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Mock Examination : ACCA Paper P5

Advanced Performance Management

Session : June 2014

Prepared by : Mr Ian Lim

Your Contact Number : ______________________________________

I wish to have my script marked by the lecturer and

collect the marked script at the SAA-GE Reception Counter

email me the marked script to ____________________________

(Please submit your script latest by 9th May 2014 for marking)

SAA GLOBAL EDUCATION CENTRE PTE LTD

Company Registration No. 201001206N

111 Somerset Road, TripleOne Somerset #06-01/02

Singapore 238164

Tel: (65) 6733 5731 Fax: (65) 6733 5750

Website: www.saage.edu.sg Email: [email protected]


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P5 Advanced Performance Management Mock exam June 2014

Ian Lim MSc, FCCA, CA(M), CFP Page 1

Section A

Armstrong Stores (Armstrong) is a listed business with a chain of 126 general departmentstores in South Postland. The company is known for the high quality of its products, mainlyfood and clothing. The majority of its goods are sourced from trusted manufacturers and

branded under the company’s own ‘Strongarm’ label.

Currently, Armstrong faces a tough competitive environment with all the major players in itsmarket trying to secure their positions. Poor economic conditions worldwide havesignificantly affected South Postland. Consumer spending is falling throughout the economyand there is no immediate likelihood of a resumption of growth.

Armstrong’s chief executive officer (CEO) has recently conducted a strategic review of thebusiness in the context of the current economic recession. He has identified the followingstrategy as critical for Armstrong’s success:

Focus on key customers – those who are occasional shoppers but not currently loyal

to the business. Ensure Armstrong’s 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 performancemeasurement systems. Armstrong uses a balanced scorecard to assess its strategicperformance and the scorecard is used to connect the business strategy with its moredetailed performance measures. The CEO has asked you to consider the implications of thenew strategy for the performance measures used by the business.

Currently, Armstrong uses Economic Value Added (EVA), earnings per share (EPS) growthand share price performance to monitor its financial performance. The company hassupplied data in appendix 1, which the CEO wishes to see used to assess the financialperformance from the shareholders’ perspective. She has asked that you explain theproblems of capturing performance with these particular metrics, and also, how they mayaffect management’s behaviour.

Finally, in order to aid refocusing the company, the CEO has requested a report to the boardcomprehensively benchmarking the current performance of Armstrong. The board needs tohave benchmarking exercise explained and then the results described. Appendix 2 containsdata analysing Armstrong, its two main competitors and statistics provided by the

government of South Postland. A junior analyst has already correctly completed thepreliminary calculation work for benchmarking in appendix 3. The CEO has requested acritical assessment of these different sources as well as the comments on the results of theanalysis.


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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 youranswer by suggesting appropriate performance measures for Armstrong for each of thedetailed points within the strategy. (8 marks)

(b) (i) Assess the f inancial performance of the company using the three shareholderperformance indicators. (6 marks)

(ii) Critically evaluate the use of these performance metrics and how they may affectmanagement’s behaviour. (6 marks)

(c) Prepare a report to the board on a benchmarking exercise using the information given inthe 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 thecompany. (8 marks)


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(d) Discuss the issues that might restrict the extent to which a performance measurementsystem is accepted and supported by management and employees; (6 marks)

(e) Discuss FOUR factors that distinguish service from manufacturing organisations andexplain how each of these factors relates to the Dental Health. (4 marks)

(f) Explain the term ‘environmental management accounting’ and the benefits that may

accrue to organisations which adopt it. (3 marks)

Professional marks for appropriateness of format, style and structure of the report. (4 marks)

Total: 50marks


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Section B – TWO questions ONLY to be attempted

QUESTION 2

FGH Telecom (FGH) is one of the largest providers of mobile and fixed line

telecommunications in Ostland. The company has recently been reviewing its corporateobjectives in the light of its changed business environment. The major new addition to the

strategic objectives is under the heading: ‘Building a more environmentally friendly business

for the future’. It has been recognised that the company needs to make a contribution to

ensuring sustainable development in Ostland and reducing its environmental footprint.

Consequently, it adopted a goal that, by 2017, it would have reduced its environmental

impact by 60% (compared to year 2001).

The reasons for the board’s concern are that the telecommunications sector is competitive

and the economic environment is increasingly harsh with the markets for debt and equities

being particularly poor. On environmental issues, the government and public are calling for

change from the business community. It appears that increased regulation and legislation

will appear to encourage business towards better performance. The board have recognised

that there are threats and opportunities from these trends. It wants to ensure that it is

monitoring these factors and so it has asked for an analysis of the business environment

with suggestions for performance measurement.

Additionally, the company has a large number of employees working across its network.

Therefore, there are large demands for business travel. FGH runs a large fleet of

commercial vehicles in order to service its network along with a company car scheme for its

managers. The manager in charge of the company’s travel budget is reviewing data on

carbon dioxide emissions to assess FGH’s recent performance.

Recent initiatives within the company to reduce emissions have included

(a) the introduction in 2010 of a homeworking scheme for employees in order to reduce theamount of commuting to and from their offices and

(b) a drive to increase the use of teleconferencing facilities by employees.

Data on FGH Telecom:

Carbon Dioxide emissions

Commercial Fleet Diesel 105·4 77·7 70·1Commercial Fleet Petrol 11·6 0·4 0·0

Company Car Diesel 15·1 14·5 12·0Company Car Petrol 10·3 3·8 2·2Other road travel (Diesel) 0·5 1·6 1·1Other road travel (Petrol) 3·1 0·5 0·3

Rail travel 9·2 9·6 3·4 Air Travel (short haul) 5·0 4·4 3·1 Air Travel (long haul) 5·1 7·1 5·4

Hire Cars (Diesel) 0·6 1·8 2·9Hire Cars Petrol 6·7 6·1 6·1

–––––– –––––– ––––––Total 172·6 127·5 106·6 –––––– –––––– ––––––


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Required:

(a) Discuss different cost categories that would aid transparency in environmentalreporting both internally and externally at FGH. (4 marks)

(b) Perform an analysis of FGH’s business environment to identify factors which will

affect its environmental strategy. For each of these factors, suggest performanceindicators which will allow FGH to monitor its progress. (8 marks)

(c) Evaluate the data given on carbon dioxide emissions using suitable indicators.Identify trends from within the data and comment on whether the company’sbehaviour is consistent with meeting its targets. (10 marks)

(d) Suggest further data that the company could collect in order to improve itsanalysis and explain how this data could be used to measure the effectiveness ofthe reduction initiatives mentioned.

(3 marks)

(25 marks)


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QUESTION 3

EEE is an established chemical company extracting flavours and oils from plant materials

and supplying them to the flavours and fragrances industries. The shareholders include

institutional investors (20%), employees and pensioners of the company (20%) and the

descendants of the family (30%) who founded the business approximately 100 years ago.

The remainder of the shares are in public ownership. The company is reasonably successfulbut, recently, there has been pressure on margins and its future is not guaranteed.

The majority of the Board of Directors are members of the founding family who have always

taken an active part in the management of the business.

When the company was originally started, the surrounding area was mainly used as

agricultural land but, over time, a residential area has developed around the factory.

Although many of the workers in the factory live locally, some of the housing is quite

expensive and has attracted affluent residents from the local city.

The chemical engineers at EEE have recently developed, and patented, a new processwhich would allow EEE to extract onion oil and garlic oil at far better yields than those

obtained by existing processes. The market for these oils is very profitable and presents a

significant opportunity for EEE to gain a real competitive advantage in its industry.

Unfortunately, as with all extraction processes, there will be some leakage and, although

perfectly safe and compliant with all safety legislation, the smell of the oils will offend some

of the more affluent residents who have complained to local government officers.

There is very little other industry in the area and EEE is a large contributor to the local

economy. One of the trade union representatives working in EEE is also an elected council

member serving in the local government.

Required:

As management accountant you have been asked to:

(a) Advise the Board of Directors of the advantages to EEE of conducting a stakeholderanalysis in the context of the proposed investment decision;

(8 marks)

(b) Analyse the principal stakeholders in EEE in the context of the proposed investment inthe new process;

(12 marks)

(c) Recommend an acceptable course of action to the Board of Directors in the light of thestakeholder analysis conducted in (b).

(5 marks)

(Total 25 marks)


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QUESTION 4

Moffat Ltd, which commenced trading on 1 December 2002, supplies and fits tyres and

exhaust pipes and services motor vehicles at thirty locations. The directors and middle

management are based at the Head Office of Moffat Ltd. Each location has a manager who

is responsible for day-to-day operations and is supported by an administrative assistant. All

other staff at each location are involved in fitting and servicing operations.

The directors of Moffat Ltd are currently preparing a financial evaluation of an investment of

£2 million in a new IT system for submission to its bank. They are concerned that sub-

optimal decisions are being made because the current system does not provide appropriate

information throughout the organisation. They are also aware that not all of the benefits from

the proposed investment will be quantitative in nature.

Required:

(a) Explain the characteristics of THREE types of information required to assist indecision-making at different levels of management and on differing timescaleswithin Moffat Ltd, providing TWO examples of information that would beappropriate to each level.

(12 marks)

(b) Identify and explain THREE approaches that the directors of Moffat Ltd mightapply in assessing the QUALITATIVE benefits o f the proposed investment in a newIT system. (8 marks)

(c) Identify TWO QUALITATIVE benefits that might arise as a consequence of the

investment in a new IT system and explain how you would attempt to assess them.

(5 marks)

(25 marks)

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