent on training (per vet) might be used as an indication of ‘new learning’ and so an ability to innovate and provide new methods of treatment Spending on training Full-time vets Training costs per vet Budget Actual $75,000 $100,000 10 10 $7,500 $10,000 By spending more than budgeted on training, the Centre might demonstrate its ability to innovate and offer new treatments for animals (c) Standards According to Fitzgerald and Moon, the three key factors are: (1) Ownership Do the individuals responsible for achieving the performance standards ‘own’ them and accept them (Were the individuals involved in setting the standards, or were they imposed by senior management?) (2) Achievability Are these standards considered achievable? (3) Equity Are the standards equitable and ‘fair’ for every manager responsible for achieving performance targets? Rewards for achieving targets According to Fitzgerald and Moon, the three key factors are: (1) Clarity Is the connection between operational performance standards and the achievement of corporate goals clear and fully understood by all employees and managers? 614 (2) Motivation Are the rewards for achieving targets (both financial rewards and non-financial rewards) sufficient to motivate the managers responsible for achieving the targets? (3) Controllability Are there any problems with the allocation of the costs of shared services, and charging managers with costs over which they have no proper control? © Emile Woolf Publishing Limited Answers 49 Total quality (a) (b) The key aspects of Total Quality Management are: (1) continuous improvement in operations and systems, to improve quality (2) a policy of trying to achieve zero defects in production (getting things right the first time) (3) the use of statistical quality control to prevent defective items reaching customers (4) employee involvement in efforts to improve quality, for example by using quality circles (5) measures to improve production systems, such as minimising inventory levels, minimising the movement of materials, minimising setup times: all these take time and money but not add any value Quality-related costs can be grouped into four categories: (1) Prevention costs: these are costs incurred in preventing quality problems Important elements of prevention costs are costs of ensuring good product design and costs of training employees (2) Appraisal costs: these are the costs of testing for quality, such as inspection costs and quality control costs (3) Internal failure costs: these are the costs of faults and errors in processing, such as costs of waste, scrap and re-working rejected items (4) External failure costs: these are the costs of quality problems after the product (or service) has been delivered to the customer such as the cost of handling customer complaints, and the loss of future business/sales In the traditional approach, the aim should be to minimise the total of qualityrelated costs At this cost-minimising level of quality, some errors will occur The TQM approach is that all errors should be avoided and sub-standard work is unacceptable External failure costs are under-estimated, and it is worth spending money on prevention and appraisal costs to avoid internal and external failure costs, which will be higher (c) Key aspects of JIT management are: (1) Hold no inventory This requires just-in-time purchasing (to avoid raw materials inventory) and just-in-time production (to avoid finished goods inventory) Holding inventory is wasteful, and does not add value (2) Just-in-time purchasing calls for close collaboration with key suppliers (3) Just-in-time production involves trying to produce items exactly in time to meet customer needs for delivery: this calls for fast production times and avoiding breakdowns and any hold-ups or bottleneck in production (4) Production systems need to be flexible, to react to changes in demand from customers (5) Avoid over-production (which results in finished goods inventory) (6) Eliminate inefficiency and poor quality in production – eliminate waste, minimise the movement of materials (which adds no value), minimise waiting times, improve the layout of the factory floor (to minimise © Emile Woolf Publishing Limited 615 Paper P5: Advanced performance management movement of materials), reduce setup times (which not add value) and improve visibility in the work place (by using cards or other signalling systems) (d) 50 Activity based management uses activity based costing to analyse the cost of activities within an organisation It focuses on the cost of activities and the causes of these costs occuring (cost drivers) The aim of ABM should be to improve the value obtained from the activities, eliminate activities that not add value or reduce the costs of activities Poole Company (a) Projected data (i) Total production units Sales Returns: (5%/2.5% of sales) Final inspection (12.5%/7.5% of production) Total production units (ii) After TQM 5,000 263 5,263 750 6,000 5,000 128 5,128 416 5,541 Before TQM After TQM 48,000 2,000 50,000 2,632 52,632 44,328 1,137 45,465 1,406 46,871 Purchases of material X Material usage (6,000 or 5,541 × m /unit) Processing losses: (4%/2.5% of input) Storage losses: (5%/3% of receipts) (iii) Before TQM Gross machine hours Before TQM Machine usage (6,000 × 0.6 hrs/unit) Work on 3rd quality units (80% × 250 x 0.2) Idle time (20% of gross machine hours) 3,600 40 3,640 910 After TQM (5,541 × 0.5hrs/unit) 2,771 (80% × 125 × 0.2) 20 (12.5% of gross machine hours) 4,550 (b) 2,791 399 3,190 Income statements Before TQM $ $ Sales: 1st quality (5,000 × 100) 2nd quality (750 × 70) 3rd quality (200 × 50) Scrap (50 × 5) Costs: Fixed Prevention Sundry Inspection $ 500,000 52,500 10,000 250 562,750 20,000 60,000 25,000 105,000 616 © Emile Woolf Publishing Limited Answers Variable Inspection/storage (52,632 × 0.1) Material (52,632 × 4) Machine hours (4,550 × 40) Delivery costs (250 × 8) Product liability claims (3% × 500,000) 5,263 210,528 182,000 2,000 15,000 414,791 Total costs Profit 519,791 42,959 After TQM $ $ $ Sales: 1st quality (5,000 × 100) 2nd quality (416 × 70) 3rd quality (100 × 50) Scrap (25 × 5) 500,000 29,120 5,000 125 534,245 Costs: Fixed Prevention Sundry Inspection 60,000 54,000 15,000 129,000 Variable Inspection/storage (46,871 × 0.1) Material (46,871 × 4) Machine hours (3,190 × 40) Delivery costs (125 × 8) Product liability claims (1% × 500,000) 4,687 187,484 127,600 1,000 5,000 325,771 Total costs Profit 51 454,771 79,474 Target cost (a) Year Working capital Cost/residual value Sales revenue Advertising costs Fixed production (cash) costs Net cash flows, excluding variable costs Discount factor at 12% Present value $000 (400) (1,400) $000 $000 $000 (2,600) 1,400 (600) (200) 600 2,100 (400) (200) 1,500 1,750 (200) (200) 1,350 $000 400 600 700 (200) 1,500 1.000 (2,600) 0.893 535.8 0.797 1,195.5 0.712 961.2 0.636 954.0 (800) NPV of cash flows, excluding variable production costs = $1,046,500 (b) Year Let the maximum variable cost per unit (the target variable cost) be V Variable costs © Emile Woolf Publishing Limited $ 40,000V 60,000V 50,000V 20,000V Discount factor at 12% 0.893 0.797 0.712 0.636 PV of variable costs $ 35,720V 47,820V 35,600V 12,720V 131,860V 617 Paper P5: Advanced performance management The variable cost per unit that will give the project a DCF return of 12% = $1,046,500/131,860 = $7.94 The DCF return will be less than 12% if the variable cost exceeds $7.94 The current estimate of the variable cost per unit is $10 The cost gap is therefore $2.06 ($100– $7.94) 52 Cost and quality (1) Total Quality Management TQM seeks to reduce quality costs, where quality costs are categorised as: Prevention costs Appraisal costs (inspection costs, etcetera) Internal failure costs (costs of scrap, waste, re-working and so on) External failure costs (cost of lost customer goodwill, lost sales, returned goods from customers, warranty costs) The aim should be to improve quality and reduce total quality costs TQM also seeks continuous improvement: improvement can be achieved by reducing costs or improving quality (2) Activity based costing A system of ABC might identify activities related to achieving quality, such as quality planning and control, and a cost driver for those activities ABC could then be used to identify the costs related to the quality activity (3) Balanced scorecard In a balanced scorecard, cost targets could be an element for the financial perspective Quality targets could be an element in the balanced scorecard for the internal perspective or the customer perspective (4) Just in Time management JIT seeks reductions in costs through improvements in production performance The aim is to eliminate breakdowns and bottlenecks, so that items can be manufactured as quickly as possible (5) Value analysis Value analysis looks at activities and costs in the value chain, and attempts to identify ways of adding more value Value is added by providing extra quality (where the value of the extra quality is less than any additional cost) or by providing the same quality at less cost 618 © Emile Woolf Publishing Limited Paper P5 Advanced performance management i Index A B ABC information 395 ABC advantages 397 limitations 397 Balanced scorecard approach 332 traditional absorption costing 393 Balancing charge 482 290 Bargaining power of customers 316 Acceptance testing Activity based budgeting (ABB) 54, 58 Backflush accounting 405 trigger point 409 two trigger points 406 Bargaining power of suppliers 315 Activity based costing (ABC) 389 Balancing 482 Activity based management (ABM) 354 BCG matrix 317 Agency theory 160 Benchmarking Altman: Z score model 360 Benchmarking and quality management Analysing costs 453 benchmarking process 36 Analysis of costs 141 Beyond budgeting 70 36 272 Annuities 476 Beyond budgeting model 72 Annuity‐based depreciation 215 Beyond Budgeting Round Table (BBRT) 70 Ansoff’s growth vector analysis 323 Ansoff’s growth vector: gap analysis 325 Beyond budgeting: performance management 73 Anthony, R N 4 Boston Consulting Group (BCG) model 4 BPR exercise 85 Budget slack (budget bias) 62 levels of planning Argenti: ‘A score’ model 362 317 Argyris: four behavioural issues in budgeting Budgetary control 47 63 behavioural aspects 66 Aspirational budgets 61 management styles 68 Assessing risk in decision‐making 440 Budget‐constrained style 68 Asset replacement decisions 488 Budgeted income statement Budgeting bargaining process © Emile Woolf Publishing Limited 451 63 619 Paper P5: Advanced performance management behavioural aspects 60 Critical success factors (CSFs) 166 planning and co‐ordination 46 Crosby 276 uncertainly 462 Customer benchmarking Burns and Scapens 376 CVP analysis and decision‐making Burritt et al (2001) 379 Business Process Re‐engineering (BPR) 41 426 83 D C Capability Maturity Model (CMM) 292 Data tables 155 one‐way 155 two‐way 155 David Otley 69 Capacity utilisation 182, 183 Capital investment 314 DCF analysis: evaluation 491 Cash cows 318 DCF and inflation 484 Change agents 376 DCF and taxation 480 DCF: basic revision points 474 Decentralisation of authority 200 Changes in strategic plans 5 Chris Argyris (1953) 63 Classification of costs: controllability 142 Decision packages Closed systems 128 Decision‐making 432 Decision‐making: quantitative and qualitative factors 417 Deming, W Edwards 274 Depreciation 213 Compatibility of management accounting and management accounting information Competitive benchmarking 125 38, 272 56 Competitive rivalry 313 Differentiation Competitive strength: five forces 312 Dimensions of performance 341 Contingency theory: management accounting Direct labour budget 450 136 Direct materials usage budget 450 Contingent variables 137 9 Control system theory 128, 131 Discontinuance decisions (shutdown decisions) 419 Controllability 144, 156 Discount tables 475 Controllability: long‐term and short‐term 147 Diversification strategy Controllable profit and traceable profit 201 Diversionary activities 396 Core activities 396 Divisional autonomy 230 62 Corporate aspirations 9, 324 Divisional managers 229 Corporate failure prediction 358 Divisional performance 213 Corporate vision 164 Divisional performance evaluation 200 Cost centres 143 DMADV 180 Cost control 396 Dogs 318 Cost drivers 389, 396 Drivers of cost 396 Dual pricing 244 Cost leadership 9, 496 Cost leadership strategy 510 Cost reduction 396 Cost‐based pricing methods 499 Cost‐based transfer prices 231 Cost‐cutting 620 61 E Earnings per share growth 170 © Emile Woolf Publishing Limited Index EBITDA 170 Full cost plus pricing Economic and market trends 113 Functional benchmarking Functional budgets Economic Value Added (EVA) 218 Economies of scale 314 Economist’s demand curve 507 Economy 190 Effectiveness 190 Efficiency 190 Gaming EMA techniques 381 Gap analysis Empowerment of employees (BPR) 85 499 42 448 G 194 8 Global competition 19 Global organisations 20 Endogenous variables 143 Engineering‐based targets 173 Goal congruence 229 Enterprise resource planning systems 132 Going rate pricing 511 Environmental activity based accounting 381 Government regualtion 115 Environmental management accounting 378 Graph of the learning curve 468 Growth vector 326 Ethical issues 28 Existing competitors 313 Exogenous variables 143, 432 Expectancy theory of motivation 65 Expectational budgets 61 Expected future profits 171 H H score model 361 Expected values 105, 436 Hammer and Champy Advantages 107, 438 Hard accountability 168 Disadvantages 107, 438 Heterogeneity 339 High low method 453 High‐level corporate objectives 165 Historical profits 171 Historical‐based targets 173 External intermediate market 237 F Hopwood and Otley 83 69 Feedback control system 129 Human resource planning Feed‐forward 131 Financial measures of performance 172 Human resources and Human Resource Development (HRD) 296 Human resources management 296 Financial performance long‐run 172 private sector 169 short‐run 172 298 I Financial ratio analysis 358 Fiscal policy 114 Ideal transfer price 231 Fitzgerald and Moon 339 Imperfect competition 508 Five Forces model 312 Imputed interest 209 Fixed budget Flexible budgets Forecasting techniques Formal strategic planning Formula for the learning curve © Emile Woolf Publishing Limited 48 48, 49, 463 459 5 468 Incremental budgeting 54 Incremental decision packages 56 Individual aspirations 62 Inflation and long‐term projects 484 Inflation in DCF analysis 484 621 Paper P5: Advanced performance management Information overload 157 M Information external sources 150 Macro‐environment 108 internal sources 149 Make or buy decisions 422 Innovation strategy 324 Management accounting 14 Input‐output analysis 381 systems 96 Institutional theory 140 theories 136 Intangibility 339 trends Integration testing 289 Management levels Interest costs and taxation 480 Management reports Internal benchmarking 37, 272 100 120 153, 155 Margin of safety 426 Investment centres 143 Marginal cost plus pricing 502 ISO9000 279 marginal revenue 514 IT systems and competitive advantage 24 Market development strategy IT systems and management accounting 23 Market penetration prices IT systems for providers of services 24 Market penetration strategy J 9, 324 510 9, 323 Market position 496 Market segmentation 497 Market skimming prices 509 Market‐based approaches to pricing 507 Joint venture 330 Market‐based transfer prices 231 Juran 276 Mark‐up pricing 502 Master budget 448 K Kaplan: ‘relevance lost’ 97 Materiality 156 Maximax 104 Maximax decision rule 434 Key financial performance measures 371 Maximax: regret decision rules regret decision rules 434 Key performance indicators (KPIs) 166 Maximin 104 Maximin decision rule 435 Maximin: regret decision rules 434 Measure fixation 193 Measurements of quality 185 Mendelow’s matrix 327 L League tables 38 Learning curve 466 Learning curve model 466 Minimax Learning curve theory 466 Minimax regret decision rule Levels of management 16 Minimum pricing 505 Linear regression analysis 455 Misinterpretation 194 correlation 457 Misrepresentation 193 forecasting Methods of benchmarking 37 104 434, 435 458 Mission statement 163 Liquidity and gearing 171 Monetary policy 114 Loss leaders 510 Monte Carlo 445 Monte Carlo method 446 MR = MC 514 622 © Emile Woolf Publishing Limited Index Multinational companies (MNCs) Myopia 20 Penetration pricing 510 193 Perfect competition 507 Performance appraisal 302 Performance hierarchy 160 N Performance management 301 Performance management systems 11 14 Negotiated targets 173 Performance measurement Negotiated transfer prices 244 not‐for‐profit organisations 188 service industries 339 Net present value (NPV) method of investment appraisal 474 New entrants 314 Performance pyramid 336 New institutional theory 126 Performance rewards 195 Niche marketing 497 Performance through quality 186 Perishability 339 PESTEL analysis 108 Non‐accounting style 69 Performance prism 348 Non‐financial information for measuring performance 147 Non‐financial performance indicators (NFPIs) 182 Pricing 499 Non‐relevant costs 412 Predicting corporate failure 358 Non‐value added activities 356 Notional costs (or imputed costs) 413 Predicting corporate failure: qualitative measures 361 Notional interest 209 Preparing budgets NPV calculations 478 O Planning gap. 8 Porter: successful competitive strategy 9 46 Price discrimination (differential pricing) 510 Pricing decisions 499, 507 Pricing strategies 496 Primary performance objective 169 Principles of BPR 84 Open systems 128 Probabilities and expected values 50, 463 41, 272 Operational ABM 355 Process benchmarking Operational information 122 Process design Operational management 17 178 Process improvement 178 Operational NFPIs 183 Processing methods 153 Operational performance 167 Product benchmarking (reverse engineering) Operational planning 4 42 505 Product costing OPT 400 Product development strategy Optimised production technology (OPT) 399 Product differentiation 497 Product differentiation strategy 509 Opportunity cost pricing Organisational structure divisional 78 395 9, 324 Ossification 194 Product life cycle costing 369 Overhead costs 389 Product life cycle decline phase 508 368 growth phase 368 introduction phase 367 market penetration strategy 368 market skimming strategy 368 P Pay‐off matrix © Emile Woolf Publishing Limited 437 623 Paper P5: Advanced performance management Return on capital employed (ROCE) 170 Return on Investment (ROI) 203 maturity phase 368 strategic significance of the product life cycle 368 Return on investment (ROI) pricing 503 pricing 508 Reward management 306 Production budget 450 Reward review 302 Profit centres 143 Reward systems 193 Rewards as incentives 308 Profit‐conscious style 68 Profit‐maximising model 507 Risk Public sector portfolio matrix 383 Risk assessment 328 Purchases budget 451 Risk neutral decision maker 433 Pyramid: interpretation 337 102, 432 Risk preference 102, 433 Risk profiling 328 Risk‐adverse decision maker 433 Q Risk‐seeking decision maker 433 Qualitative performance 187 ROI incentive schemes 206 Quality 268 investment decisions 204 Quality assurance 271 measuring 203 Quality chains 278 Rolling budgets 48 Quality control 270 Rolling budgets (continuous budgets) 52 Quality failure 269 Quality features of software 283 Quality in software 25 S Quality management certification: ISO9000 282 Quality management systems and certification 279 Sensitivity analysis Quality standards 279 Setting financial targets 173 Quality triangle 284 Short‐term decisions 419 Question marks 318 Simulation 445 Simultaneity 339 Six Sigma 176 Sales budget R 450 442, 487 Six Sigma roles 180 Skimming prices 509 Recording and processing methods 153 Soft accountability 168 Recording data 153 Software Quality Assurance (SQA) 285 Recruitment and selection 301 Sources of information 149 Reducing balance method 482 Spreadsheets Relevance lost 96 51 Spreadsheets and ‘what if’ analysis 464 Relevant cost of materials 413 Staff appraisal 302 Relevant costs 412 Stakeholder contribution 352 Relevant costs of labour 416 Stakeholder groups Relevant revenue 412 Stakeholder satisfaction 350 Residual income (RI) 209 Standard deviation of the expected return 440 183 Stars 317 Statistical process control (SPC) 271 Resource utilisation Responsibility accounting 624 141, 143 26 © Emile Woolf Publishing Limited Index Straight‐line method 481 Timing of cash flows for taxation 480 Strategic ABM 355 Total Quality Management (TQM) 274 Strategic alliance 329 Traditional budgeting: weaknesses Strategic benchmarking 42 Traditional cost accounting Strategic management 16 Transfer pricing Strategic management accounting 2 70 356 228, 240, 242 Trend 156 Strategic NFPIs 182 Trends and seasonal variations 459 Strategic objectives 165 Tunnel vision 193 Two‐part transfer prices 244 Strategic planning 4 Strategic planning and control 4 Strategic planning process Sub‐optimisation 6 61, 193 U Substitute products 316 Sunk costs 413 Uncertainty Supply chains 329 Uncertainty in budgeting Support activities 396 SWOT analysis 32; strengths and weaknesses 32 threats and opportunities System testing 34 289 OT V life cycle model Tactical information 122 Tactical management 17 Value management 197 Value‐added activities 511 W 481 What if analysis Taxation cash flows in investment appraisal 480 Worst, most likely and best possible outcomes The planning gap 166 356 51 434 89 Theory of Constraints 399 403 Throughput accounting 93 4 Tax‐allowable depreciation (capital allowances) Throughput 88 190 Target pricing throughput accounting 287 Value for money (VFM) Value system The value chain 48, 462 V Value chain analysis Tactical planning 102, 432 401 399, 401 Z Z score model 359 ZBB and performance monitoring 58 inventory 402 ZBB system: framework 55 ratio 403 Zero based budgeting 54 Time series 459 Zero based budgeting (ZBB) 54 © Emile Woolf Publishing Limited 625 Paper P5: Advanced performance management 626 © Emile Woolf Publishing Limited Publishing P5 Study Text - Advanced Performance Management A well-written and focused text, which will prepare you for the examination and which does not contain unnecessary information • Comprehensive but concise coverage of the examination syllabus • A focus on key topic areas identified by specialist tutors • Simple English with clear and attractive layout • A large bank of practice questions which test knowledge and application for each chapter • A full index • The text is written by Emile Woolf International’s Publishing division (EWIP) The only publishing company focused purely on the ACCA examinations • EWIP’s highly experienced tutors / writers produce study materials for the professional examinations of the ACCA • EWIP’s books are reliable and up-to-date with a user-friendly style and focused on what students need to know to pass the ACCA examinations • EWIP’s association with the world renowned Emile Woolf Colleges means it has incorporated student feedback from around the world including China, Russia and the UK For Distance Learning Programmes please visit our website at: www.ewipublishing.com ACCA ... new threats to a company, or they can create new business opportunities Whenever changes occur, a company should be able to respond – taking measures to deal with new threats, or to exploit new... Sell existing products in new markets – Market development strategy Sell new products in existing markets – Product development strategy Sell new products in new markets – Diversification... Publishing Limited xiii Paper P5: Advanced performance management E a) Explore the meaning and scope of reward systems b) Discuss and evaluate different methods of reward practices c) Explore the