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CPA PROGRAM

STRATEGIC MANAGEMENT
ACCOUNTING
STUDENT SUPPORT NOTES
FOR 2015

Sixth edition 2015 For 2015


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BPP Learning Media Ltd


2015

CONTENTS

Module 1
INTRODUCTION TO STRATEGIC MANAGEMENT
ACCOUNTING
page 1
Module 2
CREATING ORGANISATIONAL VALUE,
PART A: VALUE CREATION
page 37
Module 2
CREATING ORGANISATIONAL VALUE,
PART B: STRATEGIC MANAGEMENT
page 57

Module 5
PROJECT MANAGEMENT, PARTS A AND B
page 167
Module 5
PROJECT MANAGEMENT, PART C
page 181
Module 5
PROJECT MANAGEMENT, PARTS D, E AND F
page 197
Answers to Module Learning Examples

Module 3
PERFORMANCE MEASUREMENT
page 87
Module 4
TECHNIQUES FOR CREATING AND MANAGING
VALUE
page 133

Introduction

iii

iv

Module 1
PART A: THE ROLE OF MANAGEMENT
ACCOUNTING

EVOLUTION OF MANAGEMENT ACCOUNTING


CAUSES OF CHANGE IN THE BUSINESS
ENVIRONMENT

ROLE OF MANAGEMENT ACCOUNTANT

VALUE AND VALUE CREATION

STRATEGIC MANAGEMENT

PART B: UNDERSTANDING AND SUPPORTING


MANAGEMENT

PART C: MANAGEMENT ACCOUNTING


SYSTEMS

RISK MANAGEMENT

PROBLEMS WITH MA SYSTEMS

ENVIRONMENTAL MANAGEMENT
ACCOUNTING SYSTEMS

OPERATIONAL MANAGEMENT SUPPORT


TECHNIQUES

While the traditional role of management accounting


in supporting the decisions of operational managers is
still extremely important and fundamental, since 1950
the discipline has increasingly embraced both a wider,
strategic role and a more sophisticated range of
techniques. In this module we shall look at the
development and role of strategic management
accounting and management accounting systems.

INTRODUCTION
TO STRATEGIC
MANAGEMENT
ACCOUNTING
1

PART A: THE ROLE OF MANAGEMENT


ACCOUNTING

Context
In contrast to financial reporting to external users of information, strategic management accounting
is about internal reporting so that managers and operational staff can make both day-to-day and
strategic decisions.

Learning example 1.1


How does strategic management accounting information differ from financial reporting information?

Solution 1.1

1: Introduction to strategic management accounting

EVOLUTION OF MANAGEMENT ACCOUNTING

Context
From straightforward management accounting pre-1965, when the focus was on determining
costs and controlling financial resources, the discipline has developed into strategic management
accounting.

1: Introduction to strategic management accounting

CAUSES OF CHANGE IN THE BUSINESS


ENVIRONMENT

Context
The contemporary business world has changed rapidly in recent times and this has had a profound
effect on the evolution of SMA and on the roles of management accountants.

Learning example 1.2


Consider your own organisation or one that is familiar to you. How has the organisation been
affected recently by the four causes of change in the business environment, and what effect has
this had on internal reporting?

Solution 1.2

1: Introduction to strategic management accounting

ROLE OF MANAGEMENT ACCOUNTANT

Context
As traditional management accounting has evolved into strategic management accounting, the skills
required from management accountants have increased.
A matrix of required skills was provided (2004) by the International Accounting Education Standard
Board (IAESB).
These required skills are linked to the ways in which management accountants help to create
sustainable success for their organisation.

1: Introduction to strategic management accounting

10

VALUE AND VALUE CREATION

Context
Strategic management is concerned with the creation and protection of value, in both commercial
and non-commercial organisations. Strategic management accounting provides a supportive role for
strategic managers, and is concerned with the provision and use of information that can be used to
enhance value.

Learning example 1.3


How might value be created for (a) customers of an organisation and (b) employees of an
organisation?

Solution 1.3

1: Introduction to strategic management accounting

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12

STRATEGIC MANAGEMENT

Context
It is important to emphasise that management and strategy are not procedures or techniques that
can be rote learned. Candidates need to understand a wide range of strategic ideas and use them to
produce practical solutions to practical problems.
Candidates should gain an understanding of the role of strategic management accounting as they
progress through the segment. This introduction gives a basic outline.

Learning example 1.4


Consider your own organisation or one that is familiar to you. What is its strategy, and how does its
strategic plan seek to achieve that strategy?

Solution 1.4

1: Introduction to strategic management accounting

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14

PART B: UNDERSTANDING AND SUPPORTING


MANAGEMENT

Context
This overview of the strategic management process illustrates the way that various elements
involved in business strategy link together. However, it is important to note that there are
alternative approaches to strategy, so the rational model should not be seen as a checklist for
doing strategy.

Learning example 1.5


Here are some examples of business activities. Which of the elements of strategy (analysis,
planning and choice, implementation and evaluation) do they illustrate?

Review of research into the attitudes of existing customers.


Consideration of a banks attitude to providing further finance.

Solution 1.5

1: Introduction to strategic management accounting

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PART B: UNDERSTANDING AND SUPPORTING


MANAGEMENT

Context
In order for an organisation to achieve its goals and objectives, it will need to ensure that what is
meant to happen actually happens. Management at the top and bottom levels of the organisation
need to be strongly linked to ensure that an intended strategy is actually implemented.

1: Introduction to strategic management accounting

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PART C: MANAGEMENT ACCOUNTING SYSTEMS

Context
The management accounting system provides information for both strategic and operational use.
This covers a wide variety of areas.

Learning example 1.6


Traditional management accounting and MAS have been concerned with providing information for
decision making and controlling costs. It has often been criticised for not providing sufficient
relevant information to management because it tends to impose general techniques as solutions in
situations which demand custom-designed (directly applicable) methods and specific information.
Discuss the validity of this criticism of management accounting.

Solution 1.6

1: Introduction to strategic management accounting

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RISK MANAGEMENT

Context
Good corporate governance requires that the organisation be aware of the nature of the different
types of risk it faces, and to manage them as effectively as possible.

1: Introduction to strategic management accounting

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RISK MANAGEMENT

Context
This section illustrates the principle that the control environment and procedures, especially
accounting controls, should be sufficient to deal with the issues and risks in the business
environment in which they operate.

Learning example 1.7


Suggest control procedures for the following:
Business environment

Control procedure (candidate to complete)

Most of the customers pay in cash


Individual inventory items are of high
value
The organisations environment is
unpredictable and complicated

Solution 1.7

1: Introduction to strategic management accounting

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PROBLEMS WITH MA SYSTEMS

Context
Major problems with many MASs are their failure to provide information that addresses or solves
problems. If they do, there are often issues around timeliness. Note that there is a greater level of
detail seen here than in the study materials.

1: Introduction to strategic management accounting

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26

ENVIRONMENTAL MANAGEMENT ACCOUNTING


SYSTEMS

Context
Commitment to sustainability means organisations need to know physical information about, for
example, waste products as well as monetary information. This is the role of EMAS, so that an
organisation's analysis of issues and decisions about them can be properly informed about
sustainability matters.

1: Introduction to strategic management accounting

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28

OPERATIONAL MANAGEMENT SUPPORT


TECHNIQUES

Context
Although management accounting has developed a great deal at the strategic management level,
we should not ignore or underestimate its importance at the operational level.

1: Introduction to strategic management accounting

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OPERATIONAL MANAGEMENT SUPPORT


TECHNIQUES

Context
Product costing depends on the classification of costs and is at the heart of day-to-day and strategic
decisions.
A budget is the detailed expression of the organisation's strategy in the form of a monetary plan.
Operational managers require budgets to plan activities and to take control action over time.

1: Introduction to strategic management accounting

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OPERATIONAL MANAGEMENT SUPPORT


TECHNIQUES

Context
Especially in manufacturing environments, variance analysis can be a key way in which the
management accountant provides information to support operational managers.
Note that fixed and flexible budgets and variance analysis are not covered in the study materials.

1: Introduction to strategic management accounting

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OPERATIONAL MANAGEMENT SUPPORT


TECHNIQUES

Context
Note that interdependence of variances is not covered in the study materials.
Working capital comprises inventory, accounts receivable and cash, less accounts payable.
Operational managers require timely and accurate information on levels of working capital and how
efficiently they are being maintained.

1: Introduction to strategic management accounting

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Reinforcement
Study Guide Module 1

36

Make sure that you attempt all the questions and activities within the Module
to test your knowledge.

Module 2
PART A: VALUE CREATION
ORGANISATIONS: THE TRANSACTION COST
APPROACH

CORPORATE GOVERNANCE: CONFORMANCE


CORPORATE GOVERNANCE: PERFORMANCE

CORPORATE GOVERNANCE:
SUSTAINABILITY

CREATING VALUE

THE ORGANISATION VALUE CHAIN

THE INDUSTRY VALUE CHAIN

MANAGEMENT ACCOUNTANTS AND VALUE


ANALYSIS

Competitive advantage depends on the extent to which


an organisation creates value for its stakeholders.
Corporate governance is the responsibility of the board
and is directed at fulfilling the financial, social and
environmental goals of the organisation's stakeholders.
The Management Accountant (MA) plays a key role in
generating information for management and other
stakeholders about value creating activities and value
chain performance.

CREATING
ORGANISATIONAL VALUE,
PART A: VALUE CREATION

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38

ORGANISATIONS: THE TRANSACTION COST


APPROACH

Context
The transaction cost approach gets to the heart of why a business exists. Note that hierarchy basis
and problems are not specifically covered in the study materials.

Learning example 2A.1


Can you explain how transaction costs are relevant to strategic alliances/joint ventures?

Solution 2A.1

2: Creating organisational value, Part A: Value creation

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CORPORATE GOVERNANCE: CONFORMANCE

Context
Corporate governance affects the way an organisation is run and how its strategy is implemented.
Good corporate governance enables investors to feel confident that their investment is wellmanaged and will not be lost as a result of bad decisions, poor management control or greed of the
directors.
Corporate governance develops to keep pace with changes in organisations behaviour and the
economic contexts that they operate in. This leads some countries to prefer the certainty of a
system based on strict rules. Others prefer the adaptability and flexibility of codes based on
principles.

2: Creating organisational value, Part A: Value creation

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CORPORATE GOVERNANCE: PERFORMANCE

Context
The other key aspect of corporate governance that is important to Management Accountants is
performance.
This is forward-looking and involves reporting information to make decisions that achieve strategic
planning, risk management and sound performance measurement. It also includes consideration of
the 'triple bottom line' of sustainability.

2: Creating organisational value, Part A: Value creation

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CORPORATE GOVERNANCE: SUSTAINABILITY

Context

CSR links corporate governance and ethics.

Management Accountants need to develop CSR systems which identify stakeholder groups
and the social and environmental requirements of these stakeholders.

Learning example 2A.2


To understand the increasing pressure for CSR, consider the impact that the oil spill in the Gulf of
Mexico had on the reputation and share price of BP one of the founding members of the United
Nations Global Compact which requires a precautionary approach to environmental risk.

Solution 2A.2

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CORPORATE GOVERNANCE: SUSTAINABILITY

Context
Sustainability is the focus of enterprise governance.

Learning example 2A.3


What aspects of CSR and sustainability might a company operating in the tobacco industry
consider?

Solution 2A.3

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CREATING VALUE

Context
Understanding, measuring and managing the value creation process are critical strategic
management accounting activities.

Learning example 2A.4


A business unit generates annual revenue of $3 000 000 and has directly attributable annual costs
of $1 980 000. The $10 000 000 capital invested in the business unit was diverted from another of
the organisations projects where it was estimated to earn a return of 7.5% pa. how much value
has the business unit created in the year?

Solution 2A.4

2: Creating organisational value, Part A: Value creation

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THE ORGANISATION VALUE CHAIN

Context
The organisation value chain is an essential model. It focuses on the need to create value (for the
consumer) and is vital for any analysis of strategic capability. It also provides a model of the way
that organisations work, and introduces the idea of processes in business strategy (covered in more
detail under strategic management).
Note that the 'value system' is not specifically covered in the study materials.

Learning example 2A.5


Suggest one way in which each of the activities in the value chain of a manufacturing company
could create value.

Solution 2A.5

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THE INDUSTRY VALUE CHAIN

Context
The value chain approach extends outside the individual organisation to encompass others in their
supply chain. Exploiting the linkages in this chain by means of collaboration can yield very good
results.

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MANAGEMENT ACCOUNTANTS AND VALUE


ANALYSIS

Context
The strategic importance of value chain management means Management Accountants must be
familiar with the concept, and provide an organisation with information to understand and manage
its value chain.

2: Creating organisational value, Part A: Value creation

55

Reinforcement
Study Guide Module 2 Part A

56

Make sure that you attempt all the questions and activities within the Module
to test your knowledge.

Module 2
PART B: STRATEGIC MANAGEMENT
WHAT IS STRATEGIC MANAGEMENT?

STRATEGIC ANALYSIS: VALUE ANALYSIS

STRATEGIC ANALYSIS: SWOT

INTERNAL ANALYSIS: CAPABILITIES

INTERNAL ANALYSIS: PRODUCTS

EXTERNAL ANALYSIS: INDUSTRY ANALYSIS/


FIVE FORCES

EXTERNAL ANALYSIS: PEST

STRATEGIC PLANNING: DEVELOPING A


GOOD STRATEGY

STRATEGIC PLANNING: BUSINESS MODEL


GENERATION

STRATEGIC PLANNING: GENERIC


STRATEGIES

STRATEGY CHOICE

STRATEGY IMPLEMENTATION

Unless organisations can sustain competitive


advantage, profitability is eroded. Strategic
management comprises a set of techniques that enable
an organisation to understand its capabilities and
ensure best fit with its environment. Strategic
management focuses on the long-term direction of the
organisation and the implementation of strategies to
achieve those goals.

CREATING
ORGANISATIONAL VALUE,
PART B: STRATEGIC
MANAGEMENT
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58

WHAT IS STRATEGIC MANAGEMENT?

Context
It is important to emphasise that although tools and frameworks are used to help formulate
strategy, it is inherently a creative process involving uncertainty and judgement about the future.
Strategic management concerns practical processes to compare the original strategic plan to the
organisations position as it evolves, and taking corrective action where necessary; even if this
action involves changing the original strategy to adapt to the dynamic environment.

2: Creating organisational value, Part B: Strategic management

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60

WHAT IS STRATEGIC MANAGEMENT?

Context
Organisations need to make plans and carry these out successfully to survive and do well. The left
hand page outlines the rational strategic management process, which guides the setting and
execution of an organisation's strategy. We saw this figure in Module 1 too, as an overview of the
strategic management process as a whole.

Learning example 2B.1


Working with a partner, take turns to describe in your own words the rational strategic
management model on the facing page. At this stage this is not a memory exercise but a test of
your understanding. (This exercise is not as easy as it may first appear particularly if the partner
who is not doing the describing actively listens and asks plenty of questions!)

Solution 2B.1

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STRATEGIC ANALYSIS: VALUE ANALYSIS

Context
Value for the organisation is achieved through creating competitive advantage. Value analysis is
concerned with identifying how value can be created within the value chain of an organisation,
adding to customer value and competitive advantage.

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STRATEGIC ANALYSIS: SWOT

Context
SWOT is an approach to summarising strategic position. It offers some basic guidance on how
strategy may then be developed in a sound fashion.

Learning example 2B.2


Analyse the basic SWOT position of an organisation you are familiar with.

Solution 2B.2

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INTERNAL ANALYSIS: CAPABILITIES

Context
Understanding the nature of reproducible capabilities and distinctive capabilities or core
competences is fundamental to any assessment of strategic capability and competitive advantage.

Learning example 2B.3


Suggest some examples of distinctive capabilities and core competences.

Solution 2B.3

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INTERNAL ANALYSIS: PRODUCTS

Context
Product life cycles and product portfolios have significant implications for business strategy and
performance. To be successful, an organisation needs to continue to offer products that the
customer wants to buy, even as their tastes and demands change over time.
The capacity to innovate cost effectively may be an important capability to have.

Learning example 2B.4


In relation to the product life cycle suggest real life product examples for each life cycle stage.

Solution 2B.4

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EXTERNAL ANALYSIS: INDUSTRY


ANALYSIS/FIVE FORCES

Context
The five forces model is acknowledged as a valuable tool for assessing the competitive
environment. It is used to help answer the core questions required for industry analysis.

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EXTERNAL ANALYSIS: PEST

Context
The PEST framework is a useful model for identifying the major aspects of the macro-environment.

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EXTERNAL ANALYSIS: PEST

Context
The impact business activity has on the physical environment has become a major concern.
Environmental protection is a key aspect of both sustainability and corporate social responsibility
(CSR).
Note: Social/environmental factors, technological factors and environmental protection are not
covered in this level of depth in the study materials.

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STRATEGIC PLANNING: DEVELOPING A GOOD


STRATEGY

Context
After the organisation has analysed its internal and external environment, it should start strategic
planning in order to come up with a good strategy that 'ticks all the boxes'.

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STRATEGIC PLANNING: BUSINESS MODEL


GENERATION

Context
An organisation which wants to enter new, almost unheard-of industries or to carve out an
uncontested share of an existing industry needs to both improve value and reduce costs a big
challenge.

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STRATEGIC PLANNING: GENERIC STRATEGIES

Context
Porter (1980) believes there are three generic strategies which deliver competitive advantages for
an organisation cost leadership; differentiation; and focus.

Learning example 2B.5


Suggest examples of businesses pursuing each generic strategy from your own experience.

Solution 2B.5

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STRATEGY CHOICE

Context
So far, this module has been concerned with the nature and characteristics of potential strategies.
This section summarises the process by which organisations choose the strategy they are actually
going to follow.

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STRATEGY IMPLEMENTATION

Context
The best strategic plans are no good unless they are properly implemented. It is impossible to plan
for every eventuality, and plans may need to be changed.
Implementation turns the rather abstract and conceptual nature of planning into a reality, involving
hands-on work by individuals at all levels.

Learning example 2B.6


It has been suggested that control checkpoints or milestones should be established to monitor
activities, in order to ascertain whether plans are being properly implemented. Can you think of any
examples of activities that could be monitored on reaching such checkpoints?

Solution 2B.6

2: Creating organisational value, Part B: Strategic management

85

Reinforcement
Study Guide Module 2 Part B

86

Make sure that you attempt all the questions and activities within the Module
to test your knowledge.

Module 3
PART A: PERFORMANCE/PERFORMANCE
MEASUREMENT

FINANCIAL PERFORMANCE

NON-FINANCIAL PERFORMANCE

FUNCTIONS OF PERFORMANCE
MEASUREMENT

SUSTAINABILITY REPORTING

GOVERNANCE, RISK, ETHICS AND


PERFORMANCE

PART B: STRATEGY AND MANAGEMENT


CONTROL

LIMITATIONS OF TRADITIONAL
CONTROLS

OPERATIONAL AND STRATEGIC


PERFORMANCE

BALANCED SCORECARD

STRATEGY AND PERFORMANCE


MEASUREMENT

PART C: DESIGNING PERFORMANCE


MEASURES

IMPROVING PERFORMANCE

REWARDS

'What you measure is what you get' (WYMIWYG) and


'What you don't measure you can't control' (WYDMYCC)
are traditionally the justification for an organisation to
measure the performance of individuals,
departments/units and the organisation as a whole in
meeting its objectives.

PERFORMANCE
MEASUREMENT

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PERFORMANCE/PERFORMANCE
MEASUREMENT

Context
Performance measurement is a fundamental role of strategic management accounting (SMA) which
aims to support managers making decisions that lead to achievement of objectives.

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FINANCIAL PERFORMANCE

Context
This section sets out various ways that are used to report financial performance.
Traditional financial reporting and ratio analysis have given way to more flexible and varied ways of
reporting financial performance.

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NON-FINANCIAL PERFORMANCE

Context
Performance measurement systems should include non-financial performance measures. Unless key
non-financial targets are achieved, the organisation is unlikely to achieve its financial targets.

Learning example 3.1


What might be useful non-financial performance measures for:
(1)

A company selling household goods to consumers online

(2)

A hotel?

Solution 3.1

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FUNCTIONS OF PERFORMANCE MEASUREMENT

Context
There are two aspects to performance measurement. One is measuring how much value has been
created by the organisation. The other is measuring success in maintaining or achieving a
sustainable business.

Learning example 3.2


An extract from the 2012 Volkswagen Value Added Statement:
Volkswagen Group Annual Report 2012
Value added generated by the Volkswagen Group Source of funds
Source of funds in million

2012

2011

Sales revenue

192,676

159,337

24,652

13,125

-122,450

-104,648

Depreciation and amortization

-13,135

-10,346

Other upfront expenditures

-22,077

-9,759

Value added

59,666

47,709

Other income
Cost of materials

Value added generated by the Volkswagen Group Appropriation of funds


Appropriation of funds in million

2012

to shareholders (dividend)

1,639

2.8

1,406

2.9

29,503

49.5

23,854

50.0

to the state (taxes, duties)

4,322

7.2

4,525

9.5

to creditors (interest expense)

3,957

6.6

3,530

7.4

to employees (wages, salaries, benefits)

to the Company (reserves)


Value added

2011

20,246

33.9

14,393

30.2

59,666

100.0

47,709

100.0

What does this analysis tell us?

Solution 3.2

3: Performance measurement

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SUSTAINABILITY REPORTING

Context
Traditional financial reporting is reporting on historical performance, with a focus primarily on shortterm financial performance.
There has been growing recognition that historical financial reporting on its own is insufficient for
measuring and monitoring performance of companies.
CSR reporting, or sustainability reporting, provides information about other aspects of performance.
Many ASX-listed companies publish voluntary sustainability reports annually.

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Context
There have been several problems with sustainability reports, reducing their value as meaningful
measures of corporate performance. This has led to initiatives for standardisation in reporting,
particularly between similar types of company.
The separation of traditional financial reporting from sustainability reporting has also been
challenged, with guidelines for the combination of all aspects of performance (financial and
sustainability performance) included within a single integrated report. This initiative for integrated
reporting is at an early stage of development.

Learning example 3.3


What aspects of performance might you expect to see in an integrated report?

Solution 3.3

3: Performance measurement

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GOVERNANCE, RISK, ETHICS AND PERFORMANCE

Context
There is a governance aspect to performance measurement ensuring that the company operates
in line with the risk appetite (risk/return trade-off) decided by the board of directors, and ensuring
that risk management and control systems are effective.
There is also an ethical aspect to reporting performance. The board of directors uses external
reporting to send signals to shareholders and other stakeholders, and there may be some
motivation to send misleading signals through incorrect reporting.

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STRATEGY AND MANAGEMENT CONTROL

Context
Within a performance measurement system, the choice of key performance indicators will depend
partly on the business strategy of the company (cost leadership or differentiation the focus being
either cost leadership or differentiation within a market niche).
Performance measurement systems should also have several elements, from an overriding vision or
mission to a system of rewards for successful achievements.

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LIMITATIONS OF TRADITIONAL CONTROLS

Context
Traditional management accounting is often criticised because of its emphasis on fixed targets and
budgetary control.
Alternative approaches to measuring performance include the ideas of the Beyond Budgeting
movement.

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OPERATIONAL AND STRATEGIC


PERFORMANCE

Context
A performance measurement system should include reports on both operational performance and
also progress towards strategic objectives. Both aspects of reporting are needed.

Learning example 3.4


Explain how attempting to improve short-term lagging indicators in the financial quadrant of the
balanced scorecard may result in weaker strategic performance in the longer term.

Solution 3.4

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OPERATIONAL AND STRATEGIC


PERFORMANCE

Context
Performance measurement systems require some form of contextual framework. The most
appropriate framework varies with the circumstances of the organisation. This section introduces
candidates to the concepts of cause-and-effect reporting frameworks and cascading reporting
frameworks.

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OPERATIONAL AND STRATEGIC


PERFORMANCE

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3: Performance measurement

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OPERATIONAL AND STRATEGIC


PERFORMANCE

(This page is intentionally blank)

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BALANCED SCORECARD

Context
The balanced scorecard is the best known multidimensional model, and it looks at financial and
non-financial measures under four headings: customer perspective; financial perspective; internal
process perspective; and learning and growth perspective.

Learning example 3.5


What might be the key measures in the balanced scorecard for a supermarket chain?

Solution 3.5

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BALANCED SCORECARD

Context
Kaplan and Norton (2001) developed the concept of strategy mapping from the balanced scorecard.

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BALANCED SCORECARD

Context
Although the balanced scorecard provides a useful framework for developing multidimensional
performance measures, organisations may still face some potential problems when applying it.
Note that the topic Words of warning is not covered in such depth in the study materials.

Learning example 3.6


Rummidge Botanical Gardens are a not-for-profit organisation. The gardens are based in a leafy
suburb in the university city of Rummidge. The gardens consist of about 20 acres of formal and
informal gardens, hothouses, a restaurant and conference centre, a cafe and a gift shop. It also
houses a large collection of plants that is sometimes used by universities and commercial
organisations for research purposes.
Rummidge Botanical Gardens is funded through:

An admission charge to the gardens;


A grant from the local authority;
Profits from the restaurant, conference centre, cafe and gift shop;
Charges to universities and commercial organisations.

What measures might be appropriate for each perspective of the balanced scorecard?

Solution 3.6

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STRATEGY AND PERFORMANCE


MEASUREMENT

Context
Performance management should include measures for measuring and monitoring performance
against strategic objectives. In practice, this can be difficult.

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PART C: DESIGNING PERFORMANCE MEASURES

Context
A decision has to be made about what performance measures should be used within a
measurement and reporting system. The performance measures that are used should be linked to
the critical success factors for achieving the organisations goals and objectives.

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PART C: DESIGNING PERFORMANCE MEASURES

Context
Performance targets should be selected carefully, and should possess certain characteristics or
qualities.

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IMPROVING PERFORMANCE

Context
Benchmarking uses data from comparators inside and outside the organisation to identify best
practice and thereby improve performance.

Learning example 3.7


Set out the stages that would be required in a benchmarking exercise.

Solution 3.7

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127

128

IMPROVING PERFORMANCE

Context
Measures of performance are usually (1) targets for achievement, (2) measures of trends over time
or (3) comparisons of achievements against a benchmark.
However, any performance measurement system risks encouraging dysfunctional behaviour by
managers.

3: Performance measurement

129

130

REWARDS

Context
In this section we look at one of the key behavioural aspects of performance measurement the
link to rewards.

Learning example 3.8


Think of a reward scheme for an organisation that you either work for or know well. How effective
are these schemes?
Do chief executives in major companies justify the rewards they are paid?

Solution 3.8

3: Performance measurement

131

Reinforcement
Study Guide Module 3

132

Make sure that you attempt all the questions and activities within the Module
to test your knowledge.

Candidates should review Appendix 3.1 of the study materials which outlines
the case study of Western Water (WW) including examples of how WW
develops its performance measures using a balanced scorecard linked to
strategy through the strategy mapping process. This process is cascaded
down through the organisation to enable strategy to be implemented. WW
reports its performance in financial and non-financial terms and emphasises
long-term sustainability.

Module 4

PART A: ACTIVITY-BASED COSTING (ABC)

PART B: STRATEGIC REVENUE AND COST


MANAGEMENT

ACTIVITY-BASED MANAGEMENT (ABM)

BUSINESS PROCESS MANAGEMENT (BPM)

SOCIAL AND ENVIRONMENTAL VALUE


CHAIN ANALYSIS

PART C: UPSTREAM ACTIVITIES: SUPPLIER


MANAGEMENT

TOTAL QUALITY MANAGEMENT (TQM)

OUTSOURCING AND OFFSHORING

CUSTOMER PROFITABILITY ANALYSIS (CPA)

A variety of concepts and tools exist which can assist in


improving the performance of an organisation's value
chain.
The Management Accountant plays a key role in
providing information about internal value chain
activities, suppliers and customers which allows
management to identify opportunities for redesigning
or fine-tuning activities to maintain the competitive
position.

TECHNIQUES
FOR CREATING AND
MANAGING VALUE

133

134

PART A: ACTIVITY-BASED COSTING (ABC)

Context
Activity-based costing (ABC) recognises that many important categories of overheads are not
simply driven by volume and therefore using one absorption rate does not give a realistic allocation
of costs.
Increasingly in a modern environment overheads tend to be large and overhead activities are
complex and unrelated to production activity (direct labour hours or machine hours). There is a
variety of different cost drivers for overheads. In such circumstances ABC provides a more
rigorous allocation of overheads to give a more realistic unit cost estimate.

4: Techniques for creating and managing value

135

136

PART A: ACTIVITY-BASED COSTING (ABC)

Context
Implementing ABC can be broken down into a number of distinct steps.

Learning example 4.1


The following information is available for Dresden plc, which produces three products:
A
20,000
$/unit
20
5
2

Output (units)
Sales price
Direct material cost
Labour hours/unit
Wages paid at $5/hr

B
25,000
$/unit
20
10
1

C
2,000
$/unit
20
10
1

Other information is as follows:


Total production overheads are $190 000
$
Machining
Quality control and set-up costs
Receiving
Packing

Cost driver data


Labour hours/unit
Machine hours/unit
No. of production runs
No. of component receipts
No. of customer orders

55,000
90,000
30,000
15 000
190 000

A
2
2
10
10
20

B
1
2
13
10
20

C
1
2
2
2
20

Required
Using ABC, show the cost and gross profit per unit for each product during the period.

4: Techniques for creating and managing value

137

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138

Solution 4.1

4: Techniques for creating and managing value

139

140

PART A: ACTIVITY-BASED COSTING (ABC)

Context
The cost and complexity, and therefore the lack of take up, of traditional ABC by organisations has
led to a revision of the model, called time-driven activity based costing (TDABC).

Learning example 4.2


Dresden plc's receiving overheads for its production facility are $30 000, of this, $5 000 relates to
non-receiving costs such as staff training and meetings. Each standard delivery takes 1 hour of
receiving time, and each complex delivery takes 2 hours. Total receiving time available in the period
is 200 hours. Product A entails 4 standard receipts and 6 complex receipts. Production is 20 000
unit of Product A.
Calculate:
(a)
(b)
(c)

the capacity cost rate for receiving,


the cost of each standard and complex delivery and
the receiving cost to be allocated to Product A

Solution 4.2

4: Techniques for creating and managing value

141

142

PART B: STRATEGIC REVENUE AND COST


MANAGEMENT

Context
Strategic revenue management is concerned with developing strategies to optimise revenue.

4: Techniques for creating and managing value

143

144

PART B: STRATEGIC REVENUE AND COST


MANAGEMENT

Context
Strategic cost management techniques such as life cycle costing, target costing and Kaizen
costing provide opportunities for achieving cost reduction in a modern manufacturing environment.

Learning example 4.3


Discuss the implications of life cycle costing for mobile phones and nuclear power plants.

Solution 4.3

Learning example 4.4


Target costing may be used in both the manufacturing and service sectors. How might a cost gap
be eliminated if target costing was used to price the lecture in which you are currently sitting?

Solution 4.4

4: Techniques for creating and managing value

145

146

ACTIVITY-BASED MANAGEMENT (ABM)

Context
One of the traditional responsibilities of the management accountant is to provide cost information.
Indeed, in many organisations the management accountant was called the cost accountant.
Activity-based management is concerned with using information on the costs of activities
to improve efficiency and eliminate certain activities that do not add value to customers,
as well as improving design and developing better relationships with customers.

Learning example 4.5


Outline the benefits of ABM.

Solution 4.5

Learning example 4.6


Outline the problems of ABM.

Solution 4.6

4: Techniques for creating and managing value

147

148

BUSINESS PROCESS MANAGEMENT (BPM)

Context
Business processes may be changed to improve the way an organisation functions, in order to help
it achieve its business objectives.

Learning example 4.7


How could the ideas behind Porter's value chain be useful in a BPM project?

Solution 4.7

Learning example 4.8


What do you think are the major pitfalls for managers attempting to introduce business process
management into their organisations?

Solution 4.8

4: Techniques for creating and managing value

149

150

SOCIAL AND ENVIRONMENTAL VALUE CHAIN ANALYSIS

Context
As controversy over global warming continues, and big business adopts green targets, the issues
raised here are likely to become increasingly important.
T

Learning example 4.9


It may be advantageous for an organisation to show its concern for the environment. In what ways
might an organisation benefit from green practices and policies?

Solution 4.9

4: Techniques for creating and managing value

151

152

SOCIAL AND ENVIRONMENTAL VALUE CHAIN ANALYSIS

Context
Viewing suppliers as business partners instead of being a cost to be minimised affords opportunities
for cost reduction and value enhancement through collaboration.

Learning example 4.10


What would you consider when selecting a supplier?

Solution 4.10

4: Techniques for creating and managing value

153

154

PART C: UPSTREAM ACTIVITIES: SUPPLIER


MANAGEMENT

Context
Supply chain management is an externally-focused technique, whereby members of the supply
chain collaborate to provide value to the customer. Savings are shared between the partners in the
chain.

Learning example 4.11


Suggest ways in which supply chain management can provide the advantages of added value,
increased customer satisfaction, increased sales prices and reduction in waste and efficiency.

Solution 4.11

Learning example 4.12


Discuss any examples of improvements to supply chain management of which you have experience.

Solution 4.12

4: Techniques for creating and managing value

155

156

TOTAL QUALITY MANAGEMENT (TQM)

Context
Total Quality Management (TQM) focuses on the entire organisation rather than just one part of it.
It is a process of continually improving quality of products, services and processes with the
emphasis on preventing defects or failures rather than trying to do something about them after
they have occurred.
Note that total quality management is not covered in this level of depth in the study materials.

Learning example 4.13


One of the basic tenets of TQM is 'get it right first time'. Do you think variance reporting would be
a help or a hindrance in this respect? Give reasons for your answer.

Solution 4.13

Learning example 4.14


If Total Quality Management (TQM) is introduced into an organisation, would you expect each of the
following costs, in the long term to increase or decrease?
(a)

Cost of prevention

(b)

Cost of appraisal

(c)

Cost of internal failure

(d)

Cost of external failure

(e)

Total costs of quality

Solution 4.14

4: Techniques for creating and managing value

157

158

OUTSOURCING AND OFFSHORING

Context
Outsourcing and offshoring are additional examples of externally-orientated strategic management
accounting techniques.

4: Techniques for creating and managing value

159

160

CUSTOMER PROFITABILITY ANALYSIS (CPA)

Context
Customer profitability analysis (CPA) is linked with ABC, which can be used to build up customer
specific costs in a similar manner to cost pools. It is used to identify the most profitable customer
groups.

4: Techniques for creating and managing value

161

162

CUSTOMER PROFITABILITY ANALYSIS (CPA)

Context
ABC can assist in customer profitability analysis (CPA) by focusing attention on customer groups
which are not profitable and areas where cost reduction measures should be undertaken.
Note that the customer life cycle is not explicitly covered in the study materials.

Learning example 4.15


Cap Co makes high-tech electronic components. Customers place orders online or by phone, and
then Cap Co delivers the components to its customers. Cap Co has just carried out a customer
account profitability analysis and has identified various customer groups that are less profitable
than others. However, Cap Co is reluctant to stop selling to the less profitable customer groups
altogether and would prefer to increase their profitability.
How could Cap Co increase the profitability of the less profitable customer groups?

Solution 4.15

Learning example 4.16


DING is an IT consultancy that provides IT advice to a range of clients. DING classifies its
customers into four main categories.
Sales value ($000s)

D
1 000

I
3 000

N
850

G
1 200

DING employs ten full-time IT specialists who each deliver 1 500 chargeable hours per year and
who are paid $60 000 per year.
Costs
DING has estimated its other costs as follows:
$'000
Telephone support
1 000
After-sales service
1 500
Client meetings
280
2 780
U

4: Techniques for creating and managing value

163

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164

DING has reviewed its existing client database and determined the following four average profiles of
typical clients:
D
I
N
G
Total
000's
000's
000's
000's
000's
Number of telephone queries
20
480
50
250
800
Number of visits
3
21
4
8
36
Number of meetings
70
90
20
100
280
Chargeable hours
4
6
2
3
15
Previously DING used a single cost rate of $200 per hour for both in-house profit reporting and
quotations for new contracts.
Required
(a)
Prepare calculations to show the profit attributed to each customer group using the current
system of attributing costs.
(b)
Prepare calculations to show the profit attributed to each customer group using an activitybased system of attributing costs.
(c)
Discuss the differences between the costs attributed using ABC and those attributed by the
current system, and advise whether the change to the ABC system should be adopted.

Solution 4.16

4: Techniques for creating and managing value

165

Reinforcement
Study Guide Module 4

166

Make sure that you attempt all the questions and activities within the Module
to test your knowledge.

Module 5
PART A: PROJECT MANAGEMENT DEFINED
PROJECTS AND PROJECT MANAGEMENT

STEPS IN PROJECT MANAGEMENT

ORGANISATIONAL STRUCTURES

MANAGING INTERNATIONAL PROJECTS

PART B: ROLES IN PROJECT MANAGEMENT


PROJECT MANAGEMENT ROLES

PROJECT TEAM

This module considers the different stages of project


management and the different types of organisational
structure that can be adopted for projects and project
teams.

PROJECT
MANAGEMENT,
PARTS A AND B

167

168

A: PROJECTS AND PROJECT MANAGEMENT

Context
Project management is an important aspect of strategic implementation (strategy into action).
This section sets the scene for more detailed consideration of techniques and applications.

Learning example 5A.1


Discuss any project of which you have knowledge that failed to meet its objectives for time, cost
and quality.

Solution 5A.1

5: Project Management, Parts A and B

169

170

A: STEPS IN PROJECT MANAGEMENT

Context
The concept of the project life cycle (steps) is particularly useful when it comes to larger projects,
because it breaks the project into manageable parts. This makes it easier to allocate resources, and
to manage them.

Learning example 5A.2


Suggest ways in which project management could be used in the analysis of strategic position.
What advantage might this approach have?

Solution 5A.2

5: Project Management, Parts A and B

171

172

A: ORGANISATIONAL STRUCTURES

Context
Structure of project will depend on its requirements or purpose.

Learning example 5A.3


Provide a real life example of each type of project structure.

Solution 5A.3

5: Project Management, Parts A and B

173

174

A: MANAGING INTERNATIONAL PROJECTS

Context
Increased globalisation means that many organisations undertake international projects.

5: Project Management, Parts A and B

175

176

B: PROJECT MANAGEMENT ROLES

Context
A project manager has to understand how to balance the factors of scope, resources, time and risk
to ensure the project's desired result is achieved.

Learning example 5B.4


Is there a standard style of management that is appropriate for managing projects?

Solution 5B.4

Learning example 5B.5


Discuss any personal experience you may have of project or other temporary teams that did not
work together effectively.

Solution 5B.5

5: Project Management, Parts A and B

177

178

B: PROJECT TEAM

Context
Selecting the right team is critical to the success of a project.
Note that the topic building a project team is not covered to this degree of depth in the study
materials.

Learning example 5B.6


Compare and contrast the task force and matrix approaches to project teams.

Solution 5B.6

5: Project Management, Parts A and B

179

Reinforcement
Study Guide Module 5 Parts A and B

180

Make sure that you attempt all the questions and activities within the Module
to test your knowledge.

Module 5
PART C: MANAGEMENT ACCOUNTANTS ROLE
IN PROJECT SELECTION
THE BUSINESS CASE

STRATEGIC ANALYSIS/FIT

STAKEHOLDER IDENTIFICATION AND


ASSESSMENT

RISK ASSESSMENT

FINANCIAL ANALYSIS

Project selection requires the analysis of four areas:


strategic fit, stakeholders, risk and financial
projections.
A variety of analytical techniques exist to help the
management accountant complete these tasks.

PROJECT
MANAGEMENT,
PART C

181

182

C: THE BUSINESS CASE

Context
Preparing a business case for a project is essential otherwise organisations drift into ill-defined
projects based on vague hope and an even vaguer budget.

5: Project Management, Part C

183

184

C: STRATEGIC ANALYSIS/FIT

Context
Project management in its widest sense is fundamental to much of strategy.
Note Breakthrough projects are not covered in the study materials.

5: Project Management, Part C

185

186

C: STAKEHOLDER IDENTIFICATION AND


ASSESSMENT

Context
Keeping stakeholders informed and involved in a project and keeping them happy is one of the
project managers key tasks.

Learning example 5C.1


List the stakeholders in a large childcare charity which is undertaking a project to relocate one of its
children's homes.

Solution 5C.1

5: Project Management, Part C

187

188

C: RISK ASSESSMENT

Context
All projects carry an element of risk, and it is important that a clearer understanding of what the
project delivers against the business strategy is developed.

Learning example 5C.2


Identify two ways in which project risk can be classified.

Solution 5C.2

5: Project Management, Part C

189

190

C: FINANCIAL ANALYSIS

Context
A number of techniques exist to evaluate projects. In long-term projects, discounted cash flow
(DCF) methods (such as Net Present Value) are superior as they account for the time value of
money.

Learning example 5C.3


Day Mode Inc is considering a major investment project which will involve the creation of a chain of
shops. The following cash flows are expected.
Time (year)
Land and Buildings
Fittings and Equipment
Gross Turnover
Direct Costs
Marketing
Office Overheads
(a)
(b)
(c)

0
$000
8 125
1 750

1
$000

2
$000

3
$000

4
$000

4 500
1 875
425
312

6 250
2 750
625
312

7 000
3 750
500
312

7 500
4 000
500
312

60 per cent of office overhead is an allocation of head office operating costs.


The cost of land and buildings includes $200 000 which has been spent on surveyors fees.
Day Mode Inc expects to be able to sell the chain at the end of year 4 for $10 000 000.

Day Mode Inc is paying corporate tax at 30 per cent and is expected to do so for the foreseeable
future. Tax is paid one year in arrears.
The company will claim capital allowances on fittings and equipment at 25 per cent on a reducing
balance basis. Capital allowances are not available on land and buildings.
Estimated resale proceeds of $250 000 for the fittings and equipment have been included in the
total figure of $10 000 000 given above.
Day Mode Inc expects the working capital requirements to be 15 per cent of turnover during each of
the four years of the investment program.
Day Modes real cost of capital is 7.7 per cent per annum.
Inflation at 4 per cent per annum has been ignored in the above information. This inflation will not
apply to the resale value of the business which is given in nominal terms.
Required
Calculate the NPV for Day Modes proposed investment.

5: Project Management, Part C

191

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192

Solution 5C.3

5: Project Management, Part C

193

194

C: FINANCIAL ANALYSIS

Context
A variety of other techniques can contribute to an initial financial analysis of a project.

Learning example 5C.4


Two mutually exclusive projects with different project lives have been calculated as having NPVs as
follows:
Project A (4 years) $300 000
Project B (3 years) $250 000
The discount rate for both projects is 8%.
Which project should be chosen?

Solution 5C.4

5: Project Management, Part C

195

Reinforcement
Study Guide Module 5 Part C

196

Make sure that you attempt all the questions and activities within the Module
to test your knowledge.

Module 5
PART D: MANAGEMENT ACCOUNTANTS ROLE
IN PROJECT PLANNING
PROJECT SCHEDULING: GANTT CHARTS

PROJECT SCHEDULING: PERT

PROJECT SCHEDULING: CRITICAL PATH


METHOD

PROJECT BUDGETING

PART E: MANAGEMENT ACCOUNTANTS ROLE


IN PROJECT MONITORING AND CONTROL
MONITORING PROGRESS AND COSTS

RISK MANAGEMENT AND STAKEHOLDER


MANAGEMENT

PART F: MANAGEMENT ACCOUNTANTS ROLE


IN PROJECT COMPLETION AND REVIEW
PROJECT COMPLETION AND REVIEW

Management accountants play a key role in supporting


the project manager through the project planning
phase, and are central to the process of project
monitoring and control. Management accountants may
add value through writing the project completion report
and supporting other knowledge management
activities.

PROJECT
MANAGEMENT
PARTS D, E AND F

197

198

D: PROJECT SCHEDULING: GANTT CHARTS

Context
Gantt charts are a fairly basic project management tool, and they do not show the interrelationship
between the various activities in the project as clearly as a network diagram.

Module 5: Project Management, Parts D, E and F

199

200

D: PROJECT SCHEDULING: PERT

Context
In the context of project management tools, network analysis is more useful than some of the
others.

Learning example 5D.1


Explain briefly what the critical path is in relation to a project.

Solution 5D.1

Module 5: Project Management, Parts D, E and F

201

202

D: PROJECT SCHEDULING: PERT

Context
This continues our consideration of critical path analysis, showing an alternative presentation.

Learning example 5D.2


Activity

Time estimate in days

Preceding
activity

Optimistic

Most likely

Pessimistic

1
2
2
4
3
6
7
6
9

4
5
5
4
6
1
5
9
20
5

7
10
15
6
10
2
10
18
30
7

10
15
19
14
20
9
21
21
46
15

1
2
3
4
5
6
7
8
9
10

Remove kitchen
Remove toilet block
Excavate floor for new slab
Remove mezzanine
Repair mezzanine
Lay new slab
Build toilets
Fit out toilets
Build kitchen
Fit out kitchen

(a)
(b)
(c)

Construct the PERT network for the project using the AOA approach
Determine the expected completion times for all project activities.
Determine the projects critical path.

Solution 5D.2

Module 5: Project Management, Parts D, E and F

203

204

D: PROJECT SCHEDULING: CRITICAL PATH


METHOD

Context
CPM plus crashing may help shorten the project and improve cash flows and returns.

Module 5: Project Management, Parts D, E and F

205

206

D: PROJECT BUDGETING

Context
Larger, more complex projects will require a dedicated team to plan activities, monitor progress,
produce reports and record changes. Much of this activity is fairly routine and can be automated.
Note that the topics 'improving estimates' and 'influences on cost' are not covered in the study
materials.

Learning example 5D.3


Project management software may be used for a number of purposes. Which of the following is not
one of those purposes?
A
B
C
D

Estimating
Troubleshooting
Monitoring
Reporting

Solution 5D.3

Module 5: Project Management, Parts D, E and F

207

208

E: MONITORING PROGRESS AND COSTS

Context
As project activities take place, progress is monitored against set deliverable dates and cost
budgets.

Learning example 5E.4


Think of an example where project quality may need to be prioritised over time and cost.

Solution 5E.4
Learning example 5E.5
If the project progress report shows that actual progress is slower than planned, how could this
'slippage' be addressed?

Solution 5E.5

Module 5: Project Management, Parts D, E and F

209

210

E: MONITORING PROGRESS AND COSTS

Context
The three critical aspects of project performance are cost, completion and quality.
The earned value method is a method for reporting progress on a project in terms of both cost and
time, comparing actual costs and progress with expected costs and progress.

Module 5: Project Management, Parts D, E and F

211

212

E: RISK MANAGEMENT AND STAKEHOLDER


MANAGEMENT
Requires regular
communication.

Context
All projects must be carefully controlled if they are to achieve their objectives. Risk management
should be a continuing process, starting at the planning stage and continuing until project delivery
is complete, in order to take account of changing risk patterns.

Module 5: Project Management, Parts D, E and F

213

214

F: PROJECT COMPLETION AND REVIEW

Context
All projects come to an end, but they dont just stop. A project manager must examine often
formally whether the objectives have been met.
Note that post-completion audit is not specifically covered in the study materials.

Learning example 5F.6


Why should the completion report be documented? Isnt this just unnecessary bureaucracy?

Solution 5F.6

Module 5: Project Management, Parts D, E and F

215

Reinforcement
Study Guide Module 5 Parts D, E and F

216

Make sure that you attempt all the questions and activities within the Module
to test your knowledge.

ANSWERS TO MODULE LEARNING EXAMPLES

ANSWERS TO
MODULE
LEARNING
EXAMPLES
1

Module 1
Solution 1.1

Financial reporting information is often historical in nature. SMA includes historical


information, but also consists of forward-looking information such as forecasts and plans.

Financial information consists largely of quantitative information, although there is also


qualitative financial information in financial reports. SMA provides both qualitative and
quantitative information, and also information of a non-financial nature as well as financial
information.

Statutory financial reporting is regulated as to content. SMA reporting can contain whatever
information is considered appropriate.

Financial reporting is generally based on internal information/data sources. SMA information


is based on external information as well as internal information sources.

Solution 1.2
Obviously the answer to this question will depend on the organisation chosen.
However, it is likely to have been affected by one or more of the causes listed. The key point is to
identify how that might have influenced how internal reporting is carried out in the organisation.

Solution 1.3

Customer value creation. Ability to enjoy the benefits from products or services of the
organisation, purchased at a price that is no higher than the value of the benefits enjoyed.

Employee value creation. Continuing security of employment. Fair pay and satisfactory
working conditions in return for the efforts provided and results achieved.

Solution 1.4
Obviously the answer to this question will depend on the organisation chosen.
However, the strategy and strategic plan should seek to address certain key issues:

What do we (the organisation) do?


Who do we do it for?
How can we do better than the competition (or avoid it)?

Solution 1.5
Both of the examples have been carefully worded so that they describe a higher-level management
process that could be part of any of the elements.

Each is applicable to strategic analysis.

Each could be an input into strategic planning and choice, which is a complex process
involving the consideration of a wide range of influences, possibilities, advantages and
disadvantages. Should we offer new products or look to serve new markets?

Each could also be part of a response to a problem of implementation, such as sales


resistance, rising costs, or increased risk.

Answers to Module Learning Examples

Solution 1.6
Focus on past
The challenge facing management accountants is one of providing more relevant information for
decision making, but traditional management accounting systems may not always do this.
Management accounting information is often biased towards the past rather than the future, and
management accounting systems do not always detect strategic issues.
Inward focus
Decision making is a forward and outward looking process, and management accounting
information has been too inward looking.
Internal provision
The majority of management accounting information is devised for internal consumption.
Strategic management involves looking at the external environment, however, and strategy is
pursued in relation to competitors. Competitor actions need to be understood and quantified to be
able to devise appropriate responses.
Simplistic techniques
Some management accounting techniques such as variance analysis are seen as too simplistic
and largely irrelevant for decision making in today's business. Modern business is embracing new
ways of working, including outsourcing, and there is constant pressure to improve quality and
service and reduce costs. Some techniques such as activity-based costing have been developed
which are designed to take specific business processes and cost drivers into account when
measuring profitability and performance. Techniques such as customer profitability analysis
attempt to replace general analysis with specific information.

Solution 1.7
Business environment

Control procedure (candidate to complete)

Most of the customers pay in cash

Regular reconciliations

Separate cashier to handle money

Close observation of staff

Ensure good physical security

Inventory only issued to authorised signatories

Individual inventory items are of high


value

The organisations environment is


unpredictable and complicated

Close control to avoid over-ordering

Detailed monitoring of PESTEL factors,


competition, customers and suppliers

Ensure resources maintain flexible and agile


response potential with regular training

Module 2
Solution 2A.1
Strategic alliances/joint ventures create collaboration which helps organisations reduce transaction
costs by sharing information and providing access to broader markets and resources than they
would normally get if they were operating independently.

Solution 2A.2
The impact has been profound. The oil spill and BP's reaction to it ultimately resulted in a fall in the
company's share price, the resignation of senior management and direct comment from the US
President on the company's behaviour.

Solution 2A.3
These are some of the points candidates could have considered:

Providing information about the health risks of smoking.


Marketing policy.
Responding to pressure groups and lobbying.
Preventing young people smoking.
Developing 'safer' products (for example, low tar products).
Supply chain (for example, providing a fair price for leaf suppliers).
Human rights and child labour (in production and supply chain in developing countries).

Solution 2A.4
Value of benefits obtained revenue
Less: Direct costs
Less: Cost of capital used (10 000 7.5%)
Value created =

$'000
3 000
(1 980)
(750)
270

Solution 2A.5
Here are some examples. There are many more.
Inbound logistics: Storing inputs properly to avoid damage and deterioration.
Operations: Producing goods of consistent high quality.
Outbound logistics: Avoiding stockouts so that customer orders can be filled.
Marketing and sales: Obtaining feedback on what customers consider important.
After sales service: Providing prompt and effective installation of equipment.
Procurement: Obtaining quality supplies at best prices to keep costs down.
Technology development: Introducing more efficient production methods.
Human resource management: Hiring appropriately skilled staff.

Answers to Module Learning Examples

Solution 2B.1
This Learning Example requires a personalised answer and therefore there is no formal solution.

Solution 2B.2
The solution will obviously depend on the organisation chosen. But make sure strengths and
weaknesses are internal factors, and opportunities and threats are external factors.

Solution 2B.3

De Beers: diamonds.

French power companies: nuclear power.

Petrobras (Brazil) and Brazilian motor vehicle manufacturers: ethanol fuel technology.

Google: the Google search engine.

Microsoft: Windows operating system and applications suite (although this asset is fading
now, in the face of competition from open-source equivalents).

Solution 2B.4
Introduction: Virgin Galactic sub-orbital spaceflight (actually still in development but nearing
introduction);
Growth: the smartphone product class, formerly dominated by the BlackBerry, which has been
overtaken by Apples iPhone and a range of products from other manufacturers; High definition (HD
ready) televisions.
Maturity: the internal combustion-driven saloon car has been a mature product class for decades
it may be approaching the end of this phase as pressure to limit fuel consumption grows; Microsoft
Office product suite;
Decline: compact disc as a medium for music.; printed newspapers (as web versions grow); travel
agent services (with the growth of web-based booking).

Solution 2B.5
Major global examples include the following:
Cost leadership Walmart
Differentiation BMW
Differentiation focus Breitling watches
Cost focus Kwik-fit Tyres

Solution 2B.6
The following are possible issues to be checked:
(a)
(b)
(c)
(d)

Deadlines have we met them, and are we likely to meet future deadlines?
Targets have we missed any? Are we in danger of missing any?
Have we sufficient resources to complete the project?
Will the market plan be achieved; in other words, are we producing enough?

Module 3
Solution 3.1
Online retailer

Hotel

Number of visits to web site

% room occupancy (analysed by months, days


of the week, seasons of the year)

Ratio of sales orders to web site visits

Types of customer (% business, % tourist etc)

% of sales orders not met from inventory

On-time service completion (eg room cleaning)

Delivery times

Complaints: numbers, as a % of guests

% of items returned

Solution 3.2
Candidates may make many comments, including:

Value added to shareholders (who also own company reserves) has increased.

Effective tax rates have decreased. This is a sensitive issue globally.

Interest costs may reflect lower base interest rates generally.

Although employee appropriations have fallen in percentage terms, many of such costs are
fixed, and the higher volumes has benefitted the workforce in absolute terms.

Solution 3.3

Financial performance.
Strategic objectives and progress towards these.
Risks and risk management.
Sustainability performance (environmental, social).
Employment information; remuneration.
Corporate governance information.
Independent assurance/audit.

Solution 3.4
The customer and financial quadrants of the balanced scorecard are generally seen as containing
many 'lagging' indicators. These are performance measures that reflect short-term operational
activity, such as customer acquisition and net margin, which lags behind the bigger strategic
decisions that take a longer term view. Measures in the 'leading' quadrants of learning and
innovation, and business processes, look at investing in people and processes with a view to
generating benefits that may be some way down the line. In other words, positive leading
performance measures reflect the likely success of the organisations future strategy, while positive
lagging performance measures reflect the past success of the organisations short-term operations.
There is often a temptation to focus on reporting better short-term financial indicators, such as net
margin, by cutting immediate costs rather than on improving longer-term indicators, such as cycle
times of processes, by investing in training and proper maintenance of non-current assets. While
cutting training and development expenditure and 'economising' on repairs and maintenance of
machinery may generate reduced operational costs and increased profits in the short-term, the
effect will be felt in the longer term in that the organisations cycle times will not have been
improved and it may start to lose market as a result.

Answers to Module Learning Examples

Solution 3.5
Here are some suggestions, although they are by no means the only possible answers:
Financial perspective: Stable income (or growth); growth in new products/markets; share price;
dividend growth
Customer perspective: Customer choice; value for money; convenience; repeat business
Internal process perspective: Marketing/customer loyalty; inventory management; speed
through checkouts
Learning and growth perspective (extending the brand): New products as a percentage of
turnover; new markets as a percentage of turnover; number of new brands launched; staff training
expenditure
Interestingly, some supermarkets do use versions of the balanced scorecard in real life, customised
to each particular business.

Solution 3.6
A huge range of measures may be appropriate here. Examples may include:
Financial perspective cash flow, profitability, liquidity.
Customer perspective repeat visitors, customer satisfaction surveys.
Business process perspective wastage in cafes, unit costs of plants.
Innovation and learning perspective number of new exhibits per year, new plants introduced.

Solution 3.7
1

Decide what to benchmark

Identify benchmarking partners and sources

Study the processes in your own organisation and gather information

Obtain benchmarking data

Analyse the information and understand it relative to the benchmark

Learn and implement changes where necessary

Solution 3.8
This Learning Example requires a personalised answer and therefore there is no formal solution.
There is a strong body of opinion that believes that top executives receive excessive rewards
because they get the benefits of the efforts of the people who work for them.

Module 4
Solution 4.1
Workings: recovery rates

$55 000
$0.5851 per machine hour
40 000 50 000 4 000

(1)

Machine cost

(2)

QC & set-up

$90 000
$3 600 per production run
10 13 2

(3)

Receiving

$30 000
$1 363.64 per component receipt
10 10 2

(4)

Packing

$15 000
$250 per customer order
20 20 20

Machining costs
Quality control & set-up
Receiving
Packing
Total overhead costs
U

A
$
23 404
36 000
13 636
5 000
78 040

Units produced

Sales price
Gross profit/unit

C
$
2 341
7 200
2 728
5 000
17 269

20 000

25 000

2 000

$3.90

$3.79

$8.63

A
$/unit
5.00
10.00
3.90
18.90
20.00
1.10

B
$/unit
10.00
5.00
3.79
18.79
20.00
1.21

C
$/unit
10.00
5.00
8.63
23.63
20.00
(3.63)

Overhead cost/unit

Direct materials cost


Direct labour cost
Production overhead cost

B
$
29 255
46 800
13 636
5 000
94 691

Total
$
55 000
90 000
30 000
15 000
190 000

Solution 4.2
(a)

CCR =

Total resource cost


Total available capacity

= $30 000 $5 000


200 hours
= $125
(b)

Standard delivery cost= $125


Complex delivery cost = $125 2
= $250

(c)

Product A receiving cost


4 standard receipts @ $125
6 complex receipts @ $250

$
500
1 500
2 000
U

Receiving cost per unit of Product A

$2 000
$0.10
20 000

Answers to Module Learning Examples

Solution 4.3
Mobile phone

Nuclear power plant

Short life cycle

Very long life cycle

High costs at the start due to product


development, marketing

High costs at the start due to building and


equipment costs

During growth stage, cost per phone falls


dramatically due to economies of scale

During growth stage, cost per unit of electricity


falls dramatically due to economies of scale

At maturity stage, main cost will be variable


costs

At maturity stage, main cost will be variable


costs

At decline stage, sales volumes fall

At decline stage, very large decommissioning


costs

Solution 4.4
Options available to reduce costs:
(1)

Training staff in more efficient techniques. In the extreme a lecturer could have two classes
simultaneously and talk to one, while the other class watched video presentations or did
questions.

(2)

Using cheaper staff (or simply paying existing staff less!).

(3)

Acquiring a new, more efficient technology. Perhaps using web casts.

(4)

Cutting out non-value added activities. This might be hard to do for a lecturer but an
example may be social time with students.

Solution 4.5

Improved quality.
Increased customer satisfaction.
Lower costs.
Therefore increased profitability.

Solution 4.6

The amount of time setting up the system.


The associated costs of setting up the system.
Organisational and behavioural consequences.

Solution 4.7
BPM seeks to give an organisation an improved understanding of how their processes operate, so
that they can be redesigned with a view to creating and delivering better customer value.
The idea of looking at how processes operate across an organisation to achieve value for the
customer draws directly on Porter's idea of an organisation as a set of value-creating activities.

Solution 4.8

10

(a)

BPM is an all or nothing proposition. It is therefore expensive and risky, requiring major
expenditure on consultancy, investment in IT systems and disruption. It is not worth doing
unless benefits are going to exceed costs.

(b)

Implementation is difficult, as organisations fail to think through what they are trying to
achieve, and the process becomes captured by departmental interest groups.

(c)

Managers take a departmental view rather than the view of the business as a whole.

(d)

BPM becomes associated only with across the board cost cutting rather than a
fundamental re-evaluation of the business. Managers will fight very hard to avoid any threats
to their position.

(e)

Management consultants responsible for the ideas often fail to come up with realistic
strategies for implementation. Managers are therefore left with a BPM formula that they may
not fully understand and have to implement it in a hostile work environment.

Solution 4.9

Short-term savings through waste minimisation.

Potentially lower cost of capital because investors and lenders demand a lower risk premium.

A saving of energy and environmental taxes.

Longer product life cycles as environmental legislation may force early replacement of nongreen products.

No risk of pressure group action that may damage the reputation of the organisation.

Consumers may be willing to pay a higher price for the product.

There may be a larger pool of employees willing to work for the organisation and possibly for
less money.

Solution 4.10
Candidates may mention a range of answers, possibly including:

Quality (ability, expertise, experience).


Reliability.
Environmental credentials.
Cost.
Past and expected supply performance (e.g. lead time length and predictability).
Attitude of management.
Reputation.
Financial robustness.

Solution 4.11

Removal of inspection (a non-value adding activity) of both goods inwards and outwards if
quality can be assured and level of desired quality known.

Economy of scale through co-operation in ordering.

Better knowledge of end customer's interest communicated down the chain. The Internet
makes this more feasible.

Power balancing between organisations.

Faster response times.

Reduced transport costs and times through location management.

Reduced inventory levels.

Solution 4.12
Improvements can be made to a poorly performing push model, but major improvement will
normally require some aspect of the pull model to be incorporated.

Answers to Module Learning Examples

11

Solution 4.13
In theory, variance reporting should not be of any relevance at all, because variances will not occur.
In practice, an organisation will not get everything right first time and variance reporting may still
draw attention to areas for improvement but only if the standard and 'getting it right' are one and
the same.

Solution 4.14
(a)

Cost of prevention

Increase. More care is taken to get it right first time hence


higher training and set up costs.

(b)

Cost of appraisal

Decrease. By spending more on prevention, there should be less


spending on checking for and correcting faults.

(c)

Cost of internal failure Decrease. As above.

(d)

Cost of external failure Decrease. As above.

(e)

Total costs of quality

Decrease. Despite the rise in the cost of prevention the fall in the
other costs of quality will out-weigh this increase.

Solution 4.15
Cap Co needs to look at the variables which make the accounts unprofitable and then adjust them
accordingly.
Possible suggestions include:

Introducing (or increasing) the minimum order size.

Increase charge for order handling or delivery.

Introduce online ordering only for small customers.

Increase prices overall, but offer a discount for bulk orders.

Introduce (or modify) variable delivery charges depending on location of customer and size
of order

Solution 4.16
(a)

Current costing system ($'000)


Sales ($'000)
Less: $200/hour
Margin from customer

D
1 000
(800)
200
U

Net margin/$ sales


(b)

Net margin from customer


Net margin/$ sales

N
850
(400)
450

G
1 200
(600)
600

52.9%

50%

D
1 000

I
3 000

N
850.0

G
1 200.0

160
25
125
70
380

240
600
875
90
1 805

80.0
62.5
166.7
20.0
329.2

120.0
312.5
333.3
100.0
865.8

20%

60%

ABC system ($'000)


Sales ($'000)
Less customers' specific costs:
Direct costs (W1)
Telephone support (W2)
After sales service (W3)
Client meetings (W4)
Total cost

12

I
3 000
(1 200)
1 800

620
62%

1 195
39.8%

Total
3 000

520.8

334.2

61.2%

27.9%

Workings
(1)

(c)

10 staff $60 000


10 1 500hrs

= $40/hour

(2)

Telephone support telephone queries OAR = 1 000/800 = 1.25 per query

(3)

After sales service no. of visits OAR = 1 500/36 = 41.667 per visit

(4)

Client meetings no. of meetings OAR = 280/280 = 1 per meeting

The ABC system highlights that:


(i)

D & N are more profitable than believed. N costs less than previously thought because
N customers require little support.

(ii)

I & G are less profitable than believed, due to higher costs as they use a high
proportion of support services, especially expensive after-sales service visits.

Also the previous system has recovered only $3m of costs from a total of $3.38m.
Any under-recovery could lead to losses, especially if this cost is used to set prices and
quotations.
ABC systems provide better cost analysis, both for reporting of profitability and for decision-making.
The ABC system should be adopted.

Answers to Module Learning Examples

13

Module 5
Solution 5A.1
There is no formal solution to this activity, as it will depend on candidates own location and
experience.

Solution 5A.2
Market research projects are fundamental to strategic analysis. The analysis of both the wider PEST
environment and the immediate industry/market environment could be divided into project
assignments for small project teams.
The project management emphasis on clear definition of scope and objectives would tend to enforce
effective use of limited resources by focusing work on the most important areas.

Solution 5A.3
Possible examples include:
Project organisation

Leighton Holdings

Within the organisation projects

Introduction of a new Customer Relationship Management


(CRM) system

Joint venture

Lowe's and Woolworths' home improvement store

Collaborate

Global environmental initiatives

PPP

Cross City Tunnel, Sydney

Virtual project

Software development

Solution 5B.4
Projects and project teams vary very widely, so a contingency approach is necessary. Different
circumstances will require different approaches. A very relaxed style would not be appropriate for a
project in a dangerous environment, for example, nor a very autocratic style for a design project
requiring extensive collaboration.

Solution 5B.5
Teams can often suffer from poor leadership, inadequate resources or ill-defined objectives. Teams
can also be ineffective because of lack of commitment, which can usually be traced to:

14

Reluctance on the part of the managers required to supply the staff needed.
Poor communication arising from part-time working.
Rivalry, both personal and departmental.

Solution 5B.6
Task-force project
team

Advantages

Disadvantages

Team members focus solely on


completing the project.

Unless the project is of sufficient


size, team members potentially
may not be consistently busy.

Team members operate


autonomously.
Team members have their own
resources.
Team members get to work in
cross-functional teams,
potentially making their jobs
more interesting and gaining
additional experience outside
their primary discipline or area of
expertise.

Unlike in a matrix team, if team


members are unavailable, it may
be more difficult to cover absences.
Some functional staff might resist
working in a cross-functional
team as compared to working in
their own departments.
As functions (like that of the
management accountant)
change, a lack of day-to-day
involvement may reduce staff
members' exposure to the latest
thinking.
If correction is required with
some aspect of the project after
completion, obtaining prompt
action to rectify the problem can
be difficult, as the team will have
been dispersed.

Matrix project team

Individuals have a constant


employment path, as they work in
a stable functional department.

Individuals have multiple


responsibilities that can create
role uncertainty.

A range of specialist skills can be


tapped into, providing the project
manager with flexibility.

The project manager may not


have sufficient authority to
ensure staff do what is required
for the project when competing
priorities surface for team
members.

During project downtimes staff


can be used on other tasks in
their department.

Solution 5C.1
Internal

External

Management of charity

Trustees

Budget holders/fundraisers

Donors

Childcare staff and professionals

Regulators

Project team

Children at the home

Volunteers

General public

Solution 5C.2
Project risk can be classified as follows:
(a)

Quantifiable risks. These are risks where the probability of an event occurring can be
established by statistical analysis of past occurrences.

(b)

Unquantifiable risks. These are risks which cannot be quantified, making them difficult to
manage.

Answers to Module Learning Examples

15

OR
(a)

Internal risks eg arising due to inappropriate decisions by project team members.

(b)

External risks eg due to changes in exchange rates or other macro economic factors.

Solution 5C.3
Net Present Value working (All figures $000s)

Year
Sales
Direct Costs

1
4 500

2
6 250

3
7 000

4
7 500

(1 875)

(2 750)

(3 750)

(4 000)

(425)

(625)

(500)

(500)

Marketing
Office Overheads (40%)

(125)

(125)

Net Real Operating flows

2 750

2 625

2 875

1.04

1.042

1.043

1.044

2 158

2 974

2 953

3 363

Taxation at 30% in arrears

(647)

Tax Relief from Capital Allowances


(W1)
Resale value

131

0
(675)

Net Nominal Cash Flows

(675)

12% Discount Rate (W3)

Present Values

(125)

2 075

Inflated at 4% (rounded)

Working Capital Cash Flows (W2)

(125)

(675)

(892)

(301)

146

10 000

(129)

2 298

(1 009)

74

(160)

1 857

(886)

98

1 265

2 030

13 816

(863)
0.567

0.893

0.797

0.712

0.636

1 658

1 832

1 445

8 787

(489)

12 558

Cumulative PV
Less Initial Investment
(8,125 200 + 1,750 + 675)

(9 675)

NET PRESENT VALUE

2 883

Workings

Reducing balance

(1)

Tax relief

Year

30%

131

30%

98

30%

74

30%

146

1 750
Claim in year 1

25%

Claim in year 2

25%

(438)
1 312
(328)
984

Claim in year 3

25%

(246)
738

(2)

Resale value

(250)

Balance allowance claimed year 4

(488)

Working capital
Required at start of year ie
15% of Turnover
inflate current values

(increments)
(3)

16

Nominal discount rate

938

1,050

1,125

675

976

1,136

1,265

(675)

(301)

(160)

(129)

0
1 265

675

(1.077) (1.04) = 1.12

Solution 5C.4
Annuity factor Project A: (1 1.08-4)/8% = 3.3121
Annuity factor Project B: (1 1.08-3)/8% = 2.5771
Equivalent annual cash flow (EAC) Project A: $300 000/3.3121 = $90 577
Equivalent annual cash flow (EAC) Project B: $250 000/2.5771 = $97 008
Project B has the higher EAC, which means that it delivers more value per year than Project A and
would be chosen.

Solution 5D.1
The critical path is those parts of the project which if delayed beyond the allotted time would delay
the completion of the project as a whole.

Solution 5D.2
(a)

Activity
6
3

Activity
7

11

Activity
3 14
Activity
1

Activity
2
10

Activity
31 9

17

Activity
8

Activity
10

Activity
4

Activity
5
11

e
Calculations of expected time (ET)*

(b)
Activity

*ET

1=7
2 = 10
3 = 14
4=7
5 = 11
6=3
7 = 11
8 = 17
9 = 31
10 = 8
=

(4 + 4 7 + 10)/6 = 7
(5 + 4 10 + 15)/6 = 10
(5 + 4 15 + 19)/6 = 14
(4 + 4 6 + 14)/6 = 7
(6 + 4 10 + 20)/6 = 11
(1 + 4 2 + 9)/6 = 3
(5 + 4 10 + 21)/6 = 11
(9 + 4 18 + 21)/6 = 17
(20 + 4 30 + 46)/6 = 31
(5 + 4 7 + 15)/6 = 8
(O + 4ML + P)/6

Where:
O
ML
P
(c)

=
=
=

Optimistic
Most likely
Pessimistic

Critical path is 1, 2, 3, 6, 9, 10 which is 73 days.

Solution 5D.3
B

Troubleshooting. This needs to be done by humans!

Answers to Module Learning Examples

17

Solution 5E.4
The airline industry is an obvious example as safety is non-negotiable.

Solution 5E.5
Options to address slippage include:

Do nothing.
'Work smarter' to be more efficient.
Reschedule ie change the phasing.
Introduce incentives to enhance individual performance.
Change the specification.
Add resources to make up lost ground (crashing).
Replan.

Solution 5F.6
Consider what would happen if members of the project team left new members might not know
what went wrong before, and so could make the same mistakes. Also, keeping a record of what
happened can help if there is any comeback from the client.

18