ACCA
Paper P5
Advanced performance
management (APM)
Essential text
British library cataloguinginpublication data
A catalogue record for this book is available from the British Library.
Published by:
Kaplan Publishing UK
Unit 2 The Business Centre
Molly Millars Lane
Wokingham
Berkshire
RG41 2QZ
ISBN 978 1 84710 552 3
© Kaplan Financial Limited, 2008
Printed and bound in Great Britain.
Acknowledgements
We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of
Management Accountants for permission to reproduce past examination questions. The answers
have been prepared by Kaplan Publishing.
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 Kaplan Publishing.
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Contents
Page
Chapter 1
Introduction to strategic management accounting
Chapter 2
Approaches to budgets
Chapter 3
Changes in business structure and management 77
accounting
Chapter 4
The impact of information technology
101
Chapter 5
Environmental influences
117
Chapter 6
Performance measurement systems and design 153
Chapter 7
Financial performance measures in the private
sector
183
Chapter 8
Divisional performance appraisal and transfer
pricing
207
Chapter 9
Performance management in notforprofit
organisations
251
Chapter 10
Nonfinancial performance indicators
277
Chapter 11
Current developments in performance
management
315
Chapter 12
Questions & Answers
361
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chapter
Intro
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chapter
1
Introduction to strategic
management accounting
Chapter learning objectives
Upon completion of this chapter you will be able to:
•
explain the role, for organisations in general, of strategic
management accounting in strategic planning and control
•
describe the role of corporate planning in:
– clarifying corporate objectives
–
making strategic decisions
–
checking progress towards the objectives
•
describe, for organisations in general, the purpose, content,
structure and potential problems of a mission statement
•
describe the ways in which high level corporate objectives are
developed for organisations in general
•
identify, for a given scenario or in general, strategic objectives
and describe how they may be incorporated into the business
plan and cascaded down the organisation
•
compare planning and control at the strategic and operational
levels within a business entity
•
explain how organisational survival in the longterm necessitates
consideration of life cycle issues
•
explain the main aspects of strategic management accounting in
the context of multinational companies
•
explain, for organisations in general, the scope for potential
conflict between strategic business plans and shortterm
localised decisions
•
explain, in general and for a given scenario, how SWOT analysis
may assist in the performance management process
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Introduction to strategic management accounting
•
describe, in outline, the benefits and difficulties of benchmarking
performance with best practice organisations
•
evaluate how risk and uncertainty play an especially important
role in longterm strategic planning and decision making that rely
upon forecasts of exogenous variables
•
assess the impact government policy can have on an
organisation in general and its strategy formulation and
implementation.
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1 The role of strategic management accounting
The strategic planning process was examined in detail in the P3 paper. In
P5 the focus is more on the performance management aspects of strategic
planning and the role of strategic management accounting.
Strategic analysis, choice and implementation
Johnson and Scholes’ 3stage model of strategic planning is a useful
framework for seeing the ‘bigger picture’ of performance management and
strategic management accounting issues.
Within this, the role of critical success factors (CSFs) is central to
performance management:
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Introduction to strategic management accounting
Defining strategic management accounting
Historically the role of the management accountant was often limited to the
implementation stage summarised above with a focus on operational
budgeting, target setting and control. In many respects this is the emphasis
of the F5 paper.
The term ‘strategic management accounting’ has come into common use
more recently. It refers to the full range of management accounting practices
used to provide a guide to the strategic direction of an organisation.
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•
Strategic management accounting gives a financial dimension to
strategic management and control, providing information on the
financial aspects of strategic plans and planning financial aspects of
their implementation.
•
It supports managers throughout the organisation in the task of
managing the organisation in the interests of all its stakeholders.
•
Strategic management accounting places an emphasis on using
information from a wide variety of internal and external sources in order
to evaluate performance, appraise proposed projects and make
decisions.
•
It focuses on the external environment, such as suppliers, customers,
competitors and the economy in general as much as on the
organisation itself.
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•
Strategic management accounting monitors performance in line with
the organisation’s strategic objectives in both financial and non
financial terms.
Note that many of the tools and techniques studied in F5 (and some in F9)
are still examinable in P5, including the following:
•
•
•
•
costing methods, e.g. target costing, life cycle costing
•
•
•
budgeting, e.g. flexed budgets
limiting factor analysis
relevant costing
risk techniques, e.g. expected values, minimax regret, maximin,
maximax
forecasting techniquese, e.g. hilow, time series, learning curves
standard costing.
Illustration 1 – Defining strategic management accounting
Job descriptions
Aspects of strategic management accounting are being incorporated in
many management accounting roles. For example, job descriptions for
management accountants often include strategic activities such as:
•
•
•
•
•
providing information for strategic decisions
formulating business strategies
providing advice on how to improve business performance
providing analysis of competitor performance
liaising with functional managers to support the business planning
process.
Test your understanding 1
A company selling wooden garden furniture in northern Europe is facing
a number of problems:
•
•
demand is seasonal
it is sometimes difficult to forecast demand as it varies with the
weather – more is sold in hot summers than when it is cooler or
wetter
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Introduction to strategic management accounting
•
the market is becoming more fashionconscious with shorter
product life cycles
•
there is a growth in the use of nontraditional materials such as
plastics.
As a result the company finds itself with high inventory levels of some
items of furniture which are not selling, and is unable to meet demand for
others. A decision is needed on the future strategic direction and
possible options which have been identified are to:
•
use largely temporary staff to manufacture products on a seasonal
basis in response to fluctuations in demand – however it has been
identified that this could result in quality problems
•
automate production to enable seasonal production with minimum
labourrelated problems
•
concentrate on producing premium products which are smaller
volume but highpriced and less dependent on fashion.
How could strategic management accounting help with the
decision making?
The role of corporate planning
The term ‘corporate planning’ refers to the formal process which facilitates
the strategic planning framework described above.
Illustration 2 – The role of corporate planning
The description of the role of a corporate planning department of a
hospital might read:
The corporate planning department supports senior management in
making decisions to ensure corporate objectives are met. Its main roles
are:
•
to manage the business planning process through which the
objectives of individual clinical departments and support services
are agreed
•
•
to compile and publish the annual plan for the hospital
•
•
to monitor performance compared with other similar organisations
to monitor performance against the targets set in the business
planning process
to undertake specific strategic projects.
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Clarifying corporate objectives
The strategic analysis stage will generate a range of objectives, typically
relating to:
•
•
•
•
•
•
•
•
maximisation of shareholder wealth (usually via maximising profit)
maximisation of sales (whilst earning an acceptable level of profit)
growth (in sales, asset value, number of employees etc.)
survival
research and development leadership
quality of service
contented workforce
respect for the environment.
These need to be clarified in two respects:
•
•
conflicts need to be resolved, e.g. profit versus environmental concerns
to facilitate implementation and control, objectives need to be
translated into SMART (specific, measurable, achievable, relevant and
time bound) targets.
Illustration 3 – Clarifying corporate objectives
Shareholder wealth
Resolving conflict is often portrayed as a simple prioritisation –
shareholder wealth creation should be the main objective. However, in
practice, firms often view other objectives (e.g. employee welfare) as
constraints within which the firm tries to generate shareholder value.
Illustration 4 – Clarifying corporate objectives
A statement such as ‘maximise profits’ would be of little use in corporate
planning terms. The following would be far more helpful:
•
•
•
achieve a growth in EPS of 5% pa over the coming tenyear period
obtain a turnover of $10 million within six years
launch at least two new products per year.
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Introduction to strategic management accounting
Gap analysis
Gap analysis is useful for showing how (whether) strategies will enable the
firm to meet targets for key objectives (or at least those that can be easily
quantified).
For example, closing a profit gap:
In the diagram showing the gap:
T = target
F0 = initial forecast
F1 = forecast adjusted for improvements in internal efficiency
F2 = forecast adjusted for productmarket expansion.
Analysis of the gap reveals that in this instance the objectives cannot be
achieved beyond Year 4 without diversification. This gap is significant if the
lead time for diversifying exceeds 4 years.
The existence of the gap may or may not lead to the revision of objectives.
(There are after all two ways of closing a gap – revising objectives or taking
action to improve performance expectations.)
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Making strategic decisions
Strategic options can be evaluated using the suitability, feasibility,
acceptability framework.
•
Suitability – whether the options are adequate responses to the firm's
assessment of its strategic position.
•
Acceptability – considers whether the options meet and are consistent
with the firm's objectives and are acceptable to the stakeholders.
•
Feasibility – assesses whether the organisation has the resources it
needs to carry out the strategy.
The strategic management accountant will contribute to the acceptability
and feasibility aspects in particular:
Aspect
Key concerns
Acceptability Returns to
stakeholders
Feasibility
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Risk
Resources
Typical financial analysis
•
Cash flow forecasts to ensure dividend
growth requirements can be met
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•
•
•
•
•
•
NPV analysis
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•
•
Sensitivity
•
Expected values
•
Cash flow forecast to identify funding
needs
•
•
•
•
Budgeting resource requirements
ROCE
Valuation of real options
Shareholder value analysis
Economic value added
Costbenefit analysis
Ratio analysis (e.g. dividend yield,
growth)
Breakeven
Ratio analysis (e.g. gearing, dividend
cover)
Ability to raise finance needed
Working capital implications
Foreign exchange implications
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Introduction to strategic management accounting
Checking progress towards objectives
It is not enough merely to make plans and implement them.
•
The results of the plans have to be compared against stated objectives
to assess the firm’s performance.
•
•
Action can then be taken to remedy any shortfalls in performance.
•
Corporate planning is not a onceineverytenyears activity, but an on
going process which must react quickly to the changing circumstances
of the firm.
This is an essential activity as it highlights any weakness in the firm’s
corporate plan or its execution. Plans must be continually reviewed
because as the environment changes so plans and objectives will need
revision.
Illustration 5 – The role of corporate planning
Diagram of planning activities
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chapter 1
Test your understanding 2
Why do you think managers need to understand corporate
planning?
2 The performance hierarchy
Mission
The mission statement is a statement in writing that describes the basic
purpose of an organisation, that is, what it is trying to accomplish.
There are a number of fundamental questions that an organisation will need
to address in its search for purpose (Drucker). These are:
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Introduction to strategic management accounting
Mission statements will have some or all of the following characteristics:
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•
Usually a brief statement of no more than a page in length.
•
•
Used to formulate goal statements, objectives and shortterm targets.
Very general statement of entity culture.
States the aims (or purposes) of the organisation.
States the business areas in which the organisation intends to operate.
Openended (not stated in quantifiable terms).
Does not include commercial terms, such as profit.
Not timeassigned.
Forms a basis of communication to the people inside the organisation
and to people outside the organisation.
Guides the direction of the entity’s strategy and as such is part of
management information.
Potential Problems
Mission statements may:
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Not represent the actual values of the organisation
Be vague
be ignored
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chapter 1
Illustration 6 – Mission
Example: ICI plc
Mission statement
‘The chemical industry is a major force for the improvement of the quality
of life across the world. ICI aims to be the world’s leading chemical
company, serving customers internationally through the innovative and
responsible application of chemistry and related sciences. Through
achievement of our aim, we will enhance the wealth and wellbeing of our
shareholders, our employees, our customers and the communities which
we serve and in which we operate.’
The relevance of a mission for strategic planning
•
A statement of corporate mission is inextricably linked with the
organisation’s goals and objectives, although it is important to draw a
distinction between these three aspects of the strategic planning
process.
•
Whilst the organisational objectives comprise the specific targets of the
company and the goals comprise its broad aims, the mission
encapsulates the reason that the entity exists in terms of the service and
utility provided to meet specific needs of society.
•
Before setting about the preparation of a strategic plan the
management should consider the mission of an organisation. Many
commentators have suggested that consideration and determination of
the mission and its articulation into a statement of corporate mission
constitutes the first stage in the strategic planning process and that
therefore it is central to the whole planning process.
•
Johnson and Scholes have suggested that ‘the mission of an
organisation is the most generalised type of objective and can be
thought of as an expression of its raison d’être’. On the other hand,
some commentators believe that the mission statement is the end
product of the process of strategic planning and this illustrates the
confusion which often exists between the organisation’s mission and its
goals and objectives.
•
Because of the vague nature of some mission statements, it can be
difficult to assess performance by reference back to the mission.
Instead detailed tactical and operational targets are more useful – see
below.
The performance hierarchy
To enable an organisation to fulfil its mission, the mission must be
translated into
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Introduction to strategic management accounting
•
•
•
Strategic plans and objectives
Tactical plans and objectives
Detailed operational plans and targets.
Each level should be consistent with the one above.
This process will involve moving from general broad aims to more specific
objectives and ultimately to detailed targets.
Illustration 7 – The performance heirarchy
This is a hypothetical example for a privatesector company.
Mission statement (extract)
.... and we will enhance the wealth and wellbeing of our shareholders,
Goal statements
(1) We will provide our shareholders with a return on their investment
which is commensurate with their expectations.
(2) We will protect the security of our shareholders’ investments.
(3) We will endeavour to increase the capital value of our shareholders’
investment.
Objectives
Goal 1: Shareholders’ return on investment
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To realise a return on investment of 25% during the next x years.
To achieve a growth in sales turnover of x % in y years.
To maintain net profit margins.
That the return to shareholders should grow in line with the growth in
net profit. .....
Goal 2: Security of shareholders’ investments
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•
To maintain the quality of existing assets by investing not less than
8% of sales annually for the next x years, and to make new
investment at rates of return applicable to the risk involved to meet
the company’s targeted return on capital employed.
•
To ensure that loans should not exceed 45% of capital employed
unless required for exceptional circumstances of a shortterm
nature.
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To maintain a match between foreign currency assets and liabilities.
.....
Goal 3: Growth in shareholders’ investments
•
To achieve a priceearnings multiple of x by y date. .....
It is the achievement of the subsidiary objectives that forms the basis for
performance evaluation.
3 Planning and control
Characteristics of planning and control
Planning and control are often portrayed as distinct processes.
•
Planning is concerned with identifying where the organisation wants to
be (usually expressed in terms of objectives) and how it will get there
(strategies).
•
Control activities are concerned with monitoring achievement of
objectives and suggesting corrective action, which may include
modification of objectives. Management control also ensures that
resources are obtained and used effectively and efficiently.
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Introduction to strategic management accounting
Planning
Strategic planning is characterised by the following:
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•
•
•
longterm
•
will be affected by the expectations and values of all stakeholders, not
just shareholders
•
its complexity distinguishes strategic management from other aspects
of management in an organisation. There are several reasons for this
including:
– it involves a high degree of uncertainty
considers the whole organisation as well as individual SBUs
matches the activities of an organisation to its external environment
matches the activities of an organisation to its resource capability and
specifies future resource requirements
–
it is likely to require an integrated approach to management
–
it may involve major change in the organisation.
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chapter 1
Quite apart from strategic planning, the management of an organisation has
to undertake a regular series of decisions on matters that are purely
operational and shortterm in character. Such decisions:
•
•
•
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are usually based on a given set of assets and resources
•
use standard management accounting techniques such as costvolume
profit analysis, limiting factor analysis and linear programming.
do not usually involve the scope of an organisation’s activities
rarely involve major change in the organisation
are unlikely to involve major elements of uncertainty and the techniques
used to help make such decisions often seek to minimise the impact of
any uncertainty.
Illustration 8 – Planning
Strategic planning is usually, but not always, concerned with the long
term. For example, a company specialising in production and sale of
tobacco products may forecast a declining market for these products
and may therefore decide to change its objectives to allow a progressive
move into the leisure industry, which it considers to be expanding.
Strategic decisions involve the formulation of the new objectives and
deciding on the manner in which these new objectives will be achieved,
i.e. by acquisition of companies which are already established in the
industry (external development), or by starting new businesses itself
(‘organic growth’).
Although strategic planning is concerned with longterm goals it often
involves shortterm action. For example, the acquisition of a new
company in the leisure industry is made in order to fulfil a longterm
objective but it requires shortterm planning and control action, all of
which are classified under the heading of strategic planning.
Control
Control can be strategic or operational.
•
Strategic control is concerned with monitoring the implementation of the
organisation’s strategy to ascertain how well the strategic objectives
are being achieved, e.g. managing shareholder expectations.
•
Operational control is concerned with the management of existing
assets and resources, given the existing strategic direction.
Operational control will not lead to changes in that strategy.
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