ACCA paper f5 performance management
Bạn đang xem bản rút gọn của tài liệu. Xem và tải ngay bản đầy đủ của tài liệu tại đây (1.23 MB, 39 trang )
Notes
ACCA Paper F5
Performance Management
For exams in 2010
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Contents
Page | 2
About ExPress Notes
3
1.
Specialist Cost & Management Accounting
Techniques
7
2.
Decision Making – Linear Programming
10
3.
Pricing Decisions
12
4.
Make-or-buy and other short-term decisions
16
5.
Risk and Uncertainty in Decision Making
19
6.
Budgeting – an Introduction
22
7.
Budgeting and Standard Costing #1
26
8.
Budgeting and Standard Costing #2
32
9.
Performance Measurement & Control
35
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
START
About ExPress Notes
We are very pleased that you have downloaded a copy of our ExPress notes for this paper.
We expect that you are keen to get on with the job in hand, so we will keep the introduction
brief.
First, we would like to draw your attention to the terms and conditions of usage. It’s a
condition of printing these notes that you agree to the terms and conditions of usage.
These are available to view at www.theexpgroup.com. Essentially, we want to help people
get through their exams. If you are a student for the ACCA exams and you are using these
notes for yourself only, you will have no problems complying with our fair use policy.
You will however need to get our written permission in advance if you want to use these
notes as part of a training programme that you are delivering.
WARNING! These notes are not designed to cover everything in the syllabus!
They are designed to help you assimilate and understand the most important areas for the
exam as quickly as possible. If you study from these notes only, you will not have covered
everything that is in the ACCA syllabus and study guide for this paper.
Components of an effective study system
On ExP classroom courses, we provide people with the following learning materials:
The ExPress notes for that paper
The ExP recommended course notes / essential text or the ExPedite classroom
course notes where we have published our own course notes for that paper
The ExP recommended exam kit for that paper.
In addition, we will recommend a study text / complete text from one of the ACCA
official publishers, but we do not necessarily give this as part of a classroom course,
as we think that it can sometimes slow people down and reduce the time that they
are able to spend practising past questions.
ExP classroom course students will also have access to various online support materials,
including:
The unique ExP & Me e-portal, which amongst other things allows “view again” of
the classroom course that was actually attended.
ExPand, our online learning tool and questions and answers database
Everybody in the World has free access to ACCA’s own database of past exam questions,
answers, syllabus, study guide and examiner’s commentaries on past sittings. This can be
Page | 3
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
an invaluable resource. You can find links to the most useful pages of the ACCA database
that are relevant to your study on ExPand at www.theexpgroup.com.
How to get the most from these ExPress notes
For people on a classroom course, this is how we recommend that you use the suite of
learning materials that we provide. This depends where you are in terms of your exam
preparation for each paper.
Your stage in
study for
each paper
These ExPress
notes
ExP
recommended
course notes, or
ExPedite notes
ExP
recommended
exam kit
ACCA online
past exams
Prior to
study, e.g.
deciding which
optional papers
to take
Skim through
the ExPress notes
to get a feel for
what’s in the
syllabus, the
“size” of the paper
and how much it
appeals to you.
Don’t use yet
Don’t use yet
Have a quick
look at the two
most recent real
ACCA exam
papers to get a
feel for
examiner’s style.
At the start of
the learning
phase
Work through
each chapter of
the ExPress notes
in detail before
you then work
through your
course notes.
Work through in
detail. Review
each chapter after
class at least once.
Nobody passes an
exam by what they
have studied – we
pass exams by
being efficient in
being able to prove
what we know. In
other words, you
need to have
effectively input the
knowledge and be
effective in the
output of what you
know. Exam
practice is key to
this.
Don’t use at
this stage.
Don’t try to feel
that you have to
understand
everything – just
get an idea for
what you are
about to study.
Don’t make any
annotations on
the ExPress notes
at this stage.
Page | 4
Make sure that you
understand each
area reasonably
well, but also make
sure that you can
recall key
definitions,
concepts,
approaches to exam
questions,
mnemonics, etc.
Try to do at least
one past exam
question on the
learning phase for
each major chapter.
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Page | 5
Your stage in
study for each
paper
These ExPress
notes
ExP
recommended
course notes, or
ExPedite notes
ExP
recommended
exam kit
ACCA online
past exams
Practice phase
Work through
the ExPress notes
again, this time
annotating to
explain bits that
you think are easy
and be brave
enough to cross
out the bits that
you are confident
you’ll remember
without reviewing
them.
Avoid reading
through your
notes again. Try
to focus on doing
past exam
questions first and
then go back to
your course notes/
ExPress notes if
there’s something
in an answer that
you don’t
understand.
This is your most
important tool
at this stage. You
should aim to
have worked
through and
understood at
least two or three
questions on each
major area of the
syllabus. You pass
real exams by
passing mock
exams. Don’t be
tempted to fall
into “passive”
revision at this
stage (e.g.
reading notes or
listening to CDs).
Passive revision
tends to be a
waste of time.
Download the
two most recent
real exam
questions and
answers.
The night
before the real
exam
Read through
the ExPress
notes in full.
Highlight the bits
that you think are
important but you
think you are most
likely to forget.
Unless there are
specific bits that
you feel you must
revise, avoid
looking at your
course notes. Give
up on any areas
that you still don’t
understand. It’s
too late now.
Don’t touch it!
Do a final review
of the two most
recent
examiner’s
reports for the
paper you will be
taking tomorrow.
At the door of
the exam room
before you go
in.
Read quickly
through the full
set of ExPress
notes, focusing on
areas you’ve
highlighted, key
workings,
approaches to
exam questions,
etc.
Avoid looking at
them in detail,
especially if the
notes are very big.
It will scare you.
Leave at home.
Leave at home.
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
Read through the
technical
articles written
by the examiner.
Read through the
two most recent
examiner’s
reports in detail.
Read through
some other older
ones. Try to see if
there are any
recurring
criticisms he or
she makes. You
must avoid these!
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Our ExPress notes fit into our portfolio of materials as follows:
Notes
Notes
Provide a base
understanding of
the most important
areas of the
syllabus only.
Provide a
comprehensive
coverage of the
syllabus and
accompany our
face to face
professional exam
courses
Notes
Provide detailed
coverage of
particular technical
areas and are used
on our Professional
Development and
Executive
Programmes.
To maximise your chances of success in the exam we recommend you visit
www.theexpgroup.com where you will be able to access additional free resources to help
you in your studies.
START
About The ExP Group
Born with a desire to be the leading supplier of business training services, the ExP Group
delivers courses through either one of its permanent centres or onsite at a variety of
locations around the world. Our clients range from multinational household corporate
names, through local companies to individuals furthering themselves through studying for
one of the various professional exams or professional development courses.
As well as courses for ACCA and other professional qualifications, our portfolio of expertise
covers all areas of financial training ranging from introductory financial awareness courses
for non-financial staff to high level corporate finance and banking courses for senior
executives.
Our expert team has worked with many different audiences around the world ranging from
graduate recruits through to senior board level positions.
Full details about us can be found at www.theexpgroup.com and for any specific enquiries
please contact us at
Page | 6
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Chapter 1
Specialist Cost & Management
Accounting Techniques
KEY KNOWLEDGE
Activity Based Costing (ABC)
ABC is a method that seeks to group overhead costs according to the activities causing
those costs. The activities giving rise to the costs are called “cost drivers”. By linking costs to
activities (cost drivers), it becomes possible to charge costs to the agents undertaking those
activities.
EXAMPLE
A factory clinic with total annual costs of $500,000 serves two Workshops A and B.
Workshop A has 200 employees and Workshop B has 300 employees.
Page | 7
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
A conventional way of apportioning the cost would be on the basis of employees:
Workshop A: (200/500) x 500,000 = 200,000
Workshop B: (300/500) x 500,000 = 300,000
500,000
An ABC approach might look at the number of visits to the clinic by the employees of A and
B.
Workshop A: 150 visits p.a.
Workshop B: 70 visits p.a.
In this case, the apportionment could be:
Workshop A: (150/220) x 500,000 = 340,909
Workshop B: ( 70/220) x 500,000 = 159,091
500,000
The different levels of usage may reflect different degrees of occupational hazard present in
the two workshops.
ABC advantages: provides a more precise way to determine costs per unit of output,
especially since not all overhead costs are driven by production volumes.
Budgetary planning, pricing decisions and managing performance are all facilitated by ABC.
ABC disadvantages: it can be complex and costly to implement. It is not a “plug-in-and-go”
system! It is therefore imperative that management carefully weigh the costs against the
(expected) benefits from ABC before deciding to implement it.
KEY KNOWLEDGE
Target costing
This is a market-oriented approach to costing which starts by identifying the likely price that
a product can fetch in the market, deducts the profit that the product is expected to earn,
and arrives at the maximum (target) cost of manufacturing the product.
Such a method usually requires successive iterations in order to close a “cost gap”, i.e.
where the costs are above the targeted level. Product re-design, alternative materials and
production processes are examined in order to achieve the desired level of costs.
Page | 8
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
KEY KNOWLEDGE
Life-cycle costing
A product normally “lives” beyond one accounting period and the costs connected to its
development/design, launch and maintenance fall unevenly across time periods. This
method takes a comprehensive view of the costs relating to the product throughout its lifecycle.
KEY KNOWLEDGE
Back-flush Accounting
This is a simplified costing method which can be used in conditions of short operational
cycles and low inventories. Companies working on a Just-In-Time (JIT) basis may practise it,
as it avoids the detailed tracking of costs during production; instead, it records costs when
goods are completed. These costs are then “back-flushed” through the system based on
standard costs.
KEY KNOWLEDGE
Throughput accounting
This method is also consistent with a JIT environment and focuses on the bottlenecks in a
production process; by eliminating these bottlenecks, it raises the amount of output that can
flow through the process (assuming there is demand for the output – the idea is not to
produce for inventory!).
The throughput accounting approach itself considers all costs (including direct labour) as
fixed and treats only direct materials as being variable in the short term.
Page | 9
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Chapter 2
Decision Making – Linear
Programming
KEY KNOWLEDGE
Multi-limiting factors and the use of linear
programming and shadow pricing.
When resources are scarce, or other limiting factors are present in a given situation, then
management is concerned with achieving the most efficient allocation of available resources.
Whereas planning with one limiting factor involves the use of “key factor analysis” (in which
typically one seeks to maximize the contribution per unit of the limited, or bottleneck,
resource – see Paper F2), the presence of several limiting factors requires the use of linear
programming.
In such cases, linear programming is typically used to either maximise contribution or to
minimize costs. The usual steps to be followed are:
1)
2)
3)
4)
Define the variables
Define the “objective function”
Express the constraints as equations
Solve the equations simultaneously as well as feasible values corresponding to
the corner points;
5) Determine the combination of specific values that satisfies the objective function.
Page | 10
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
The answer can also be graphed and Step 5 determined visually. A graph also shows the
“feasible region” of value combinations that are consistent with the constraints.
EXAMPLE
An aircraft manufacturing company producing propellers and wing ribs operates under the
following conditions:
Materials (kg)
Labour (hrs)
Contribution ($)
Propellers
6
8
50
Wing ribs (set)
12
6
30
Materials are limited to 120 kg. per week while labour must not exceed 100 hours.
1) Define the variables:
p = propellers
w = wing ribs
2) Maximise contribution = 50p + 30w
3) Materials: 6p + 12w ≤ 120
Labour: 8p + 6w ≤ 100
4) Simultaneous solving results in: p = 8 and w = 6; the feasible corner points are p =
12.5 (when w=0) and w = 10 (when p=0)
5) Calculate the highest contribution at each of the combinations in Step 4
This can also be graphed for easier visualisation of the feasible region and solution.
Shadow (dual) price
A shadow price is the additional value to be obtained (usually an increase in contribution) by
having available one more unit of a scarce resource. In the example above, the shadow
price of 1 kg of material can be determined by re-solving the simultaneous equations with
121 (kg) substituted for 120. Similarly, the shadow price of an additional hour of labour can
be expressed by re-solving the equations with labour equal to 101, and determining what
the increase in contribution will be.
Slack
This represents the amount of a resource that has not been exhausted (i.e. its availability
does not act as a constraint or limiting factor in a given set of circumstances).
Page | 11
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Chapter 3
Pricing Decisions
START
The Big Picture
The pricing of a product or service is crucially influenced by several factors:
Internal: How much does it cost us to produce it?
External: How much is a customer willing to pay for it?
The latter is further influenced by how much the competition is charging for the same (or
similar) product or service.
KEY KNOWLEDGE
The price elasticity of demand (PED)
This measures the sensitivity of (customer) demand to a change in prices. There is usually
an inverse relationship: when price goes up, demand goes down (and vice versa).
PED =
Page | 12
% change in demand
% change in price
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
EXAMPLE
A cinema increases its ticket prices from $4 to $6; as a result, the number of cinema goers
drops from 2,000 to 1,500.
The PED = (500/2000) = 25% = 0.5 (Note:Ignore + or – signs; take the absolute value)
(2/4)
50%
In the above example, demand is considered inelastic, because the PED < 1. When PED >
1, then demand is considered elastic.
KEY KNOWLEDGE
Demand Equation
Whereas the PED is expressed in percentages, the demand equation (or function) is
portrayed as a downward sloping straight line which shows price and demand combinations
in their full values. The equation is expressed as
P = a – bQ
Where:
P = price – corresponding to the dependent variable (y-axis) on a graph;
Q = (Quantity) demanded – corresponding to the independent variable (x-axis);
a = the maximum price (where Q = 0) -- corresponding to the y-intercept; and
b = the slope of the (negatively-sloping) line (change in P / change in Q)
EXAMPLE
On an average Saturday night, a cinema (capacity: 225) attracts 150 visitors at a price of
$5. If the price of the ticket is decreased by $0.50 then 25 more people will come.
In order to fill up the cinema, the ticket price would have to be set at:
Page | 13
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
5 = a – (0.50/25) x 150; therefore, a = 8, and
P = 8 – 0.02Q
At Q = 225, P = $3.50
KEY KNOWLEDGE
Total Cost Function
An equation can also be formulated to express the relationship between total costs and
variable costs:
Y = aX + b
Where:
Y = Total costs;
X = Output – corresponding to the independent variable;
a = fixed cost – corresponding to the Y-intercept;
b = the variable cost per unit -- corresponding to the slope of the total cost line
EXAMPLE
The variable cost per unit of a bottling process is 10 cents per unit. Fixed costs amount to
$5,000. At an output level of 20,000 units, what is the total cost?
Y = $5,000 + ($0.10) x 20,000
= $7,000
When working with bulk discounts and other sales volumes, it is important to make sure
that fixed costs remain unchanged over the output range covered. If they increase (as a
result of expanding the production capacity, for example) then the new (higher) level of
fixed costs need to be included in the calculation of total costs.
Page | 14
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
KEY KNOWLEDGE
Pricing Strategies
There are a variety of pricing strategies with which one should be familiar:
Cost plus: A mark-up is added to a given cost base (which can be variable or full production
cost).
Skimming: Enter the market at a high price to catch customers willing and able to pay the
price.
Penetration pricing: Go in at a very low price to win market share.
Premium pricing: Maintain a high price due to the nature of the product.
Target pricing: This method “backs into” the price by calculating the required profit and the
possible production costs first.
Promotional Pricing: These are in support of campaigns to raise customer awareness of a
product.
Perceived value pricing: Plays on perception of value and what the market is willing to pay.
Value Pricing: Increasing the value content of the product so as to defend market share (in
times of difficult economic conditions or competition).
Product-line pricing: Sell a “core” product cheaply and price high related products.
Volume-discounting pricing: The bigger the order, the lower the price per unit.
Discriminatory pricing: Pricing the same product at different levels in different markets
(geographical) or market segments (customers).
Psychological Pricing: Plays on the emotion of the consumer.
Product Bundle Pricing: Combining products into one pack and pricing it overall.
Complementary product pricing: This refers to products that are used in conjunction with
other products (e.g. printers and cartridges, razor grips and blades, staplers and staples,
automobiles and spare parts). Typically, the approach to pricing may be low for the main
product and more expensive for the “re-fills”.
Relevant cost pricing: Basing the price on a keen (accurate) understanding of the real costs
of the product or service.
Page | 15
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Chapter 4
Make-or-buy and other short-term
decisions
START
The Big Picture
One of management’s responsibilities involves making decisions affecting the firm in the
short-run based on relevant costs.
What is relevance?
A relevant cost is a cash cost which is uniquely incurred (or avoided) as a consequence of
taking a decision; cash, because it is the main determinant of value (unlike accounting
profit); and unique in the sense that is not common to the alternative choices that are under
consideration.
Page | 16
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
EXAMPLE
A company seeking to determine whether to continue to transport its products by truck or to
switch to the railroad discovers that insurance costs are identical in both choices; in that
case, insurance costs are not relevant to the decision.
If, however, there is a difference in the two insurance costs, then one can speak of the
difference between the two choices as being “incremental”; this difference (referred to in
some places as the “differential”) is relevant to the decision under consideration.
Future
Relevant costs refer to the future, i.e. they can be influenced prospectively by choice. It
follows that:
Sunk costs are not relevant: They have already taken place and cannot be reversed.
Committed costs, if they cannot be avoided, are likewise not relevant, even if the timing of
their occurrence is in the future. Their “unavoidability” has already been established in the
past (making them effectively the equivalent of sunk costs).
In keeping with the above logic, relevant costs therefore involve cash, are incremental and
relate to the future.
Relevant costs need to be identified with care, as they may include opportunity costs.
EXAMPLE
A company considers building a storage facility on the site of a parking lot. If the parking lot
had been generating parking fees which will now be lost, then this foregone revenue is an
opportunity cost.
Make-Buy
A make-buy decision requires the determination of all relevant costs.
Page | 17
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
EXAMPLE
An automotive components producer can supply itself externally with car heaters for $210
per unit. In considering whether to make these internally, the company calculates that an
equivalent unit can be made in 2 labour hours using $100 worth of materials.
Labour is currently at full capacity producing carburettors which generate contribution of
$100. A carburettor takes 2.5 hours to produce. Labour costs $10 per hour. The carburettor
also absorbs fixed overhead costs at the rate of $20 per labour hour.
The relevant costs are ($):
Materials:
Contribution lost (carburettors):
Labour (added-back):
100
80
20
200
It is cheaper to produce internally.
Shut Down decisions
Whether to close a plant making (accounting) losses depends on relevant costs:
Superior
Revenues (m)
40
Costs (m)
(44)
Profits (m)
(4)
If 25% of the costs are fixed costs allocated by H.O., then it appears that closing the plant
will leave the company worse off, as 40m in revenues and only 33m in costs will disappear.
A careful examination of all costs needs to be made before arriving at a final decision.
Page | 18
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Chapter 5
Risk and Uncertainty in Decision
Making
START
The Big Picture
Risk, whichever way it is defined, is a quantification of probability. In other words, it is
susceptible to measurement, statistically or mathematically. Risk may be viewed as relating
to objective probabilities.
Uncertainty, in contrast to risk, is not capable of being quantified. It has also been referred
to as subjective probability (or unmeasurable uncertainty).
Expected Value
Profit/(Loss)
340
766
278
450
(230)
Page | 19
Expected
Probability Value
10%
20%
50%
18%
2%
100%
34.0
153.2
139.0
81.0
(4.6)
402.6
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
KEY KNOWLEDGE
Sensitivity
Sensitivity Analysis
This asks the following question: What happens to the NPV of a project if certain key
variables are altered. It is a one-dimensional approach as it isolates and alters each (key)
variable in turn in order to measure the impact.
Sensitivities by scenario
One can also go beyond determining project sensitivity to one variable and define scenarios,
in which several variables move simultaneously (as outlined in the previous paragraph).
Based on these scenarios, the NPV outcomes can be evaluated.
KEY KNOWLEDGE
Simulation
Simulation -- Monte Carlo
This is a simulation model that uses probability distribution analysis to analyze the possible
outcomes of a project. It is built on the simultaneous changes of many variables, the
relationships between these variables being defined in advance, e.g. if price is reduced, how
much demand may go up.
Each variable itself has a probability distribution and the combinations of variables are
modeled through running the model repeatedly by computer, resulting in a distribution of
simulation results.
Page | 20
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
KEY KNOWLEDGE
Maximax, maximin and minimax regret
In the absence of (numerical) probabilities, a decision maker may act on the basis of his
attitude toward uncertainty. Here are examples of three techniques as they relate to the
following choices regarding developing a business:
Profits
1
Outcomes:
Strategy
2
A
25
30
B
50
35
C
60
40
Maximax – going for the upside: Chooses Strategy
60).
3
20
55
45
1 (to keep the door open to a profit of
Maximin – limit the downside: Choose Strategy 2 (one cannot do worse than 30).
Minimax regret – limit the opportunity cost of getting it wrong.
To determine this, one needs to quantify the “regrets” under each Outcome. For example:
If the Outcome turns out to be A, then Strategy 2 (=30) would have been the best strategy.
Regrets: Choosing Strategy 1 (=25) would have “missed” by 5 (30-25); while
Choosing Strategy 3 (=20) would have “missed” by 10 (30-20).
We can modify the table above to show all the regrets (opportunity costs) under each
Outcome:
Regrets
Outcomes:
1
A
B
C
Maximum regrets
Strategy
2
3
(5)
(5)
Best
Best
(20)
(20)
(10)
Best
(15)
(5)
(20)
(15)
Conclusion: Minimizing the maximum regret leads to Strategy 1.
Page | 21
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Chapter 6
Budgeting – an introduction
START
The Big Picture
Budgets
A budget is a quantitative plan addressing the future.
Budgetary control systems seek to monitor performance against the budget in a timely way
so that deviations can be identified and rectified. The system can only work as well as the
care and thought that went into defining performance targets to be measured, and the
incentives (and sanctions) that follow from achievement (or not) of those targets.
Goal congruence at all levels of the organisation – corporate, divisional and individual – must
exist for a budget, and its attendant control systems, to be effective.
Problems frequently encountered when using conventional budgets:
Page | 22
They invite “gaming” of the system;
They can be inflexible;
They are often imposed from the top – “Top Down”;
There is an indirect connection with the company’s strategy;
They are used for too many different purposes;
They reinforce centralising tendencies in the company;
There is a lack of goal congruence between corporate, divisional and individual goals
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
KEY KNOWLEDGE
Budgetary Systems / Types of Budgets
Fixed
A fixed budget is not adjusted to the actual volume of output (activity level)
Flexible vs. Flexed
The distinction is sometimes overlooked:
Flexible: designed to change according to actual volumes of output; usually done
before the start of the budgetary period as a sort of scenario planning;
Flexed: This is done “after the fact” and is based on the actual level of activity
achieved.
Zero-based (ZBB)
Each year, budget owners must justify the entire budget (build it from zero)
At odds with incremental budgeting (where only changes need justification, hence
encouraging the “spend it or lose it” mentality)
A three-step approach to ZBB:
1. Define “decision packages” (i.e. activities that result in costs or revenues),
distinguishing between “mutually exclusive packages” (alternative activities to
achieve the same result) and “incremental packages” (base level of input needed
+ additional inputs)
2. Evaluate and rank packages (based on the benefit to the organisation)
3. Allocate resources across packages, considering ranking and seniority of
responsible managers
Activity-based (ABB)
Page | 23
No budget owners (departments, functions), but budgeted activity cost (ABC costing)
Budgeted activity cost = demand for activity * unit cost of activity
More detailed and accurate than traditional budgets, especially regarding indirect
costs
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
Incremental
Such budgets are based on what went on during the period before. Typically, this approach
results in modest changes and adjustments to the earlier budget. At worst, they retain and
perpetuate inefficiencies and old assumptions. This might be termed the “lazy man’s
budget”.
KEY KNOWLEDGE
Quantitative Analysis in Budgeting
The High-Low method and regression analysis have been covered in F2.
Learning Curves
Learning curve effects can be applied to variance analysis, as they allow standards to be
adapted to a dynamic situation, i.e. one where the time to produce units declines with the
increase in output.
EXAMPLE
A product requires 20 hrs of labour per unit at a cost of $6 per hr.
A traditional labour standard would expect 4 units to be produced in 80 hrs at a labour cost
of $480.
If a 90% learning curve effect applies, then one would expect the 4 units to be completed in
less time. How long will they require?
Utilizing the formula: y = axb
Where:
y = cumulative time required per unit
a = time to produce the first unit (in the example above = 20)
x = cumulative number of units produced ( = 4 units)
b = log r/log2
r = learning curve ( = 90%)
Page | 24
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
ACCA F5 Performance Management
We solve for: y = 20 X 4-.1522
= 16
(remember: this is the cumulative time per unit)
Therefore, 4 units will require 64 hrs (16x4)
Conclusion: Based on the above, 64 hrs define the standard against which the time required
to produce 4 units should be compared when calculating the labour efficiency variance.
KEY KNOWLEDGE
Behavioural Aspects of Budgeting
There are numerous inter-relationships between types of budgets, budgeting processes and
the motivation of employees:
Top-Down budgets may be necessary from a coordination point of view; however they can
be de-motivating to employees;
Bottom-Up budgets allow useful employee input, but they may create exaggerated
expectations on the part of the employee that his/her voice will be heard.
Unrealistic budgets – with unachievable targets – can be de-motivating (as can budgets
which are easily achieved, since most people stop working when they reach the targets!).
Page | 25
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own
private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this
material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of
reproduction. All examples presented in these course materials are for information and educational purposes only and
should not be applied to a specific real life situation without prior advice. Given the nature of information presented in
these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any
information presented in these materials as to its application to any specific cases.
theexpgroup.com
