ACCA p5 EW 2011

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.    You must not circulate this book in any other binding or cover and you must impose  the same condition on any acquirer.      Notice  Emile Woolf Publishing Limited has made every effort to ensure that at the time of  writing the contents of this study text are accurate, but neither Emile Woolf Publishing  Limited nor its directors or employees shall be under any liability whatsoever for any  inaccurate or misleading information this work could contain.      British Library Cataloguing in Publications Data  A catalogue record for this book is available from the British Library.      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