Question answers

Question 1

VBM & SELECTION OF APPROPRIATE MEASURSE

Answer 1

Selection of appropriate measures and targets: Totaig should focus on value drivers like unit cost of production and product quality, setting both financial and non-financial targets to avoid overemphasis on backward-looking measures like ROI and operating margin.

Timescales to which the targets should relate: Short-term targets should address immediate competition challenges, such as reducing production costs within a year, while long-term targets should anticipate competitors’ improvements in product quality over three to five years.

Management levels to which the targets should relate: Operational managers should focus on targets related to unit cost of production and product quality, while strategic decision-makers should oversee targets related to acquisitions and long-term value creation.

Difficulties in measuring and managing performance using VBM: Challenges include outdated IT systems, lack of familiarity with VBM among operational managers, the need for cultural change, and difficulties in measuring economic depreciation and assessing the value of heavy investments in product development.

Question 2

What is VBM?

Answer 2

Management decisions designed to lead to higher profits do not necessarily create value for shareholders.

Often
long term value is sacrificed to meet short term profit targets.

VBM starts with the view that companies only create value when they create returns in excess of their cost of capital.

Question 3

What is BPR

Answer 3

Involves radical changes in organizational processes, focusing on customer needs and satisfaction.
Aims to improve key performance measures like cost reduction, quality enhancement, service delivery, and customer satisfaction.

Question 4

Cuthbert- BPR & Operational Performance

Answer 4

**Reorganizing into Teams:
**
Proposal at Cuthbert involves shifting from a functional structure to team-based production.
Limited multi-skilling among production staff leads to bottlenecks and delays in fulfilling customer orders.
Job enlargement for machinists is proposed, necessitating training in multiple production processes to ensure smoother operations.

**Production Teams and Quality:
**
Production teams would take responsibility for product quality, leading to improvements in meeting customer needs.
Reduction in quality checks by supervisors is anticipated, with production teams managing quality themselves, aligning with BPR principles.

**Tracking with RFIDs:
**
Implementation of RFID tags would automate data collection, reducing the need for supervisor intervention and streamlining communication.
Reflects the characteristic of flatter hierarchies in organizations that undergo BPR.

**Practical and Cultural Aspects:
**
New performance measures emphasizing quality would require development, along with new reward systems.
Cultural change may face resistance from staff, requiring senior management commitment, communication, and training.

Question 5

Cuthbert- Reward Systems -Recommend and Justify

Answer 5

Current Reward System:

Current system incentivizes speed over quality, leading to reduced flexibility and potential delivery failures.
Machinists and supervisors lack direct motivation for quality improvement, with bonuses primarily tied to volume rather than overall profit.
Proposal suggests shifting to team-based rewards, emphasizing quality, innovation, on-time delivery, and cost efficiency, requiring new performance measures and reporting systems.

Question 6

Sgoltaire- Ethics

Answer 6

**Strategy Formulation and Business Ethics:
**
Business ethics involves behavior expected by society, not just codified in law.
Strategies demonstrating high ethical standards, particularly towards the environment, can create sustainable competitive advantage.
Stakeholders, especially influential ones like major shareholders, strongly influence strategy formulation based on ethical principles.

**Considerations in Strategy Formulation:
**
Ethical issues, such as environmental impact and social responsibility, must be addressed alongside economic considerations.
Neglecting ethical concerns can harm stakeholder relationships, reputation, and long-term financial performance.

**Role of Ethical Behavior in Business Performance:
**
Ethical behavior can enhance brand reputation and customer loyalty, contributing to long-term financial success.
Managing ethical concerns proactively can mitigate risks and expenses associated with environmental damage or social backlash.

Question 7

SGOLTAIRE- EMA

Answer 7

**Environmental Management Accounting (EMA):
**
EMA involves analyzing both financial and non-financial information to identify and manage environment-related costs.
Helps in understanding hidden costs, setting realistic budgets, and making investment appraisals that include all relevant environmental costs.

**EMA in Setting Performance Measures and Targets:
**
EMA aids in setting targets for reducing environment-related costs and improving environmental performance.
Targets can be financial or non-financial, short-term or long-term, internal or external, reflecting various stakeholders’ interests.

**EMA in Product Pricing:
**
EMA assists in understanding lifecycle costs, including environment-related costs, ensuring products are priced to cover all costs.
Demonstrating environmentally friendly production practices can justify premium pricing, enhancing long-term financial performance.

Question 8

Fiag- Performance reporting

Answer 8

**Introduction:
**The report evaluates Fiag’s current performance report against accusations of misrepresentation and failure to measure performance against objectives. Recommendations for performance indicators from external business environment analysis are provided.

**Misrepresentation by Report:
**
The report omits negative news and manipulates performance indicators, such as revenue growth and cost classifications.
Key figures like revenue growth and year-on-year changes are selectively presented, giving a misleading impression of performance.
Misclassification of costs, like exceptional costs and grant income, distorts key performance indicators like return on capital employed (ROCE).
**Measuring Achievement of Fiag’s Objectives:
**
The report lacks direct measures of shareholder returns and sustainability of returns, failing to connect financial measures to Fiag’s mission.
It does not measure product quality, manufacturing efficiency, or customer base expansion, all crucial to Fiag’s objectives.
Lack of external data hinders planning and control, with insufficient trend analysis and budget variances provided.
External Business Environment at Fiag:

Political factors like government incentives for cycling impact Fiag positively, with indicators like increased demand and participation rates relevant.
Economic growth and wealth increase in Beeland benefit Fiag, but tariffs pose a risk to profit margins.
Socio-cultural trends like health consciousness and aging demographics favor Fiag’s products, with market size and share comparisons necessary.
Technological advancements in new models and materials influence Fiag’s competitive advantage, with indicators like average model weight and material cost per unit important.
**Examiner’s Comments:
**
Candidates should provide depth in analyzing the implications of the report’s shortcomings and offer justified recommendations for improvement.
A thorough understanding of Fiag’s objectives and the external business environment is crucial for effective performance reporting and management.
Overall, the report highlights the importance of accurate, comprehensive performance reporting aligned with organizational objectives and the external business environment for informed decision-making at Fiag.

Question 9

Achility- PM Issues

Answer 9

**Introduction:
**The report evaluates Achilty’s current performance report for strategic review, proposes performance indicators, and assesses risks and opportunities associated with a data warehouse system.

**Current Performance Reporting:
**
The report analyzes whether it addresses Achilty’s objectives, contains relevant information, and is well-presented.
Achilty’s mission aims for sustainable shareholder returns through product range improvement, customer expansion, service focus, and cost control.
The report partially measures objectives but lacks clarity on sustainability and specific indicators for product range, customer service, and inventory control.
Commentary is vague and does not address all objectives adequately.

**Proposed Performance Indicators:
**
Calculated indicators include Return on Capital Employed (ROCE), inventory days, and receivables days.
ROCE measures shareholder returns but may not fully capture Achilty’s intangible assets’ impact.
Total Shareholder Return (TSR) and inventory days offer insights into shareholder value and efficiency, respectively.
Receivables days may not be relevant due to Achilty’s online business model.

**Data Warehouse System:
**
Opportunities include improving product ranges, customer spending, service, and cost control through data analysis.
Risks involve significant costs, legal and reputational issues related to data security, and data accuracy challenges.
**Examiner’s Comments:
**
Candidates should focus on performance reporting rather than business improvement in their answers.
Attention to detail is crucial, including understanding performance indicators’ implications and their alignment with company objectives.
Evaluation of proposed systems should consider practical implications and associated risks comprehensively.
In summary, the report highlights the importance of aligning performance reporting with company objectives, proposing relevant indicators, and assessing risks and opportunities associated with potential system implementations for informed decision-making at Achilty.

Question 10

NJN: PM tech Info and Lean

Answer 10

**Manual Input Issues:
**
Manual inputs to the WIS at NJN lead to errors, consuming time and money.
Incorrect input of packing lists results in inaccurate inventory records and order fulfillment, causing customer dissatisfaction.
8% of picking notes contain errors, leading to wasted time and resources searching for items, customer dissatisfaction, and inefficient storage space usage.
Cyclical inventory counts to correct WIS errors are wasteful and do not add value.
Improvement Suggestions:

Implement barcodes or RFIDs on products for accurate and automated data input.
Utilize electronic data interchange (EDI) to interface with manufacturers and retailers for timely and accurate information exchange.
**Time Delays:
**
Packing list availability delays of up to 48 hours lead to outdated WIS information, affecting order fulfillment.
Automated input can improve data timeliness, reducing labor costs and improving order accuracy.
Use of terminals or portable devices for picking information access reduces staff movement and time wastage.
**Complex Presentation Issues:
**
Picking sheets with complex product codes increase error likelihood.
Presenting information in a clear and concise manner prevents errors and saves time.
**Lean Principles and Waste Identification:
**
Warehouse reorganization to reduce staff movement and time wastage.
Absenteeism and search time for misplaced items are wastes due to inefficient processes.
Holding excessive inventory and cyclical inventory counts are non-value-adding activities.
**5S Principles in Lean Adoption:
**
Structurise: Arrange items for easy access, segregate damaged inventory.
Systemise: Organize items for efficient use, prioritize high volume items.
Sanitise: Maintain tidiness for safety and efficiency.
Standardise: Establish consistent processes to minimize errors.
Self-discipline: Sustain improvements through consistent performance and motivation.

Question 11

Quark Healthcare: RFID & Lean

Answer 11

**Cost Considerations:
**
Implementation and operation costs of the RFID system include hardware, software, maintenance, consumables, and employee time.
Efficiency savings from reduced employee time searching for items and improved patient care offset these costs.

Information Collection and Changes:
Non-financial information on equipment and drugs’ location and quantities will be collected in real-time, improving accuracy and timeliness.
RFID tags on high-value drugs require physical counts for accuracy but speed up the process by providing locations.

**Performance Reporting Changes:
**
Weekly inventory check reports for high-value drugs will be replaced by real-time, screen-based information.
Staff will need training to access and utilize the new system effectively.

**Improved Control:
**Knowledge of high-value drug locations enhances control over inventory, reduces theft opportunities, and minimizes wastage. Identification of equipment locations reduces staff search time, improves response time, and simplifies security checks.

**Lean Principles Alignment:
** RFID system aligns with lean principles by improving efficiency, minimizing waste, and promoting openness to change.
Five Ss concept (Structurise, Systemise, Sanitise, Standardise, Self-discipline) aids in creating an organized workplace.

**Staff Attitude and Implementation:
**Persuading high-status medical staff to accept the system is crucial, emphasizing benefits to reduce resistance.
Careful design of reports and user interfaces is essential for staff acceptance and ease of use.

**Responsibility and Accountability:
**
Management can assign specific staff responsibility for asset storage, with regular checks through the system.
Control reporting can identify responsible individuals and ensure accountability, promoting responsibility and adherence to protocols.
Overall, successful implementation requires addressing staff attitudes, careful system design, and promoting responsibility and accountability.

Question 12

Beach Foods- EVA and CostCenters/Profit Centres

Answer 12

**Economic Value Added (EVA™) as Divisional Performance Measure:
**
**Benefits:
**
Aligns with corporate objective of adding shareholder value, motivating divisional managers to work in the company’s best interest.
Provides an absolute measure, indicating overall contribution to the company.
Reflects performance above required return, promoting efficiency.
Closer to cash flows than accounting profits, minimizing impact of accounting policies.
Encourages future investment by treating certain costs like capital expenditure, reducing short-term decision-making.

Disadvantages:
Reliance on historical data limits forecasting capability.
Complexity of calculation, with over 100 adjustments, may hinder understanding.
Uses weighted-average cost of capital, potentially not reflecting divisional risks accurately.
Inability to compare divisional managerial performance if divisions vary significantly in size.

**Calculation Workings:
**
**Baby Division:
**Controllable profit: $99m
Profit after R&D costs: $88m
Divisional profit before tax: $60m
ROI: 23% (based on controllable profit)
RI: $52.4m (based on controllable profit)
RI: $41.4m (based on profit after R&D)
ROI: 14% (based on divisional profit)

**Divisional Management Styles:
**
**Baby Division:
**Investment division due to rapid growth and product launches, managing according to profit generating ability.
Budget-constrained style may stifle creativity, non-accounting style focusing on revenue growth and new product development may be more appropriate.
**Chocolate Division:
**Profit or investment center, focusing on profit generation and cash flow.
Budget-constrained management style with emphasis on cash generation.
**R&D Division:
**Cost center primarily, but value demonstrated through overall profit generated by new products.
Budget-constrained management style for individual projects, non-accounting style for idea generation.
Overall, management styles should be tailored to each division’s characteristics and goals, ensuring alignment with company objectives and maximizing performance.

Question 13

Behavioural Aspects of Budgeting

Answer 13

Question 14

Chicory- DIvisional Financial Indicators ROCE& EBITDA

Answer 14

**ROCE (Return on Capital Employed):
**
**Benefits:
**Provides a percentage figure for comparison, accommodating businesses of different sizes.
Easy to calculate and readily available from published data.
Familiar to Chicory’s management.
Reflects overall contribution and percentage return.
**Disadvantages:
**Weak correlation with objective to maximize shareholder wealth.
May be distorted by accounting policies or intangible assets.
May discourage investment in new assets, contradicting Chicory’s strategy.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):

**Benefits:
**Easy to calculate and understand, serving as a proxy for cash flow.
Relevant for Chicory’s cash flow difficulties post-acquisition.
Excludes items unrelated to underlying business performance, like tax and interest.
Enhances comparability and removes subjectivity in accounting policies.

**Disadvantages:
**Absolute measure makes comparison difficult across businesses of different sizes.
Limited by subjective assumptions and inconsistent accounting policies.
Ignores replacement costs of assets, affecting comparability if one leases and the other purchases assets.

**Benchmarking Considerations:
**
Benchmarking against Fennel may be inappropriate as it may not be the best-in-class.
Fennel’s financial data is older and may not reflect recent operational improvements or market changes.
Shared data from Fennel may be inaccurate or misleading.
Difficulty in finding comparable businesses for future benchmarking.
Chicory’s intended business model change towards electric car charging points differs significantly from Fennel’s current operations.
Differences in economic strength and currency exchange rates between Veeland and Deeland affect comparability.

**Examiner’s Comments:
**
Candidates struggled with calculations but performed well in evaluating the methods.
Some candidates didn’t relate their knowledge to the scenario or spent time explaining benchmarking process unnecessarily.
Understanding the problems associated with benchmarking was crucial, and some candidates missed this opportunity.

Question 15

JLW-EVA

Answer 15

• Divisional Performance Measurement:
  
  • Divisional managers should only be appraised on performance within their control.
  • Costs not controlled by divisional managers should be added back to profit for performance appraisal.
  • Depreciation in profit centers like the Export division, where managers don’t control capital investment decisions, should be added back.
  • On June 30, 2015, currency fluctuations benefiting Export division’s revenue, not under the manager’s control, must be deducted.
  • Controllable profit: net profit after adding back non-controllable items.
  • Traceable profit: net profit reflecting divisional activity, excluding allocated head office costs.
• Conclusion on Export Division Manager’s Bonus:
  
  • Controllable net profit margin exceeds target, but difficulty in assessing productivity’s impact on profit.
  • It’s uncertain if productivity improvements entirely under manager’s control.
  • To meet bonus threshold, controllable net profit margin would have to decrease significantly.
• EVA™ as Performance Measure:
  
  • EVA™ aligns with JLW’s objective to maximize shareholder wealth.
  • Involves adjustments to financial profit and capital employed.
  • Avoids distortion from estimates and financial policies.
  • Encourages long-term view and consideration of cost of capital.
  • Unsuitable for comparing divisional performance due to absolute measure and lack of consideration for relative sizes.
  • Export division lacks controllable capital employed, making EVA™ unsuitable.
  • Domestic division can control investment decisions, making EVA™ suitable.
  • Calculation based on historical data may not reflect future circumstances accurately.

Examiner’s Comments:
- Candidates understood the concept of controllable and traceable profit but struggled with the calculations.
- Some uncertainty exists regarding productivity’s impact on controllable profit, affecting the decision on the manager’s bonus.
- Understanding the implications and limitations of using EVA™ as a performance measure was evident, but candidates could improve in explaining these concepts clearly.

Question 16

Landual- Transfer Pricing

Answer 16

• Current Transfer Pricing Policy:
  
  • Aims for goal congruence, fair performance measurement, and managerial autonomy.
  • Variable costs are preferred for optimal decisions; fixed costs can lead to suboptimal decisions.
• Electrical Components:
  
  • Market price basis makes sense due to generic nature and external market.
  • Small contribution to head office costs ($383k) reflects product’s generic nature.
  • Argument for lowering market price due to omitted costs like transport, marketing, and bad debts.
• Housing Components:
  
  • Priced using actual production costs to preserve Landual’s competitive advantage.
  • Lack of incentive to reduce costs; failure to meet budget by $575,000.
  • Proposal: Apply a markup of 30% on actual total production costs for additional profit ($2,461k).
• Impact of Transfer Policy Change:
  
  • Shifts $1,302k of divisional profit from components to assembly division.
  • Emphasizes assembly division’s importance despite housing components’ competitive advantage.
  • Clarity of variable cost transfer pricing may aid in achieving optimal pricing and profit.
• Effect on Divisions:
  
  • Housing division becomes a cost centre, focusing on cost control and quality.
  • Electrical division remains a profit centre, facilitating benchmarking and “make or buy” decisions.
  • Assembly division unaffected; clarity in electrical division’s results aids competitiveness.
  • Landual Lamps’ profit remains unchanged, but potential for future improvements with policy changes.

Examiner’s Comments:
- Weak efforts in quantifying and analyzing the impact of proposed changes on divisions and company profit.
- Lack of focus on Landual’s competitive advantage in housing components, which should have been prioritized.
- Candidates struggled with straightforward calculations, impacting their ability to evaluate and provide advice effectively.
- Importance of considering strategic changes in designation of cost, profit, and investment centers for performance management should be emphasized in future revisions.

Question 17

Posie: DMAIC

Answer 17

• DMAIC Process:
  
  • Define:
    
    • CEO’s concern: Increasing returns affecting Posie brand.
    • Objective: Reduce customer returns; understand reasons for returns.
    • Customer expectations: Proper assembly, undamaged delivery, timely delivery.
  • Measure:
    
    • Current returns data limited; unclear categories.
    • Insufficient data on returns related to external products or total returns relative to sales.
  • Analyze:
    
    • Identify root causes; analyze returns by product type, country, and definition of “defective.”
    • Focus on areas with high returns to prioritize improvements.
  • Improve:
    
    • Implement proposals; consider resource availability and costs.
    • Improve production/packaging processes, machinery maintenance, staff training.
  • Control:
    
    • Monitor reduction in defective manufacturing returns.
    • Redesign returns data to clarify responsibility centers; revisit DMAIC stages if necessary.
• Information Requirements:
  
  • Responsibility centers need specific performance data related to their control.
  • Ensure fairness by holding managers accountable only for aspects within their control.
  • Provide detailed information for timely decision-making; consider costs of data collection.
  • Ensure appropriate frequency of reporting; monthly for the board, more frequent for responsibility centers.
  • Balance focus on revenue and profitability to prevent neglect of cost control and customer satisfaction.
• Overseas Subsidiaries:
  
  • Consider reclassifying as revenue centers due to lack of control over costs.
  • Focus performance data on revenue but monitor profitability and reasons for returns.
  • Provide information on pricing strategies and external environment.
  • Ensure managers maintain control over costs and address reasons for returns.

Examiner’s Comments:
- Understanding of DMAIC methodology was crucial; candidates who lacked this knowledge scored poorly.
- Importance of applying DMAIC to the scenario and recognizing data connections was emphasized.
- In part (b)(i), failure to recognize the impact on information requirements led to lower scores.
- Differentiation between responsibility center types and considering effects on performance and information requirements were key in part (b)(ii).

Question 18

Laudand Advertising - CSF & Transfer Pricin

Answer 18

• CSF of High Quality Design:
  
  • Importance identified by LAA directors for successful advertising campaigns and client satisfaction.
  • May achieve objective to delight clients with quality of work but unclear if it contributes to providing excellent value for money.
  • Unlikely to directly contribute to providing clients with access to local and specialist knowledge.
  • Relationship between quality of design and perception of value for money influences client return.
• KPI to Buy 90% Internally:
  
  • Encourages achieving target but effectiveness depends on internal quality surpassing external.
  • May not align with providing value for money if internal costs are higher.
  • May not support offering specialist knowledge to clients or achieving client satisfaction and return.
• Transfer Pricing Policy:
  
  • Aims to promote subsidiary autonomy, facilitate performance evaluation, and maintain goal congruence.
  • Current high transfer prices negatively impact subsidiaries’ performance and dissatisfaction.
  • Clear policy needed to prevent conflicts, save managerial time, and ensure fair performance measurement.
  • Transparent pricing basis required to prevent demotivation and ensure compliance with taxation laws.
• Advantages of Market Value Transfer Prices:
  
  • Reflects open market prices, promotes efficiency, and reduces selling and administration costs.
  • Allows for cost savings and possibly lower transfer prices, benefiting both parties.
  • Avoids wasteful negotiations and promotes overall organizational performance.
• Disadvantages of Market Value Transfer Prices:
  
  • May not reflect unique internal services or external market fluctuations.
  • Requires frequent adjustments and may lead to confusion among managers.
  • Difficulty in agreeing on adjusted prices considering reduced costs included in internal transfers.

Examiner’s Comments:
- Many candidates struggled with analyzing CSFs and KPIs appropriately, focusing more on business specialization rather than performance management.
- Part b) received better responses, with candidates adept at linking transfer pricing issues to performance management and organizational objectives.
- In part c), candidates lacked technical knowledge, providing basic definitions instead of analyzing the relevance of market value transfer prices to the scenario.
- Future candidates are advised to focus on specific question requirements and engage in in-depth analysis rather than providing general definitions.

Question 19

Bazeele- Performance Pyramid & Bazeele

Answer 19

• Performance Pyramid and Six Sigma:
  
  • Ensure thorough understanding and application before the exam.
  • Focus on how the performance pyramid aids in achieving the corporate vision.
  • Address specific operational performance requirements in responses.
• Performance Pyramid (a):
  
  • Covers financial and non-financial measures, aiding long-term financial performance.
  • Interrelated elements support each other, cascading objectives from strategic to operational levels.
  • Measures ensure comprehensive assessment of internal and external performance.
• Operational Performance Measures (b):
  
  • Quality, delivery, cycle time, and waste represent operational performance.
  • Utilize appropriate measures considering relevance to corporate vision and customer satisfaction.
  • Consider strengths and weaknesses of each measure based on scenario data.
• Six Sigma DMAIC Method (c):
  
  • Understand DMAIC phases: define, measure, analyse, improve, and control.
  • Select measures valued by customers and capable of improvement.
  • Apply DMAIC approach to selected measures for relevance and effectiveness.
• Specific Measure Analysis:
  
  • Percentage of Stops Made Within 10 Minutes:
    
    • Not valued by customers beyond existing satisfaction level.
    • Cost of measurement outweighs benefits.
  • Failed Deliveries:
    
    • Represents significant costs and impacts customer satisfaction.
    • Only measures within Zones’ control are suitable for improvement.

Examiner’s Comments:
- Part (a): Many candidates addressed individual pyramid elements but missed the holistic application of the model.
- Part (b): Responses showed understanding but lacked depth in considering both strengths and weaknesses of measures.
- Part (c): Generally performed poorly, candidates should apply DMAIC approach to selected measures for relevance and improvement potential.
- Focus on technical correctness and relevance in responses for better scoring.

Question 20

Bazeele- VBM & EVA

Answer 20

• Value-Based Management (VBM):
  
  • Business value measured by discounting cash flows at cost of capital.
  • Value created when returns exceed cost of capital; destroyed when returns fall short.
  • VBM aims to ensure all decisions create shareholder value.
• Challenges with Current Objectives (a):
  
  • Bazeele’s focus on maintaining ROCE may not create shareholder value, especially with long-term projects.
  • Long-term hire agreements may yield acceptable ROCE but have negative net present value.
  • Managers incentivized to maintain net profit margins may overlook long-term value creation activities.
• Transition to VBM (b):
  
  • Adopting EVA(TM) as a performance measure encourages decisions that create long-term value.
  • Managers need targets aligned with value creation objectives.
  • Identification of value drivers and accurate information crucial for VBM implementation.
  • Resistance to cultural change may impede VBM adoption but benefits outweigh costs.
• Economic Value Added (EVA(TM)) Calculation (c):
  
  • EVA(TM) calculated as NOPAT minus capital charge.
  • NOPAT adjusted for economic depreciation, interest, bad debt provision, and long-term advertising.
  • Capital employed adjusted for accumulated depreciation and bad debt provision.

Examiner’s Comments:
- Part (a): Many candidates provided irrelevant information, indicating a lack of knowledge.
- Part (b): Poorly answered, reflecting a weak understanding of VBM principles.
- Part (c): Generally good performance, but some candidates made simple errors in adjusting profit or capital employed.

Question 21

Dibble- ABC & ABM

Answer 21

• Implementation of Activity-Based Costing (ABC):
  
  • ABC replaces absorption costing and involves detailed data analysis.
  • Overheads are grouped into cost pools, and cost drivers for each pool are identified.
  • Cost per unit of cost driver is calculated for each activity, and overhead costs are allocated accordingly to calculate full production costs.
• Appropriateness of ABC:
  
  • Useful for businesses with a wide range of complex products and high production overheads.
  • Enables accurate cost calculation for pricing and cost control.
  • Allows identification of cost drivers and non-value adding activities for cost reduction.
  • Less effective for businesses with simple products and low production overheads.
• Application of Activity-Based Management (ABM):
  
  • Helps set product prices based on accurate cost calculations, ensuring competitive yet profitable pricing.
  • Identifies profitable customer segments for resource allocation and marketing efforts.
  • Analyzes activities to reduce non-value adding processes and improve efficiency.
  • Guides product design decisions to optimize costs and profitability.
  • Requires commitment from senior management and employee training for successful implementation.
  • New performance measurement systems aligned with ABM objectives are necessary.

Examiner’s Comments:
- Part (a) (i): Candidates struggled with basic ABC concepts, affecting their performance in subsequent parts.
- Part (a) (ii): Candidates lacked understanding of ABC’s role as an overhead allocation system, leading to vague answers.
- Part (b): Many responses lacked specificity and failed to relate benefits to the use of activity-based approaches, indicating a lack of understanding of fundamental concepts.

Question 22

Graviton- Performance Pyramid

Answer 22

• Performance Pyramid at Graviton:
  
  • Based on the belief that different levels of an organization must support each other to achieve overall objectives.
  • Aims to produce comprehensive performance measures covering outputs and drivers of the organization.
  • Illustrates the interconnection between operational and strategic levels, supporting the corporate vision.
• Criticism and Challenges:
  
  • Tunnel vision leading to over-focus on measured areas.
  • Lack of comprehensive measures may lead to misalignment with corporate objectives.
  • Revenue growth prioritized over profit margins, possibly impacting profitability.
  • No variances from budget provided, limiting insights into performance discrepancies.
• Analysis of Graviton’s Performance Measures:
  
  • Corporate vision aimed at maximizing shareholder wealth through flexibility and close production chain control.
  • Current measures like ROCE lack direct focus on shareholder wealth maximization.
  • Lack of emphasis on profit margins and cost control, potentially sacrificing profitability for revenue growth.
  • Measures of flexibility and customer satisfaction exist but may not adequately address quality concerns.
• Addressing Shortcomings and Challenges:
  
  • Prioritizing long-term performance measures over short-term ones to mitigate myopia.
  • Emphasizing honesty and long-term gains over short-term profit triggers to counter gaming behavior.
  • Persuading the board to adopt necessary changes by linking current good performance with future sustainability.

Examiner’s Comments:
- Candidates demonstrated varying levels of understanding regarding the performance pyramid and its application to Graviton’s case.
- Successful answers provided clear connections between the pyramid concepts and Graviton’s performance measures.
- Challenges were identified, and potential solutions were proposed, showcasing critical thinking skills and understanding of management issues.

Question 23

Breac- SLA’s & VBM

Answer 23

Responsibility for Damaged and/or Faulty Goods:

• Detection of Defects:
  
  • Breac must ensure Gowan remains responsible for faulty goods with financial penalties upon detection.
  • Detection points may vary based on the nature of defects; some may be evident during manufacturing while others may arise post-purchase.
• End-User Detection:
  
  • Faults detected by end-users pose significant reputational damage to Breac, warranting stronger penalties for Gowan.
  • Gowan may resist extending liability beyond initial inspection, advocating for limited responsibility.
• Challenges in Detection:
  
  • Breac may only sample check goods, leading to potential undetected defects.
  • Gowan may dispute liability for defects emerging post-inspection, attributing them to Breac’s additional manufacturing or mishandling.

Delivery Time:

• Global Logistics Challenges:
  
  • Delivery times may be impacted by global trading regulations and shipping conditions.
  • SLA should clarify Gowan’s responsibilities and conditions beyond its control, like shipping delays.
• Responsibility for Alternate Delivery:
  
  • Breac may propose holding Gowan accountable for alternative delivery methods, such as air freight, in case of shipping issues.
  • Gowan may resist due to cost implications, necessitating negotiation on shared responsibilities.

Information Systems:

• Communication Challenges:
  
  • Incompatible information systems hinder communication between Breac and Gowan.
  • Breac requires access to Gowan’s production schedules and quality control data for effective SLA implementation.
• Need for Shared Platform:
  
  • Specific targets in quality assurance and delivery should be agreed upon and shared on a common platform.
  • Lack of shared system may lead to disagreements based on differing interpretations of data, undermining SLA effectiveness.

Financial Measures:

• Value Based Management (VBM):
  
  • VBM emphasizes measuring company value through discounted cash flows and economic value added (EVA).
  • Breac currently focuses on profit-based measures like operating and gross profit margin, lacking consideration for cost of capital.
• Resistance to Change:
  
  • Introducing EVA would require a cultural shift within Breac, with potential resistance due to ingrained behaviors and lack of understanding.
  • Gradual adoption, starting with one SBU, could facilitate learning and eventual integration across the organization.

Manufacturing and Marketing Measures:

• Quality Assurance and Delivery Metrics:
  
  • Manufacturing departments face pressure to deliver defect-free goods on time, necessitating enhanced quality assurance processes.
  • Inventory management and stock-out monitoring remain crucial in a VBM environment for optimizing capital utilization.
• Marketing Contribution to Revenue:
  
  • Marketing spend alone is insufficient; linking marketing spend to revenue without considering value creation is flawed.
  • Measures like marketing contribution to revenue offer better accountability but should be aligned with value creation metrics like EVA.

Recommendation:
- Adoption of VBM:
- Despite challenges, adopting VBM aligns with Breac’s need to assess capital utilization effectiveness.
- Gradual integration, starting with one SBU, allows for learning and adjustment before full-scale implementation across the organization.

Question 24

Joint Venture & Unified Data Base - Luvij

Answer 24

Summary: Luvij (Mar/Jun 18) (Amended)

Requirement (a): Evaluating the Usefulness of External Information

1. Relevance
   
   • External information must meet the specific needs of users.
   • Current quarterly spreadsheets may contain irrelevant data for certain departments.
   • A unified database would filter and deliver relevant data to each department, enhancing efficiency and reducing the time spent on irrelevant information.
2. Timeliness
   
   • Information must be available when needed, especially in the fast-paced fashion industry.
   • Quarterly updates are too infrequent, risking delays in decision-making.
   • A unified database could provide real-time data, speeding up response times to market changes.
3. Accuracy
   
   • Accurate information is critical for sound decision-making.
   • Manual data entry into spreadsheets is error-prone and time-consuming.
   • A unified database would automate data processing, reducing errors and ensuring all departments have accurate data.
4. Communication
   
   • Clear communication of information is essential.
   • Large volumes of data in spreadsheets can be overwhelming and difficult to interpret.
   • A unified database would present information in an easily accessible format and restrict access to sensitive data, improving data security.
5. Cost
   
   • The cost of producing external information should be justified by its benefits.
   • Current costs include staff time and potential inaccuracies.
   • While a unified database would incur setup and maintenance costs, it might be more cost-effective in the long run. Alternatively, improving the existing system might be a more economical option.

Requirement (b): Problems of Performance Measurement in Joint Ventures

1. Confidentiality
   
   • Sharing confidential information between Luvij and Shirville could be challenging due to commercial sensitivities.
   • Luvij’s innovative designs and Shirville’s production techniques are both valuable and sensitive.
2. Contribution Measurement
   
   • Measuring the contributions of each party is complex due to the different nature of their inputs (designs vs. production techniques).
   • This makes it difficult to assess individual contributions to profits or other metrics.
3. System Compatibility
   
   • Luvij and Shirville may have incompatible information systems.
   • Integrating these systems can be difficult and costly, and differing data collection methods may lead to inconsistencies.
4. Diverse Objectives
   
   • The parties have different objectives: Luvij aims to become a market leader, while Shirville seeks to utilize spare capacity.
   • Performance metrics might conflict, complicating the management of the joint venture.
5. Differing Time Horizons
   
   • Luvij’s long-term goal contrasts with Shirville’s short-term objective tied to the factory lease.
   • Aligning performance objectives over different timescales is challenging.
6. Risk Appetite
   
   • Luvij has a higher risk tolerance, having invested heavily in market research and product design.
   • Shirville’s lower risk appetite may lead to conflicts in decision-making.
7. Quality Expectations
   
   • Luvij focuses on high-quality footwear, while Shirville’s products are geared towards supermarkets and high street stores, likely at a lower quality.
   • Differing quality standards can hinder joint venture performance.

Question 25

Cortinas- RFID, Budgeting & ABM

Answer 25

Summary: Cortinas Retail Clothing (CRC) Budgeting Systems (Mar/Jun 19)

Advantages of Current Incremental Budgeting System

1. Simplicity and Familiarity: Incremental budgeting is quick and easy to prepare. CRC’s managers are experienced with this system, which has been in place for a long time.
2. Stability: This system was appropriate during steady, slow growth (one new store approximately every two years).
3. Flexibility: Budgets can be adjusted based on anticipated activity levels, as demonstrated by the central warehouse manager’s adjustment for increased volumes.

Disadvantages of Current Incremental Budgeting System

1. Encourages Slack: Managers might incorporate extra costs to make budgets more achievable, leading to inefficiency and inflated budgets.
2. Lack of Innovation: Incremental budgeting does not encourage finding new, more efficient ways of operation. CRC has less automation in the warehouse compared to competitors.
3. Propagates Inefficiencies: Existing inefficiencies and poorly controlled costs are carried forward, as evidenced by the resistance to the RFID system and its operational challenges.

Advantages of Activity-Based Budgeting (ABB)

1. Cost Control: ABB focuses on activities driving costs, helping to manage and eliminate non-value-adding activities.
2. Identifying Critical Success Factors: It helps in identifying and focusing on critical operations like efficient warehouse management.
3. Adaptability to Change: Suitable for CRC’s rapid expansion and changing business nature, making it more appropriate than incremental budgeting under new, complex operational circumstances.

Disadvantages of Activity-Based Budgeting (ABB)

1. Resource Intensive: Implementing ABB requires significant time and resources to identify activities and their cost drivers.
2. IT System Constraints: CRC’s outdated IT systems are not capable of handling the data requirements for ABB, necessitating significant investment.
3. Resistance to Change: Staff may resist the new system and require extensive training.

Conclusion

CRC should adopt ABB to better handle its business expansion and increasing complexity. The out-of-town stores and potential food retailing business will benefit from the detailed cost management and efficiency focus of ABB, despite the initial costs and disruption of implementing the new system.

Activity-Based Budget for Central Warehouse (YE 30 June 20X6)

• Annual number of receipts into goods inwards: 9,000
• Cost per receipt into goods inwards: $30.50 ($274,500/9,000)

Variance Analysis Comments

• Expected cost for goods inwards (July 20X5): $19,825 ($30.50 x 650 receipts)
• Actual cost: $18,000, resulting in a favorable variance of $1,825.
• Favorable Variance Cause: Larger quantities received per delivery might have led to cost savings. This could be due to fewer suppliers providing larger shipments.

Workings

1. RFID Tagging (W1)
   
   • Expected items: 100,000
   • Staff needed: 3 (each tagging 35,000 items/month)
   • Annual wages: $72,000 (3 x $24,000)
2. Warehouse Staff Wages (W2)
   
   • Total staff: 14 (12 existing + 2 new)
   • Annual wages: $315,000 (14 x $22,500)
   • Allocated to goods inwards/outwards: $157,500 each
3. Heating and Lighting (W3)
   
   • Cost: $10,000 (no increase due to zero inflation)

Cost Category | Total | Goods Inwards | Goods Outwards | Other |
|——————————–|———|—————|—————-|———|
| Warehouse manager’s salary | $55,000 | – | – | $55,000 |
| Lease of RFID system | $75,000 | $45,000 | $30,000 | – |
| RFID tagging (W1) | $72,000 | $72,000 | – | – |
| Warehouse staff wages (W2) | $315,000| $157,500 | $157,500 | – |
| Heating and lighting (W3) | $10,000 | – | – | $10,000 |
| Total | $527,000 | $274,500 | $187,500 | $65,000 |

Question 26

Chiven-Value chain, Performance Reports

Answer 26

To: The Board of Chiven Stores (Chiven)
From: An Accountant
Date: June 2018
Subject: Performance Reporting and Management Issues

This report evaluates the current performance report used for the annual board review and suggests three additional important performance indicators. It also examines how the value chain approach can be used to streamline the supply chain and discusses the impact, risks, and challenges of Big Data for Chiven.

(i) Performance Report for Annual Board Review

Role of the Performance Report:
The primary function of the performance report is to allow the board to evaluate whether the company’s mission and subsidiary aims are being achieved. Chiven’s mission has two key components:
1. Becoming the largest clothing retailer in Beeland, measured by market share.
2. Delivering exceptional value to shareholders, measured through dividends, EPS, economic value added, and ROCE.

However, to better assess performance, it would be more effective to focus on the year-on-year growth of these indicators rather than absolute figures. Additionally, including market average information would help investors compare their investments in Chiven with others in their portfolios.

Subsidiary Aims and Initiatives:
Based on the CEO’s comments, the subsidiary aims and initiatives include:
- Maximizing opportunities from new technology
- Increasing web presence
- Utilizing ‘Big Data’ for web sales
- Simplifying the supply chain

There are no measures for web sales or the impact of technology on Chiven’s activities, as sales are reported in total rather than being broken down into store and web sales. However, the aim of simplifying the supply chain is measured by the number of suppliers and product lines, which indirectly improves the probability of reducing inventory write-downs.

General Comments on the Current Report:
The current report is likely to overwhelm the board due to information overload from too many indicators. This could be improved by reducing and prioritizing the indicators. For instance, there might be redundancy in having both economic value added and ROCE in the report. Suggested headings for a more organized report include:
- Shareholder value performance
- Market leadership
- Impact of new technology
- Efficiency in the supply chain

The report should focus on year-on-year growth of shareholder value indicators and include competitor information such as the market-leading market share. Forward-looking information is also lacking, which is crucial given the aim of innovation through new technology. Additionally, property cost summaries would be useful for comparison with web operations.

Some indicators are too operational (e.g., average time between customer entry and employee greeting), which may not be necessary for the board report. If customer experience indicators are deemed strategically important, equivalent indicators for web sales should be included.

(ii) Three New Performance Measures for Chiven

To improve the presentation of Chiven’s results, three performance measures are suggested:
1. Revenue per Employee: This ratio would help evaluate how effectively each employee contributes to revenue generation.
2. Revenue per Square Meter: This measure would assess the efficiency of store space utilization.
3. Operating Profit per Square Meter: This ratio would highlight the profitability of the store space, providing insight into cost management and revenue generation.

These measures simplify the interpretation of results and align with common retail industry practices. The current figures from 2017 and 2016 are:

These measures will help better understand store performance and employee productivity.

(iii) Streamlining the Supply Chain Using the Value Chain

The value chain analysis divides business activities into primary and support activities to enhance value creation. Simplifying the supply chain impacts procurement, technology development, and inbound logistics.

Procurement:
Focusing on fewer suppliers and more efficient procurement processes can streamline operations.

Technology Development:
Implementing advanced information systems for supplier management and delivery tracking can enhance supply chain efficiency.

Inbound Logistics:
Adopting just-in-time delivery systems can reduce stockholding costs and improve inventory turnover.

Performance measures for supply chain simplification should include:
- Number of suppliers
- Number of product lines per supplier
- Time to source new products
- Revenue and profits from new products

These measures ensure a leaner supply chain and better inventory management.

(iv) The Potential Impact of Big Data for Performance Management at Chiven

Characteristics of Big Data:
- Volume: Large amounts of data from store transactions, web interactions, and social media.
- Velocity: Real-time data processing to quickly respond to customer behavior.
- Variety: Diverse data types, including structured and unstructured data from various sources.

Potential Impact:
Big Data can provide predictive insights into customer behavior, improving marketing strategies and operational efficiency. For example, loyalty card data and website browsing patterns can personalize customer experiences and optimize inventory levels.

Risks and Challenges:
- Cost: High investment in hardware and software for data storage and analysis.
- Privacy and Regulation: Ensuring compliance with data protection laws to avoid legal and reputational risks.
- Data Accuracy: Managing the veracity of data to avoid incorrect conclusions and outdated information.

Implementing Big Data strategies requires balancing these risks with the potential for significant performance improvements.

Examiner’s Comments Summary:
- Part (i) required better alignment with company aims and critical success factors. Candidates often missed subsidiary aims and did not relate measures to these aims.
- Part (ii) lacked justified suggestions and calculations based on the provided data. Candidates should have focused on measures that improve current ones and justified their relevance to the company’s aims.
- Part (iii) often included unnecessary descriptions of the value chain rather than focusing on its impact on supply chain simplification. Responses should have been scenario-specific.
- Part (iv) was generally well-handled, with good explanations of Big Data risks and challenges, although some candidates lacked technical knowledge.

By addressing these areas and focusing on justified and scenario-specific recommendations, Chiven can enhance its performance reporting and management processes.

Measure | 2017 | 2016 |
|——————————–|———-|———-|
| Revenue per employee ($000) | 65.0 | 66.1 |
| Revenue per sq meter ($) | 3,096.5 | 3,147.3 |
| Operating profit ($m) | 434.3 | 430.0 |
| Operating profit per sq meter ($) | 510.9 | 519.3 |

Question 27

Chicory- Benchmarking, Divisional Comparisona

Answer 27

Summary: Evaluation of Performance Measures for Benchmarking (Chicory and Fennel)

(a) Performance Measures

(i) ROCE (Return on Capital Employed)
- Calculations:
- Chicory: 13.6%
- Fennel: 14.9%
- Fennel’s higher ROCE suggests better performance.

• Advantages:
  
  • Provides a percentage figure, facilitating comparisons across businesses of different sizes.
  • Familiar to Chicory’s management.
  • Data required for calculation is readily available from published sources.
• Disadvantages:
  
  • May not correlate strongly with the objective of maximizing shareholder wealth.
  • Can be distorted by differing accounting policies or levels of intangible assets.
  • May discourage investment in new non-current assets, which contradicts Chicory’s strategy of investing in charging points.

(ii) EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- Calculations:
- Chicory: $52.0m
- Fennel: $51.0m
- Chicory’s EBITDA is slightly better than Fennel’s.

• Advantages:
  
  • Easy to calculate and understand.
  • Proxy for cash flow generated from operating profit, relevant given Chicory’s cash flow difficulties.
  • Excludes tax, interest, depreciation, amortization, and goodwill write-offs, focusing on underlying performance.
  • Removes subjectivity and inconsistencies in accounting policies.
• Disadvantages:
  
  • Ignores replacement costs of assets.
  • Less useful for comparing businesses of different sizes due to being an absolute measure.
  • May limit usefulness if one company leases and the other purchases non-current assets.
  • Differences in accounting policies between regions (e.g., capitalizing development costs) can complicate comparisons.

(b) Problems with Benchmarking Against Fennel

1. Relevance of Fennel as a Benchmark:
   
   • No indication Fennel is best in class.
   • Differences in tax incentives and loan guarantees between Veeland and Deeland.
   • Potential need for Chicory to consider leasing assets or accept slower growth due to funding limitations.
2. Timeliness and Currency of Data:
   
   • Fennel’s financial data is 18 months older than Chicory’s.
   • Rapid growth in the electric car market and falling component prices not reflected in Fennel’s data.
3. Accuracy and Reliability of Data:
   
   • Data shared by Fennel may be inaccurate or misleading.
   • Difficulty in finding other comparable businesses for future benchmarking.
4. Comparability of Business Models:
   
   • Fennel’s business model (providing charging points) is different from Chicory’s existing business.
   • Benchmarking against Fennel may be misleading without detailed activity-specific data.
5. Economic and Currency Differences:
   
   • Differences in economic strength between Deeland and Veeland.
   • Potential unachievability of performance targets set based on Fennel’s data.
   • Currency exchange rate fluctuations affecting comparability.

Examiner’s Comments

• Part (a): Candidates struggled with correct calculations but performed well in evaluating the methods.
• Part (b): Good knowledge demonstrated but often lacked specific relation to the scenario. Some candidates discussed the general process of benchmarking instead of focusing on problems, missing the opportunity to score higher marks.