ACCA p5 2010 past papers summary by Taha Popatia

June 2010

Question # 1

Importance of non-financial performance indicators and use of balanced scorecard to improve performance

• There is a widely held view that ‘what gets measured gets done’ and if performance measures are
restricted to financial measures alone then the focus of managers will be myopic (lacking foresight) and
consequently they may be motivated by the wrong stimuli.
• Many commentators have argued that financial measures encourage short-termism to the detriment of
the longer-term prospects of organizations.
• The increasing attention given to NFPIs was a key factor in the development of ‘balanced scorecard’
which proposed that business performance is reviewed from four perspectives: 1. Financial perspective –
How does an organization appear to the shareholders? 2. Customer perspective – How does an
organization appear to the customer? 3. Internal business perspective – What must an organization excel
at? 4. Innovation and learning perspective – Can an organization continue to improve and create value?
• The results from innovation and learning, internal business and customer perspective will be mirrored in
the financial perspective.
• Possible measures that might be featured within a balanced scorecard: 1. Customer perspective: % of
sales from new clients, % of clients from whom repeat business is gained, Ratings from client satisfaction
survey. 2. Internal business perspective: % of client projects completed on time and within budget, % of
employee time billed to clients. 3. Innovation and learning: % of time used for staff development, % of
revenues earned from new products or services. 4. Financial perspective: Growth in operating cash flows,
Gross margin earned from clients, % increase in operating costs.

potential benefits and potential problems of subcontracting work

• Benefits: 1. Increased flexibility 2. Particular expertise 3. Reduces the overall cost since the staff is
temporary.
• Problems: 1. Use of subcontract staff might cause resentment to full-time staff. 2. Subcontracts might not
identify the corporate culture. 3. The fact that there are two completely different pay schemes operating
might prove problematic and cause dissatisfaction among full-time consultants and/or subcontractors.

Question # 2

Expected values

• Expected values take into account the relative likelihood of each of the possible outcomes occurring. The
use of expected values implies that the company have a risk-neutral attitude. A risk neutral decision-
maker will ignore the variability in the range of potential outcomes and will be concerned only with the
expected value of outcomes.

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 ACCA p5 2010 past papers summary by Taha Popatia
Question # 3

Value for money audits

• They may be seen as being of particular relevance in not-for-profit organizations where they are an
important performance assessment tool. The VFM audit focuses on the achievement of objectives of the
organization in a way that ensures that most economic, efficient and effective manner.

Economy, efficiency and effectiveness

• The three Es are likely to be seen as possibly being in conflict with each other in terms of the
achievement of objectives.
• Economy: minimizing the average cost per unit.
• Efficiency: maximization of the input: output ratio.
• Effectiveness: achievement of the objectives of the proposal.

Intangibility, Heterogeneity, Simultaneity and Perishability

• Intangibility: not easily measurable.

• Heterogeneity: refers to a possible variability in the standard of performance in the provision of the
service.
• Simultaneity: refers to the provision and consumption of the service coinciding and hence making it
difficult to apply all relevant checks and tests before use.
• Perishability: refers to the inability to store the service in advance.

Question # 4

Differences in the job cost estimates under traditional costing and Activity Based Costing systems

• The costs may differ in the way they consume activities in each of the activity areas.
• The activity areas differ in their indirect cost allocation bases.

Potential problems in the successful implementation of the activity-based costing system

• Initially it would be very time consuming to collect a large amount of data concerning the activities
relating to each job.
• It would be vital to identify the real ‘cost-drivers’ within the activity-based costing system.

Operational Activity-Based-Management (ABM)

• Operational ABM is about doing things right. Those activities which add value to products can be
identified and improved. Activities that do not add value should be reduced in order to cut costs without
reducing product value.

Strategic Activity-Based-Management (SBM)

• Strategic ABM is about doing the right things using the ABC information to decide which products to
develop and which activities to use.

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 ACCA p5 2010 past papers summary by Taha Popatia
Implicit value of an activity

• An activity may have implicit value not necessarily reflected in the financial value added to any service or
product. For example, servicing customers. Cutting back on such expenditure may lead to a poorer
perceived value by customers of the service provided with a consequent fall in demand.

Question # 5

Cost targeting

• The use of cost targeting would necessitate comparison of current estimated cost levels against the
targets which must be achieved if the desired levels of profitability and hence return on investment are
to be achieved. Thus, where a difference exists between the current estimated cost levels and the cost
target, it is essential that this gap be closed.

Performance assessment

Financial performance and marketing

• The profit increase is partly linked to the projected fall in quality costs, both costs of conformance
(appraisal and prevention) and costs of non-conformance (internal and external failure).

External efficiency

• In order to achieve external efficiency a company has to satisfy its customers. Customer satisfaction may
be defined as meeting customer expectations. The quality of service provision and delivery are
operational criteria that can be used to monitor levels of customer satisfaction.

Internal efficiency

• Internal efficiency may be assessed by reference to flexibility and productivity. Flexibility relates to the
business operating system as a whole whilst productivity relates to the management of resources such as
staff time. This should be helped through reduced cycle time and decreased levels of waste.

December 2010

Question # 1

Building and monitoring CSFs

• Critical success factors are those areas of business performance where the company must succeed in
order to achieve its overall strategic objectives.
• Monitoring CSFs are those that are used to keep abreast of ongoing operations, for example, comparison
of actual results to budgets and industry averages.
• Building CSFs are those which look to the future of the organization and its development.

Information for establishing CSFs

• The company can use information about the internal and external environment to set its CSFs. Relevant
external information would include the structure of the industry and the strategy of company’s

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 ACCA p5 2010 past papers summary by Taha Popatia
competitors. Relevant internal information would include measures of seasonality on sales and
effectiveness of marketing campaigns.

Performance indicators linked to the CSFs

• CSFs for audience satisfaction: Sales per film, Brand recognition, repeat viewings and Awards won.
• CSFs for profitability in operations: Industry average margin, time in production and costs.

Impact of chosen Performance indicators for the design and use of the company’s website and its management
information system and its executive information system

• The company website can collect audience survey results and comments posted on the site.
• A management information system (MIS) will collate the information from individual transactions
recorded in the accounting system to allow middle level management to control the business. This
system will allow customer purchases to be summarized into reports to identify both products that sell
well and the customers who provide the main sources of revenue.
• An executive information system is one that will supply information to the senior management of the
organization allowing them to drill down into the more detailed transaction reports where necessary.

Question # 2

Costing systems

• Absorption costing is a traditional system of allocating overhead costs to products based on production
activity.
• ABC is an alternative for the allocation of overheads intended to capture the different activities that lead
to costs being incurred. The principle benefit of ABC is that identification and monitoring of these
activities leads to more accurate cost control.

Beyond budgeting

• The process known as going beyond budgeting involves replacing the annual system of a centrally
created budget with a more flexible system of targets. Performance measurement changes from
monitoring variances from the budget towards measuring achievement of strategic goals, adding value
and performance against suitable benchmarks. The targets are intended to guide rather than constrain
the line managers thus improving their motivation.

Question # 3

Value based management

• The value-based approach takes the primary objective of the business to be maximizing shareholder
wealth and seeks to align performance with this objective. The principle measure used at the strategic
level will be economic value added. By using this as the sole measure of performance, management is
focused and they will be able to avoid conflicts which occur when there are multiple objectives and
measures.

Evaluation of VBM based measures against traditional profit-based measures of performance

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 ACCA p5 2010 past papers summary by Taha Popatia
• Value measures are considered to be superior to profit measures because they take into consideration
the capital employed and cost of capital.
• Also, although value measures are calculated from profit figures they are adjusted in order to bring them
closer to a cash flow measure of performance which is less affected by the various accounting
adjustments such as depreciation.
• A disadvantage of value-based measures like EVA compared to profit is the unfamiliarity and complexity
of the calculation. These difficulties can be overcome by a process of education and training for the staff
and shareholders.

Question # 4

Factors which will affect a company’s environmental strategy

• Government regulations such as requirements to recycle material, limits on pollution and waste levels
along with new taxes such as carbon levies to add additional costs. Performance indicators would be
additional costs resulting from failure to recycle waste, fines paid for breaches and the level of
environmental tax burdens.
• The general economic climate is relevant to the strategy including factors such as interest, inflation and
exchange rates.
• Trends and fashions among the general public appear to be relevant as the public will be end-users of its
services and environmentally efficient technologies such as hybrid cars and solar recharging cells would
be relevant to the cost and product. Performance indicator would involve measuring the impact of the
use of new technology on existing emission data.

Question # 5

Quantitative models and Qualitative methods

• Quantitative models such as the Altman Z-score use publicly available financial information about a firm
in order to predict whether it is likely to fail within the two-year period. The method uses a model
equation into which the financial data is input and a score obtained. The advantages of such methods are
that they are simple to calculate and provide an objective measure of failure. These models are open to
manipulation through creative accounting which can be a feature of companies in trouble.
• Qualitative methods are based on the realization that financial measure are limited in describing the
circumstances of a company. Models such as Argenti’s rely on subjective scores to certain questions
given by the investigator. A score above a certain level indicates potential disaster. The advantage of the
method is the ability to use non-financial as well as financial measures and the judgement of the
investigator but this is also a weakness as there is a danger that the investigator will give scores to ensure
the conclusion agrees with first impressions.

Qualitative problems apparent in the company’s structure and performance

• The qualitative problems can be broken down according to the Argenti model into three broad areas:
defects, mistakes made and symptoms of failure.
• Company exhibits the following defects: a domineering CEO, a failure to split CEO/Chairman roles and a
passive senior management. These are structural problems within the company that will obstruct any
effort to change direction if that direction is leading the company downwards.

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 ACCA p5 2010 past papers summary by Taha Popatia
• The company may also be making mistakes: Overtrading and this is mainly funded by debt and the
company seems to depend on one big project.
• Symptoms of failure: Deteriorating ratios, Creative accounting and declining morale and quality. These
are not yet apparent from the information to hand and this may imply that there is still time to correct
matters as these are often the final signals of failure e.g. creative accounting being employed to massage
the financial statements.

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