ACCA 2016 BPP PASSCARD p5

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ACCA Passcards
Paper P5
Advanced Performance
Management
Passcards for exams from
1 September 2015 – 31 August 2016

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Professional Paper P5
Advanced Performance Management


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First edition 2007, Ninth edition Apr il 2015
ISBN 9781 4727 2709 1
e ISBN 9781 4727 2774 9
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the
British Library
Published by
BPP Learning Media Ltd
BPP House, Aldine Place
142-144 Uxbridge Road
London W12 8AA
www.bpp.com/learningmedia

Printed in the UK by
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Your learning materials, published by BPP Learning
Media Ltd, are printed on paper obtained from traceable
sustainable sources.

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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 or otherwise, without the prior
written permission of BPP Learning Media.
©
BPP Learning Media Ltd
2015


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Preface

Contents

Welcome to BPP Learning Media's ACCA Passcards for Professional Paper P5 Advanced Performance
Management.
They focus on your exam and save you time.
They incorporate diagrams to kick start your memory.
They follow the overall structure of the BPP Learning Media's Study Texts, but BPP Learning Media's
ACCA Passcards are not just a condensed book. Each card has been separately designed for clear
presentation. Topics are self contained and can be g rasped visually.
ACCA Passcards are still just the right size for pockets, briefcases and bags.
Run through the Passcards as often as you can during your final revision period. The day before the exam, try
to go through the Passcards again! You will then be well on your way to passing your exams.

Good luck!

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Preface

1
2
3
4
5
6
7
8
9

Introduction to strategic management
accounting
Performance management and control of
the organisation
Business structure, IT developments and

other environmental and ethical issues
Changing business environment and
external factors
Performance management information
systems
Management information, recording and
processing and management reports
Performance hierarchy
Scope of strategic performance measures
in the private sector
Divisional performance and transfer
pricing issues

Page
1
17

10a
10b
11

25
41
51
63
71
81
91

12

13
14
15
16

Contents

Strategic performance measures
in not-for-profit organisations
Non-financial performance indicators
The role of quality in management
information and performance
measurement systems
Performance measurement: strategy,
reward and behaviour
Alternative views of performance
measurement and management
Strategic performance issues in complex
business structures
Predicting and preventing corporate
failure
Current developments, issues and trends

Page
101
107

111
127
141

151
155
163


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Page 1

1: Introduction to strategic management
accounting
Topic List

This chapter introduces strategic management accounting
and how it fits into the planning and control process of an
organisation.

Planning, control, decision-making and
management information

The chapter also explains how organisations set strategic
plans and control their outcomes.

Corporate planning
Planning and control: strategic and
operational

Multinational aspects
SWOT analysis
Benchmarking

However, it is important to remember that P5 is not pr imarily
a business strategy paper – its main focus is how
organisations can evaluate and improve their performance.
Benchmarking could provide a useful way of comparing
processes or performance between business units or
organisations, with a view to improving them in line with
best practice.


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Planning, control, decision-making
and management information

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Corporate
planning

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Planning and control:
strategic and operational

Strategic planning
The process of deciding on the objectives of the
organisation, on changes to these objectives, on the
resources used to attain them, and on the policies
that are to govern the acquisition, use and disposal
of those resources.

Strategic decisions
Strategic decisions are long-term decisions,
characterised by wide scope, wide impact, relative
uncertainty and complexity.
Most strategic decisions are unique, so the
information needed to support them is likely to be
ad-hoc and specially tailored to the decision.

Multinational
aspects

SWOT
analysis

Benchmarking

Characteristics of strategic information
Long term and wide scope
Generally formulated in writing
Widely circulated
Doesn't trigger direct action, but a series of
more detailed (tactical, operational) plans
Includes selection of products, purchase of noncurrent assets, required levels of company profit

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Management control
The process by which managers ensure that
resources are obtained and used effectively and
efficiently in the accomplishment of the organisation's
objectives. It is sometimes called tactics or tactical
planning.

Management accounting information for
strategic planning and decision making
Incorporates forecasts/estimates/risk and
uncertainty analysis
Has an external orientation
Forward looking and outward looking
Helps to ensure goal congruence

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Characteristics of management accounting
information
Short-term and non-strategic

Management control planning activities include
preparing annual sales budget
Management control activities include ensuring budget
targets are achieved
Carried out in a series of routine and regular planning
and comparison procedures
Management control information covers the whole
organisation, is routinely collected/disseminated, is
often quantitative and commonly expressed in money
terms:
– Cash flow forecasts
– Variance analysis reports
– Staffing levels
Source of information likely to be endogenous (from
within the organisation)

1: Introduction to strategic management accounting


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Planning, control, decision-making
and management information

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Corporate
planning

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Planning and control:
strategic and operational

Multinational
aspects

SWOT
analysis

Benchmarking

Strategic planning and management control compared
Example
The decision to launch a new brand of frozen foods is a strategic plan, but the choice of ingredients for the
meals is a management control decision.
Long-term strategic plans can conflict with the shor ter-term objectives of management control.
Performance measures/control measures do not take strategic direction into account
Strategic imperatives might not be properly communicated to middle management
Strategic planning information might be difficult to measure


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Performance management

Performance management systems

Activity designed to improve an
organisation's performance and ensure
that its goals are being met

Plans, with set guidelines and targets, to help
organisations measure how efficiently goals are being
met, and to identify areas where performance can be
improved

Organisation has to establish its goals and
objectives before it can assess whether they
are being met
Once performance targets have been set, an
organisation can measure whether its goals
and targets are being achieved

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Often linked to employee reward programmes
so employees are rewarded for helping an
organisation reach its goals
Performance measurement is an important
control in an organisation.

1: Introduction to strategic management accounting


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Planning, control, decision-making
and management information

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Corporate
planning

Operational control/planning
The process of ensuring that specific
tasks are carried out effectively and
efficiently.

Management control
v operational control
Operational control decisions are
more narrowly focused, carried out
within a shorter time frame and taken
by managers less senior in the
organisation.
Operational control focuses on
individual tasks whereas
management control is concerned

with the sum of all tasks.

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Planning and control:
strategic and operational

Example
Strategic plan
Senior management decide
sales should increase by 5% pa
for at least five years.
Management control decision
Sales quotas are assigned to
each sales territory.
Operational control decision
Managers of sales territories
specify weekly targets for each
sales representative.

Multinational
aspects

SWOT
analysis

Benchmarking

Characteristics of operational
control

Short-term and non-strategic
Occurs in all aspects of an
organisation's activities and
needed for day to day
implementation of plans
Often carried out at short
notice
Information likely to have an
endogenous source, often
from detailed transaction data,
eg customer orders and cash
receipts


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Anthony hierarchy

Performance management systems
should have clear links between
performance measures at the different
hierarchical levels of the organisation
Strategic planning

Managment control

Means all departments and divisions will
be working towards the same ultimate
goal
Illustrated by performance pyramid (see
Chapter 13)

Operational control

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1: Introduction to strategic management accounting


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and management information

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Corporate
planning

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Planning and control:

strategic and operational

Overall strategic
stance

Multinational
aspects

and/or
MISSION

SWOT
analysis

Benchmarking

Business's
underlying values

Why the business exists at all
What the business is

Strategic
analysis

GOALS
The relevance of the mission to
different stakeholders

Often the same

Terms used interchangeably

OBJECTIVES
How the mission can be achieved
Desirable outcomes of corporate
activity

ENVIRONMENTAL ANALYSIS

CORPORATE APPRAISAL

POSITION AUDIT

eg PEST factors, competitive forces,
turbulence

eg Strengths, Weaknesses,
Opportunities, Threats,
Gap analysis

Company's internal resources and
capabilities: current performance,
comparatives


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Strategic
choice

Strategic
implementation

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CORPORATE STRATEGIC CHOICE

1

Options generation

2

Options evaluation

3

Choice

STRATEGY IMPLEMENTATION

REVIEW & CONTROL

eg Marketing strategies, production
strategies

Assess actual performance in the
light of plans etc

TACTICS
Page 9

ACTUAL PERFORMANCE

1: Introduction to strategic management accounting


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Corporate
planning

Page 10

Planning and control:
strategic and operational

Multinational
aspects

SWOT
analysis

Benchmarking

Levels of strategy
Corporate
Strategy

Business level
Strategy

Operational/functional
Strategies

Covers business as a whole
Issues such as: – diversifying or restricting activities
– acquisitions or major capital projects
– survival or growth
How an organisation approaches a par ticular market
Choice of generic strategies: – cost leadership
– differentiation
– focus
Involves decisions made at operational level
eg product pricing; personnel and recruitment
Operational strategies are crucial in implementing
corporate and business level strategies successfully

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Planning, control, decision-making
and management information

Linking strategy and
operations
The achievement of long-term
goals will require strategic
planning which is linked to shortterm operational planning ... If
there is no link between strategic
and operational planning, the
result is likely to be unrealistic
plans, inconsistent goals, poor
communication and
inadequate performance
measurement.

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Corporate
planning

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Planning and control:

strategic and operational

Multinational
aspects

SWOT
analysis

Benchmarking

Strategic planning and control versus operational planning and control
Strategic

Operational

'Broad brush' targets
Whole organisation
External input
External focus
Future orientated, feedforward
control
Potential for double loop
feedback (ie opportunity to
change the plan)

Detailed
Activities of department
Mainly internal information
Internal focus, on actual procedures
More concerned with monitoring

current performance against plan
Mainly single loop feedback
(performance must change, not the
plan)

Long term

Short term
1: Introduction to strategic management accounting


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Planning, control, decision-making
and management information

Strategic control
The key to strategic control is
ensuring that the right things
get measured.
False alarms
motivate managers to
improve areas where there
are few benefits to the
organisation
Gaps are important areas
that are neglected (eg
customer satisfaction)

Different measures apply
to different industries

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Corporate
planning

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Planning and control:
strategic and operational

To encourage the measurement of the
right things, organisations can institute
formal or informal systems of strategic
control. Formal systems require the
identification of milestones of
performance (strategic objectives).
Influences on strategic
control systems
Time-lag between control
measures and financial results
Linkages with other businesses in
a group
Risks a business faces
Sources of competitive advantage

Multinational
aspects

SWOT
analysis

Benchmarking

Desirable features of strategic
performance measures
Focus on what matters in the
long term
Identify and communicate
drivers of success
Support organisational learning
Provide a basis for reward
Measurable
Meaningful
Acceptable
Described by strategy and
relevant to it
Consistently measured
Re-evaluated regularly


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Corporate
planning

Page 13

Planning and control:
strategic and operational

Multinational
aspects

SWOT
analysis

Benchmarking

Potential issues in managing foreign subsidiaries
Planning: is strategic planning co-ordinated by corporate centre or at national level?
Control: is control centralised or do foreign subsidiaries have autonomy?

Performance measurement
Problems of performance measurement

Establishing realistic standards
Determining controllable cash flows
Currency conversion
Bases of comparison (like for like?)
Examples of problems when setting objectives

Exchange rate fluctuations
Cost structure
Transfer prices
Government policy
Level of domestic competition
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Risk
Accounting policies
Workforce
Life cycle

Differences between domestic and international
businesses

Cultural factors (eg international has
fragmented, diverse markets)
Economic factors (eg international has
multiple (unstable?) environments)
Competitive factors (eg little information
about many more competitors in
international business)
Political factors (often significant in
international businesses)
Technological factors (eg training problems
in international businesses)
1: Introduction to strategic management accounting

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Corporate
planning

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Planning and control:
strategic and operational

SWOT analysis

SWOT and performance management
Identify weaknesses which need to be
addressed
Identify key aspects of performance
(CSFs) which need to be measured
(through KPIs)
Help set targets (eg to take advantage of
opportunities)
Determine information needs (eg to
report on KPIs)

SWOT
analysis

Benchmarking

How SWOT can guide strategy formulation
Strengths
Internal to
the company

Exist
independently
of the
company

1

Matching

A critical appraisal of the strengths and
weaknesses, opportunities and threats in
relation to the internal and external
environmental factors affecting an
organisation, in order to establish its condition
prior to the preparation of a long-term plan.

Multinational
aspects

Weaknesses

Conversion
Conversion
Opportunities

Match strengths
with market
opportunities.

2

Threats

Convert weaknesses into
strengths and threats into
opportunities.


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Planning, control, decision-making
and management information

Benchmarking
The establishment,
through data
collection, of targets
and comparators,

which will allow
relative levels of
performance (and
particularly areas of
underperformance)
to be identified. By
adopting identified
best practices, it is
hoped that
performance will
improve.
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Corporate
planning

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Planning and control:
strategic and operational

Internal

Types of
benc hmarking

Functional
Competitor

Non-competitor

Advantages
Provides basis for establishing
standards of performance
Sets targets that are
achievable
Can be a spur to innovation

Multinational
aspects

SWOT
analysis

Benchmarking

Comparing one operating unit or function with
another in the same industry
Comparing an internal function with the best external
practitioners, regardless of industry
Comparing performance to direct competitors. But
will competitors be willing to share commercially
sensitive information?
Particularly relevant for not-for-profit organisations.
Compare against organisations in the same industr y
although they are not competitors

Disadvantages
Implies one best way of doing things

Primarily a catching-up exercise
Potential negative side effects of 'what gets
measured gets done'
Impact on motivation for staff whose
functions appear to be performing poorly
1: Introduction to strategic management accounting


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Corporate
planning

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Planning and control:
strategic and operational

Multinational
aspects

SWOT
analysis

Benchmarking

Stages of a benchmarking exercise
1

Set objectives of the benchmarking exercise and determine areas to benchmark

2

Identify key performance indicators or performance drivers to measure during the benchmarking
exercise

3

Select comparators: departments or organisations to compare performance against

4

Measure own and others' performance, using the measures identified in Stage 2

5

Compare performance, and identify gaps between own performance and those of the depar tments or
organisations being compared against

6

Design and implement an improvement programme to close the performance gaps

7

Monitor improvements


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2: Performance management and control
of the organisation
Topic List
Budgeting
Not-for-profit organisations
'Beyond budgeting'

Budgets are short-term plans which provide short-term
targets within the framework of the longer-term strategic
plans (covered in Chapter 1). Some of the contents of
this chapter are brought forward from earlier studies and
will provide background to exam problems on higher-level
budgeting issues.
Not-for-profit organisations and their specific budget
issues are considered, before we look at the concept of
'beyond budgeting' which tries to address some of the
problems faced in traditional budgeting.

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Budgeting

Uses of budgeting
Ensures organisation's objectives
are achieved
Compels planning
Communicates ideas and plans
Coordinates activities
Allocates resources
Authorises expenditure
Provides a framework for
responsibility accounting
Establishes a system of control
Provides a means of performance
evaluation
Motivates employees to improve
performance

Not-for-profit
organisations

As a budget has different purposes, it might
mean different things to different people.
Forecast
Yardstick
Target
Means of allocating resources

Alternative budget systems
Incremental
Flexible
Zero based
Rolling
Activity based

'Beyond
budgeting'

Prior knowledge
You should know the detail
behind the following points.
Long-term plan
Limiting factor
Budget manual
Sales budget
Production capacity
Functional budgets
Discretionary costs
Consolidation and
coordination

Cash budget
Master budget


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Strengths and weaknesses
Incremental budging
Pros
Easy to
prepare
Can be
flexed to
actual
levels

Cons

Encourages
slack
Doesn't look
to improve
performance
Assumes

3E's in place

Pros

Responds to
changes in
environment
Reviews cost
behaviourclosely
Improves
efficiency of
resource allocation

Flexible budgeting
Pros
Identifies
spare
capacity

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Zero-based
budgeting

Cons
Prone to error if standards
incorrect
Irrelevant in a mainly fixed
cost environment

Cons
Time
consuming
Needs
training
Needs a
participative
approach

Rolling budget

Pros

Reduces uncertainty
in an unstable
environment
Most recent
plans used
Budgets always
several months
ahead

ABB

Pros
Identifies critical
success factors
Looks at activity in depth

Cons

Time
consuming
Not necessary
in a stable
environment
Managers
may not see
value of
continuous
updating

Cons
Time consuming
Difficult to identify
responsibility and
accountability for
activities

2: Performance management and control of the organisation


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Budgeting

Not-for-profit
organisations

'Beyond
budgeting'

Not-for-profit organisation
An organisation whose ... prime goal is not assessed by
Bois
economic measures.

Funding

Planning

Funding comes from government rather than users
and is a political decision. So no clear link
between providing more service and funding.

The political system affects planning. Changes in
priorities and funding can be imposed at will.

Poor performance can lead to higher levels of
funding

Limited control is offered over funding.

Budgeting in public sector

Characterised by incremental, short-term (one
year) bid budgets.