Mock Examination M kE i ti

: ACCA P Paper P5

Advanced Performance Management

Session Prepared by : June 2012 : Mr Ian Lim

Your Lecturer Mr Ian Lim Your Mailing Address : ______________________________________ ______________________________________ Your Contact Number : ______________________________________

I wish to have my script marked by my lecturer and collect the marked script at the SAA-GE Reception Counter have the marked script returned to me by mail (Please submit your script latest by 16th May 2012 for marking)

SAA GLOBAL EDUCATION CENTRE PTE LTD

Company Registration No. 201001206N 20 Aljunied Road, #01-04, CPA House, Singapore 389805 Tel: (65) 6744 9700 Fax: (65) 6744 9796 Website: www.saage.edu.sg Email: acca@saage.edu.sg

Section A BOTH questions are compulsory and MUST be attempted

1 Armstrong Stores (Armstrong) is a listed business with a chain of 126 general department stores in South Postland. The company is known for the high quality of its products, mainly food and clothing. The majority of its goods are sourced from trusted manufacturers and branded under the companys own Strongarm label. Currently, Armstrong faces a tough competitive environment with all the major players in its market trying to secure their positions. Poor economic conditions worldwide have significantly affected South Postland. Consumer spending is falling throughout the economy and there is no immediate likelihood of a resumption of growth. Armstrongs chief executive officer (CEO) has recently conducted a strategic review of the business in the context of the current economic recession. He has identified the following strategy as critical for Armstrongs success: Focus on key customers those who are occasional shoppers but not currently loyal to the business. Ensure Armstrongs offering addresses their needs. Cut out costs that do not address these customers priorities. Amend current processes to meet this new focus. Build for the future with a programme of sustainable development.

The company now needs to address the impact of this new strategy on its performance measurement systems. Armstrong uses a balanced scorecard to assess its strategic performance and the scorecard is used to connect the business strategy with its more detailed performance measures. The CEO has asked you to consider the implications of the new strategy for the performance measures used by the business. Currently, Armstrong uses Economic Value Added (EVA), earnings per share (EPS) growth and share price performance to monitor its financial performance. The company has supplied data in appendix 1, which the CEO wishes to see used to assess the financial performance from the shareholders perspective. She has asked that you explain the problems of capturing performance with these particular metrics, and also, how they may affect managements behaviour. Finally, in order to aid refocusing the company, the CEO has requested a report to the board comprehensively benchmarking the current performance of Armstrong. The board needs to have benchmarking exercise explained and then the results described. Appendix 2 contains data analysing Armstrong, its two main competitors and statistics provided by the government of South Postland. A junior analyst has already correctly completed the preliminary calculation work for benchmarking in appendix 3. The CEO has requested a critical assessment of these different sources as well as the comments on the results of the analysis.

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Required:
(a) Describe the four perspectives of the balanced scorecard showing how the new strategy of the business as outlined by the CEO links to the different perspectives. Illustrate your answer by suggesting appropriate performance measures for Armstrong for each of the detailed points within the strategy. (8 marks) (b) (i) Assess the financial performance of the company using the three shareholder performance indicators. (6 marks) (ii) Critically evaluate the use of these performance metrics and how they may affect managements behaviour. (6 marks) (c) Prepare a report to the board on a benchmarking exercise using the information given in the appendix: (i) Evaluate the benefits and difficulties of benchmarking in this situation (5 marks) (ii) Evaluate the performance of Armstrong using the data given in the question. Indicate what further information would be useful and conclude as to the performance of the company. (8 marks) Professional marks for appropriateness of format, style and structure of the report. (3 marks) Total: 36 marks
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The Rubber Group (TRG) manufactures and sells a number of rubber-based products. Its strategic focus is channelled through profit centres which sell products transferred from production divisions that are operated as cost centres. The profit centres are the primary value-adding part of the business, where commercial profit centre managers are responsible for the generation of a contribution margin sufficient to earn the target return of TRG. The target return is calculated after allowing for the sum of the agreed budgeted cost of production at production divisions, plus the cost of marketing, selling and distribution costs and central services costs. The Bettamould Division is part of TRG and manufactures moulded products that it transfers to profit centres at an agreed cost per tonne. The agreed cost per tonne is set following discussion between management of the Bettamould Division and senior management of TRG. The following information relates to the agreed budget for the Bettamould Division for the year ending 30 June 2009: (1) The budgeted output of moulded products to be transferred to profit centres is 100,000 tonnes. The budgeted transfer cost has been agreed on a two-part basis as follows: (i) A standard variable cost of $200 per tonne of moulded products; (ii) A lump sum annual charge of $50,000,000 in respect of fixed costs, which is charged to profit centres, at $500 per tonne of moulded products. (2) Budgeted standard variable costs (as quoted in 1 above) have been set after incorporating each of the following: (i) A provision in respect of processing losses amounting to 15% of material inputs. Materials are sourced on a JIT basis from chosen suppliers who have been used for some years. It is felt that the 15% level of losses is necessary because the ageing of the machinery will lead to a reduction in the efficiency of output levels.

(ii) A provision in respect of machine idle time amounting to 5%. This is incorporated into variable machine costs. The idle time allowance is held at the 5% level partly through elements of real-time maintenance undertaken by the machine operating teams as part of their job specification. (3) Quality checks are carried out on a daily basis on 25% of throughput tonnes of moulded products. (4) All employees and management have contracts based on fixed annual salary agreements. In addition, a bonus of 5% of salary is payable as long as the budgeted output of 100,000 tonnes has been achieved; (5) Additional information relating to the points in (2) above (but NOT included in the budget for the year ending 30 June 2009) is as follows: (i) There is evidence that materials of an equivalent specification could be sourced for 40% of the annual requirement at the Bettamould Division, from another division within TRG which has spare capacity.

(ii) There is evidence that a move to machine maintenance being outsourced from a specialist company could help reduce machine idle time and hence allow the possibility of annual output in excess of 100,000 tonnes of moulded products. (iii) It is thought that the current level of quality checks (25% of throughput on a daily basis) is vital, although current evidence shows that some competitor companies are able to achieve consistent acceptable quality with a quality check level of only 10% of throughput on a daily basis. The directors of TRG have decided to investigate claims relating to the use of budgeting within organisations which have featured in recent literature. A summary of relevant points from the literature is contained in the following statement: The use of budgets as part of a performance contract between an organisation and its managers may be seen as a practice that causes management action which might lead to the following problems: (a) (b) (c) (d) (e) (f) (g) (h) Meeting only the lowest targets Using more resources than necessary Making the bonus whatever it takes Competing against other divisions, business units and departments Ensuring that what is in the budget is spent Providing inaccurate forecasts Meeting the target, but not beating it Avoiding risks.

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Required: (a) Explain the nature of any SIX of the eight problems listed above relating to the use of budgeting; (12 marks) (b) Illustrate EACH of the six problems chosen in (a) using the data from the Bettamould division/TRG scenario; and (6 marks) (c) Suggest ways in which each of the six problems chosen in (a) above may be overcome. (6 marks) (24 marks)

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Section B: TWO questions ONLY to be attempted

(a) The Creative Division (CD) of Unique Components Ltd produces wooden components that it both sells to external customers and transfers to other divisions within its own group of companies. The production involves the preparation of timber, cutting the timber into shapes and the assembly of the shapes into components. The total component cost for component A has been estimated as $41.21 per unit. Selling prices to external customers have been set by adding a mark-up of 35% to total estimated component cost. Required: Discuss the application and acceptability of each of the following transfer price bases at which component A may be offered by CD to other divisions within the same group of companies: (i) External selling price and adjusted selling price;

(ii) Marginal cost marginal cost plus an annual lump sum; and (iii) Dual pricing. Your answer should incorporate illustrative values ($) for each transfer price using data provided above and additional data of your choice. (10 marks) (b) A redesign of component A is being considered that is likely to result in changes in the quantity of timber and number of cuts, in the shaping process that will be required. A data-table analysis has been prepared to monitor the effect on unit cost for component A of a range of values for such changes. In addition, a set of subjective probabilities have been assigned to the likelihood of (i) the timber required and (ii) the number of cuts required, being at the levels shown in the data-table analysis. A matrix has been constructed showing the combined probability for each possible combination of changes of timber and number of cuts. The data-table analysis and combined probability matrix are as follows: Data-table of values of total component cost for component A per unit ($) for a range of values of number of cuts in shaping and timber required (square metres) Timber (square metres) 0.8 0.7 0.6 0.5 0.4 25 47.15 43.50 39.81 36.07 32.28 Number of cuts 30 35 40 47.69 48.15 48.55 44.04 44.50 44.90 40.34 40.81 41.21 36.61 37.07 37.47 32.81 33.28 33.68

50 49.21 45.56 41.87 38.13 34.34

Combined probability matrix showing combined probability values for a range of values of number of cuts in shaping and timber required (square metres) Timber (square metres) 0.8 0.7 0.6 0.5 0.4 Number of cuts 30 35 0.3 0.3 0.03 0.03 0.06 0.06 0.06 0.06 0.12 0.12 0.03 0.03

Prob. 0.1 0.2 0.2 0.4 0.1

25 0.2 0.02 0.04 0.04 0.08 0.02

40 0.1 0.01 0.02 0.02 0.04 0.01

50 0.1 0.01 0.02 0.02 0.04 0.01

Note: The expected value of unit cost, based on above data-table and combined probability matrix is $39.84.

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You may assume that management attitudes vary as follows: (i) Some of the management team are in favour of change provided that a reduction of at least 12% from the existing total unit cost is achieved;

(ii) Others in the management team are not in favour of change if it might lead to an increase in total unit cost from the current level of $41.21; and (iii) The remainder of the management team are of the view that they are willing to consider the re-design change if the expected value (EV) solution is less than the current value of total unit cost. Required: Discuss the impact of the possible changes in the quantity of timber and number of cuts in the Shaping process caused by the re-design of component A on the total cost per unit of component A. You should incorporate an analysis of statistics from the data-table and probability information contained in the model into your discussion with specific reference to the impact of management attitude to risk when deciding whether or not to change from the existing quantity of timber and number of cuts for component A. (10 marks) (20 marks)

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The Success Education Centre (SEC), which commenced trading in 2003, provides tuition for students preparing for accountancy examinations in Homeland. In 2005, SEC established a similar semi-autonomous operation in the neighbouring country of Awayland. Divisional managers have no control over acquisition and financing policy with regard to operations under their control. Financial data (all stated on an actual basis) in respect of the two divisions for the two years ended 30 November 2006 and 2007 are as follows:

Income statement 2006 2007 Homeland Awayland Combined omeland Awayland Combined H $000 $000 $000 $000 $000 $000 Revenue 4,500 1,000 5,500 5,000 1,300 6,300 Salaries Tuition materials & consumables Other operating costs 1,500 500 1,000 3,000 Marketing Interest (Group) Depreciation and amortisation 250 350 600 3,600 Profit 900 2,750 750 3,500 10% Loan stock 600 150 300 1,050 75 50 125 1,175 (175) 2006 250 150 400 2,100 650 1,300 4,050 325 150 400 875 4,925 575 3,000 900 3,900 1,500 2,400 Capital and Reserves Required: (a) Provide an assessment of the financial performance of SEC and of the respective contributions of the operations in Homeland and Awayland during the two years ended 30 November 2007. (8 marks) (b) Discuss FOUR items of additional information that would be required in order to provide a more comprehensive assessment of the financial performance of each operation. (4 marks) (c) Discuss FOUR factors that should be taken into consideration when assessing the comparative financial performance of the two operations. (4 marks) (d) Discuss FOUR advantages of using Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) as a measure of financial performance. (4 marks) (20 marks) 2,400 2,750 1,315 4,065 1,575 510 1,040 3,125 300 350 650 3,775 1,225 630 155 300 1,085 100 100 200 1,285 15 2007 500 200 700 2,205 665 1,340 4,210 400 125 450 975 5,185 1,115

Summary Balance Sheets Non- current Assets Net Current Assets

3,250 1,515 4,765 1,250 3,515 3,515

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5. EMC is a global environmental charity. EMC is internationally recognised for its work in the area of sustainable development and the protection of endangered species and habitats. Some supporters of EMC have criticised the organisation for its lack of clear direction in an increasingly competitive environment. Donations to charities have been declining, year on year, for the past five years. The structure of EMC is unusual in that there is an autonomous division in each country in which the charity operates. There are 45 autonomous divisions, each headed by a CEO. It is the responsibility of each divisional CEO to report to the Supervisory Board of 10 trustees, which is based in a European country. Four times a year, the 45 CEOs meet for two days to discuss performance and their plans for the future. The meetings usually finish with no clear decisions about a unified direction for the charity to take. The divisions act independently for the next three months. This has led to a number of crises, both financial and non-financial, in the past five years. As a result, the Supervisory Board has recognised that the charity cannot continue with the existing lack of direction, control and accountability. The Supervisory Board has decided to introduce a performance measurement and control system which will help it to implement a clear strategic direction for the charity. The Supervisory Board recognises that this will be a significant change for the CEOs and managers, and the Board expects considerable resistance. A consultant has suggested EMC should introduce a balanced scorecard system of performance measurement and control.

Required
(a) Discuss the advantages and disadvantages for EMC of introducing a balanced scorecard system of performance measurement. (9 marks) (b) Discuss four reasons why the CEOs of EMC might resist the proposed changes. (6 marks) (c) Recommend the steps that could be taken to overcome the resistance to change. (5 marks) (20 marks)

Present Value Table Present value of 1 i.e. (1 + r)n Where r = discount rate n = number of periods until payment Discount rate (r) Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0990 0980 0971 0961 0951 0942 0933 0923 0941 0905 0896 0887 0879 0870 0861 2% 0980 0961 0942 0924 0906 0888 0871 0853 0837 0820 0804 0788 0773 0758 0743 3% 0971 0943 0915 0888 0863 0837 0813 0789 0766 0744 0722 0701 0681 0661 0642 4% 0962 0925 0889 0855 0822 0790 0760 0731 0703 0676 0650 0625 0601 0577 0555 5% 0952 0907 0864 0823 0784 0746 0711 0677 0645 0614 0585 0557 0530 0505 0481 6% 0943 0890 0840 0792 0747 0705 0665 0627 0592 0558 0527 0497 0469 0442 0417 7% 0935 0873 0816 0763 0713 0666 0623 0582 0544 0508 0475 0444 0415 0388 0362 8% 0926 0857 0794 0735 0681 0630 0583 0540 0500 0463 0429 0397 0368 0340 0315 9% 0917 0842 0772 0708 0650 0596 0547 0502 0460 0422 0388 0356 0326 0299 0275 10% 0909 0826 0751 0683 0621 0564 0513 0467 0424 0386 0305 0319 0290 0263 0239 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

(n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

11% 0901 0812 0731 0659 0593 0535 0482 0434 0391 0352 0317 0286 0258 0232 0209

12% 0893 0797 0712 0636 0567 0507 0452 0404 0361 0322 0287 0257 0229 0205 0183

13% 0885 0783 0693 0613 0543 0480 0425 0376 0333 0295 0261 0231 0204 0181 0160

14% 0877 0769 0675 0592 0519 0456 0400 0351 0308 0270 0237 0208 0182 0160 0140

15% 0870 0756 0658 0572 0497 0432 0376 0327 0284 0247 0215 0187 0163 0141 0123

16% 0862 0743 0641 0552 0476 0410 0354 0305 0263 0227 0195 0168 0145 0125 0108

17% 0855 0731 0624 0534 0456 0390 0333 0285 0243 0208 0178 0152 0130 0111 0095

18% 0847 0718 0609 0516 0437 0370 0314 0266 0225 0191 0162 0137 0116 0099 0084

19% 0840 0706 0593 0499 0419 0352 0296 0249 0209 0176 0148 0124 0104 0088 0074

20% 0833 0694 0579 0482 0402 0335 0279 0233 0194 0162 0135 0112 0093 0078 0065 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

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Annuity Table
n Present value of an annuity of 1 i.e. 1 (1 + r) r

Where

r = discount rate n = number of periods Discount rate (r)

Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1% 0990 1970 2941 3902 4853 5795 6728 7652 8566 9471 1037 1126 1213 1300 1387 11% 0901 1713 2444 3102 3696 4231 4712 5146 5537 5889 6207 6492 6750 6982 7191

2% 0980 1942 2884 3808 4713 5601 6472 7325 8162 8983 9787 1058 1135 1211 1285 12% 0893 1690 2402 3037 3605 4111 4564 4968 5328 5650 5938 6194 6424 6628 6811

3% 0971 1913 2829 3717 4580 5417 6230 7020 7786 8530 9253 9954 1063 1130 1194 13% 0885 1668 2361 2974 3517 3998 4423 4799 5132 5426 5687 5918 6122 6302 6462

4% 0962 1886 2775 3630 4452 5242 6002 6733 7435 8111 8760 9385 9986 1056 1112 14% 0877 1647 2322 2914 3433 3889 4288 4639 4946 5216 5453 5660 5842 6002 6142

5% 0952 1859 2723 3546 4329 5076 5786 6463 7108 7722 8306 8863 9394 9899 1038 15% 0870 1626 2283 2855 3352 3784 4160 4487 4772 5019 5234 5421 5583 5724 5847

6% 0943 1833 2673 3465 4212 4917 5582 6210 6802 7360 7887 8384 8853 9295 9712 16% 0862 1605 2246 2798 3274 3685 4039 4344 4607 4833 5029 5197 5342 5468 5575

7% 0935 1808 2624 3387 4100 4767 5389 5971 6515 7024 7499 7943 8358 8745 9108 17% 0855 1585 2210 2743 3199 3589 3922 4207 4451 4659 4836 4988 5118 5229 5324

8% 0926 1783 2577 3312 3993 4623 5206 5747 6247 6710 7139 7536 7904 8244 8559 18% 0847 1566 2174 2690 3127 3498 3812 4078 4303 4494 4656 4793 4910 5008 5092

9% 0917 1759 2531 3240 3890 4486 5033 5535 5995 6418 6805 7161 7487 7786 8061 19% 0840 1547 2140 2639 3058 3410 3706 3954 4163 4339 4486 4611 4715 4802 4876

10% 0909 1736 2487 3170 3791 4355 4868 5335 5759 6145 6495 6814 7103 7367 7606 20% 0833 1528 2106 2589 2991 3326 3605 3837 4031 4192 4327 4439 4533 4611 4675 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

End of Question Paper

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