ACCA P5 Advanced Performance Management - ?· ACCA P5 Advanced Performance Management Session 2.1 Traditional…

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  • 1

    ACCA P5 Advanced Performance Management www.globalapc.com

    ACCA P5 Advanced Performance Management

    Tuition Note

    For exams in June 2015

  • 2

    ACCA P5 Advanced Performance Management www.globalapc.com

    Lesco Group Limited, April 2016

    All rights reserved. No part of this publication may be reproduced, stored in a

    retrieval system, or transmitted, in any form or by any means, electronic,

    mechanical, photocopying, recording or otherwise, without the prior written

    permission of Lesco Group Limited.

  • 3

    ACCA P5 Advanced Performance Management www.globalapc.com

    Content

    Chapter1: Help company success............................................................................. 5

    Session 1.1: Avoid corporate failure ............................................................................................................................6

    General indicators ............................................................................................................................................6

    Corporate failure prediction.............................................................................................................................7

    Chapter 2: Management Accountant Traditional role ............................................. 11

    Session 2.1 Traditional Role: ..................................................................................................................................... 12

    Session 2.2 Gap analysis ............................................................................................................................................ 13

    Session 2.3 Strategy .................................................................................................................................................. 15

    1, definition of strategy ................................................................................................................................. 15

    2, Johnson and Scholes has classified strategy into 3 levels(types): ............................................................. 15

    Session 2.4 Costing .................................................................................................................................................... 31

    Session2.4.1 JIT [just-in-time] system ........................................................................................................... 32

    Session2.4.2 Total quality management ....................................................................................................... 34

    Session2.4.3 Absorption costing VS Activity based costing .......................................................................... 36

    Session2.4.4 Job costing ................................................................................................................................ 41

    Session2.4.5 Batch costing ............................................................................................................................ 43

    Session2.4.6 Target costing ........................................................................................................................... 44

    Session2.4.7 Lifecycle costing ....................................................................................................................... 47

    Session2.4.8 Environmental management accounting: ................................................................................ 48

    Session2.4.9 Benchmarking ........................................................................................................................... 57

    Session2.4.10 Standard costing:.................................................................................................................... 65

    Session2.4.11 Kaizen costing: ....................................................................................................................... 78

    Session 2.5 Budgeting ............................................................................................................................................... 83

    Session 2.5.1 Basic knowledge about budgeting .......................................................................................... 83

    Session2.5.2 Budgeting Types ....................................................................................................................... 92

    Session2.5.3 Beyond budgeting .................................................................................................................... 95

    Session2.5.4 Budgeting in pubic sector ......................................................................................................... 98

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    ACCA P5 Advanced Performance Management www.globalapc.com

    Session 2.6 Pricing ..................................................................................................................................................... 99

    Session2.7 Decision making .................................................................................................................................... 105

    Session 2.8 Performance Measurement ................................................................................................................. 113

    Session 2.8.1 financial and non financial measurement ............................................................................. 114

    Session2.8.1.2 Human Resource Management .......................................................................................... 138

    Session2.8.1.3 Balanced scorecard: ............................................................................................................ 141

    Session2.8.1.4Performance pyramid .......................................................................................................... 143

    Session2.8.1.5 Performance prism .............................................................................................................. 148

    Session2.8.1.6 Building blocks model: used in service industry ................................................................. 154

    Session2.8.1.7 Six Sigma .............................................................................................................................. 160

    Session 2.8.2 behavior aspects .................................................................................................................... 165

    Session2.8.3 Divisions performance measurement .................................................................................... 165

    Chapter3 Current issues ...................................................................................... 184

    Session3.1 Management Accountant Changing role: ................................................................................. 184

    Sessoin3.2 Manage information system (MIS):........................................................................................... 187

    Session3.3 Business process change ........................................................................................................... 191

    Session3.4 Organizational change ............................................................................................................... 194

    Session3.5 Integrated report ....................................................................................................................... 194

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    ACCA P5 Advanced Performance Management www.globalapc.com

    Chapter1: Help company success

  • 6

    ACCA P5 Advanced Performance Management www.globalapc.com

    Session 1.1: Avoid corporate failure

    General indicators

    Operational issues

    -loss of key staff

    -Poor internal control system

    -lack of production/service introduction

    Financing issues

    -profitability problem

    -liquidity problem

    -gearing problems

    Compliance issues

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    ACCA P5 Advanced Performance Management www.globalapc.com

    Corporate failure prediction

    Quantitative measure: Altman Z score

    Z = 12X1 + 14X2 + 33X3 + 06X4 + X5

    Where:

    X1 is working capital/total assets (WC/TA);

    X2 is retained earnings reserve/total assets (RE/TA);

    X3 is Profit before interest and tax/total assets (PBIT/TA);

    X4 is market value of equity/total long-term debt (Mve/total long-term debt);

    X5 is Revenue/total assets (Revenue/TA).

    Key to remember:

    If the score is 3 or above they are financially sound

    Between 1.81 and 2.99 they need further investigation [grey area]

    Below 1.81 they are in danger of bankruptcy

    What to do to prevent failure?

    See the signs and take action.

    Seek external advice.

    Management accept there is a problem.

    Make strategic changes as necessary.

    Put in more controls and management systems.

    Qualitative measure: Argenti A score

    Qualitative models such as Argenti use a variety of qualitative and some non-accounting factors such

    as management experience, dependence on one or a few customers or suppliers, a history of qualified

    audit opinions and the business environment including the industry and economic situation.

    Argenti developed a model, which is intended to predict the likelihood of company failure based on

    three connecting areas that indicate likely failure:

    defects,

    mistakes

    symptoms of failure

    Which are all awarded a specific score.

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    ACCA P5 Advanced Performance Management www.globalapc.com

    Sources

    of

    problems

    Variable Score

    A Management defects

    Chief Executive is an autocrat 8

    Chief Executive also holds position of Chairman 4

    Passive Board of Directors 2

    Unbalanced Board of Directors, not representing all business

    functions or overweight in one discipline

    2

    Weak Finance Director

    2

    Poor management in team 1

    Accounting defects

    No budgets or budgetary controls

    3

    No cash flow forecasts, or not up to date 3

    No costing system: costs and contribution of each product or

    service are not known

    3

    Poor response to change: old-fashioned product or service, obsolete

    production facilities, out-of-date marketing methods; old directors

    15

    43

    B Management mistakes(as a result from the above defects)

    High gearing 15

    Overtrading 15

    Failure of a big project 15

    45

    C Symptoms of trouble(as a result from the above defects and

    mistakes)

    Financial indicators forecasting poor results[poor Z-score]

    4

    Creative Accounting

    4

    Non-financial signs (eg high staff turnover). 4

    12

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    ACCA P5 Advanced Performance Management www.globalapc.com

    Score Maximum permitted

    A 10

    B 15

    C 0

    25

    If any score which are more than 25 then it will need immediate action to avoid company insolvency.

  • 10

    ACCA P5 Advanced Performance Management www.globalapc.com

    Strengths and weaknesses of quantitative and qualitative models for predicting

    corporate failure

    Quantitative models:

    Advantages:

    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 advantages of such methods are that they are simple to calculate and provide an objective

    measure of failure.

    Disadvantages:

    However, they only give guidance below the danger level of 18 and there is potential for a

    large grey area [1.81-2.99] in which no clear prediction can be made.

    Additionally, the prediction of failure of those companies below 18 is only a probabilistic one,

    not a guarantee. This means not every company with Z score under 1.8 will go bankruptcy.

    These models are open to manipulation through creative accounting which can be a feature of

    companies in trouble.

    Qualitative models:

    Advantages:

    The advantage of the method is the ability to use non-financial as well as financial measures

    and the judgment of the investigator

    Disadvantages:

    But this is subjective and will vary from different investigators.

  • 11

    ACCA P5 Advanced Performance Management www.globalapc.com

    Chapter 2: Management Accountant Traditional role

    Management accounting is to provide information relating to planning, decision making and controlling.

    Planning:

    Gap analysis - Strategy

    Costs

    Budgets

    Pricing decision

    Decision making

    Risks and uncertainties decision rules

    Controlling

    Performance measurement

    Different ratios

    Divisions measurement

    Transfer pricing

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    ACCA P5 Advanced Performance Management www.globalapc.com

    Session 2.1 Traditional Role

    Traditionally, it was thought that management accountants needed to be independent from

    operational managers in order to allow management accountants to objectively judge and report their

    accounting information to senior management.

    What management accountant does is to:

    1. Compiling information: collect costs relating to each material, labor, overhead etc. focusing on

    internal and external information such as existing financial information/ company resources staff

    /government report such as inflation rate, predicted exchange rate, consumer expenditure

    etc/industry report.[using different costing systems]

    2. Analyzing those costs: making sure costs are accurate (how they come with the costs); favorable or

    adverse (variance); etc.

    3. Preparing budgets using best estimates, ie, sales budget, cash budget etc.

    And management accountant would help senior management in the following management

    activities:

    Planning: [what to do, like strategy]

    Plan future activities, budget

    Decision making: [do it]

    Whether to set up company and what further investment that company may try to make

    Control: [if plan is not correct we can correct it later on again]

    Variance-Compare results of operation with expected (meet sales/ cost target?)

    Performance measurement

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    ACCA P5 Advanced Performance Management www.globalapc.com

    Session 2.2 Gap analysis

    This is a difference between current position and the ideal position.

    Current position: if you continue to offer ACCA products, you can have $100 return.

    Ideal position: shareholders actually want $1,000 of return rather than $100.

    And hence $900 is a gap.

    But the future forecasts may not be appropriate because its subject to uncertainty.

    Our aim is to close/minimize that gap.

    Ultimate objective GAP

    $ Revenue

    Future

    project

    s

    Current

    operatio

    ns

    Years

  • 14

    ACCA P5 Advanced Performance Management www.globalapc.com

    But how?

    The way we are going to close the gap is to set appropriate/additional strategies, ie, developing new

    products which may give us a better return.

    Ansoff growth vector matrix:

    A market penetration strategy aims to increase sales within existing markets.

    A market development strategy aims to find additional markets for existing products.

    A product development strategy aims to find additional products for an organizations

    existing customers.

    A diversification strategy aims to reduce the risks of a business or to increase its growth

    prospects by entering new industries.

    Other strategies:

    Efficiency strategies which are designe...

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