Current Developments

Related to Exam and

TCS Questions
Question Attempting EXTRAS
T C S Minimizing Cost
1. Related to Question Superior
Improvement
waste Reduction Software House: Why EBITDA Skepticism Commercial Acumen IMP Realization Marks Liquidity Risk Shareholder Ratios
JIT TC Six Examiner doesn’t ask random or unpredictable
wasn’t calculated for divisions?
TQM KC Sigma Quality Practices Value Based Environmental 2. Related to Question Royal
Don’t be shy to write this could be done to 1. Practicing will really help in building commercial acumen questions.
Receivable Collection Period = Operational Gearing Earnings per share
League Tables manipulate the results, where needed 2. New investments take time to realize into huge profits. Hence, E.g. related to question Cod in PP, requirement b, the
Receivables / Credit Sales * 365/12/52 Measures the EPS = PAT less
32. 07. 01:00 Management Management Accounting Hospital: Should assumptions
When the question is asking for whether asset turnover is reduced when new investments take place question asked for how PP could help achieve Inventory Holding Period = Inventory
proportion of fixed Preference Share
made regarding the data be stated costs.
something should be implemented 3. You can imagine a similar company in real world / Cost of sales *365/12/52 Dividends / W. Avg No.
Just like scoreboard on which in answer (e.g. assumption that coherence in performance measures for Cod. Both
Environmental costs are HID Technical Professional Measures the risk of shares in issue
performance of each division is shown (suitability), discuss pros and cons of 4. use examples model answers, (of sir rizwan and studyhub) ONLY
Uses value based indicators to measure majority of the complains are Payables Payment Period = Payables associated with high
implementing it and then give judgement 5. Recommendations should be practical, plausible and Price to Earning
Total Quality performance at all levels (strategic to related to clinical performance of explained the model. And simply wrote ‘PP will help
/ Credit Purchases * 365/12/52 fixed cost payments. Ratio
Quality Costs Kaizen Costing Advantage include competition between operational) hospitals_
Skepticism is NOT very much tested in APM commercially viable Cod achieve coherence’
Formula
Management (TQM) Others
managers boosts performance
E.g. ROCE at strategic level and profit per
3. Is share price and earning per Others
6. Hotels naturally have high fixed costs So examiner will also be expecting simple explanation If you think about in what element
Fixed costs / Total
Share price / EPS
Earnings Yield
7. For Not-For-Profit Organizations, accessibility to the service is of model and no details as to examples of how does an item gets turned around to
Includes: Includes: share superior method to gauge Answer should be in paragraphs and not Costs
Used by Toyota and Continual Cost reduction technique unit at operational level important EPS / Share Price
product / process Supervising cost financial performance of an bullets coherence is being achieved. in SOPL, makes it more intuitive
C - Continuous improvement Canon implemented in production phase OR (Inverse of PE Ratio)
8. Following can be businesses having high operational gearing Just stick to million dollar approach and don’t think
redesigning Inspection cost Better Measures to indicate shareholder organization than ROCE and profit Examiner will NOT test any concept related E.g. Fixed costs / Variable
I - Involvement at all levels (from CEO to When selling price in a. manufacturers Dividend Yield
training of workers Testing cost C - Continuous improvement value margins? to other P-level exams. So don’t get puzzled some question outside to it will come
clerk) later years is expected RM gets turned around to mat Costs Dividend per share /
b. E-commerce businesses This is really making the exam more easier!
T - Tightening standards Economic Value Added 4. Should we go through all of the when something like this comes. This usage OR
A - Aim is to achieve perfect quality to decline, Kaizen will be c. telecommunications Share Price
E - Elimination of waste data quickly before starting the happened in the question Dargeboard Co, WIP gets turned around to Contribution / PBIT
(ZERO defect) helpful to maintain the d. airlines
Prevention Costs Appraisal (detecting) Costs exam or not? Or should we answer for expense of reorganization, for calculating Specific
current level of margins Elimination of waste include: e. utilities (electricity and water providers) production costs
Analysis of quality costs into costs of sequentially? profit margin it is obvious that all costs are When performing ratio analysis, it is very helpful to
FILTER Implemented for long- production delays / idle time f. pharmaceuticals (drug manufacturers) FGs gets turned around to cost of
calculate % change in numerator and denominator to ROCE = PBIT / Capital Employed
conformance and costs of non- term use defective products to be deducted and hence that is what sales
g. hospitality and hotels explain the reason for change (Cant use net profit instead of PBIT)
conformance is part of TQM should have come to your mind
Production
Shipped to (hence less useful if unnecessary inventory h. IT companies USE breaking down approach/ Top Down Approach
Receivables get turned around to
ROE (Return On Equity) = Net Profitability Liquidity Risk
customer Aim of TQM is to reduce the costs of product life is short) over production Note that when something doesn't seem credit sales
Required 9. Following can be businesses having low operational gearing Learnt in: Question Superior Software House profit / Equity ROCE Current Ratio Financial Gearing
non-conformance Believes in small over processing obvious, it most probably isn't a point Payables get turned around to
repairing a. freelancers Start with ratios which include other ratios as it’s ROE Quick Ratio Operational Gearing
incremental transportation cost (layout examiner is expecting. Credit purchases
b. service businesses elements. E.g. If you start with ROCE, you can get Asset Turnover Receivable Interest Cover
Internal Failure Costs External Failure Costs If recommendation/ suggestion verb is not
improvements of factory should be simple) 10. Service businesses have high levels of intangible assets. Which
used than DON’T DO IT!. BUT Yes sometimes, to Asset Turnover and Operating Profit Margin. Basic Ratios Profit Margins Collection Period Dividend Cover
(rather than a large one-off are NOT shown in SOFP. Hence any measure using SOFP Payables Payment
you should ONLY recommend when it is And than you can get to change in CE, Sales and Normal ratios
Includes: Includes: improvement as in Business asset’s figure in service industry could be criticized for this. Period
needed to clarify or as an example (PT) Costs Current: 2:1
Rework / Warranty cost Process Re-engineering/ E.g. ROCE Inventory Holding
You should sometimes give a basic If divisions are given, start with interpreting Use quick ratio Quick: 1:1
rectification Customer after sales Target Costing) Related to data in the question: Period
explanation for each element of model if the combined results first when inventory F.G (D/D+E): 50%
cost service cost First 1 or 2 paragraphs would be giving general
question asked for using the model Copied from Technical Article on Performance Common reasons holding days F.G (D/E): 100%
Lost sales due to affected INFO of the company. This para has to be used
Reports for failure are very long
Goodwill and reputation for every requirement If the performance report does not address the mission
Legal costs if customer All the other paras are related to ONLY specific Bad time
and subsidiary aims effectively then this should be
took legal action requirements each called out and a justified explanation provided as to management
what the organization should do instead. The Lack of EBITDA Shareholder Ratios Disadvantages
When answer any requirement it will be VERY
Just In Time Target Costing Six Sigma time saving to just use it’s relevant paragraph.
justification is key here as for example saying that ‘the practice (Earning Before Interest, Tax, Depreciation & Earnings per share Might be subject to manipulation
EVERY INFO can be used to make some point
fourth subsidiary aim is only being measured through Weak Advanced Amortization) Price to Earning as they depend on profit (except
gross profit margin and there is nothing on inventory’
JIT procurement JIT production conceptual Ratios Ratio for dividend yield)
DONE in development phase Six Sigma Team Performance Try to use each data in the scenario somewhere
in your answers
would score one mark but if the answer said ‘the fourth
subsidiary aim is only being measured though gross knowledge
Gives amount close to CF from operations
Earnings Yield Study have shown that EPS have
has members with Very useful calculation when Depreciation / POOR correlation with
these belts
Management Relating to the INFO in question is VERY IMP profit margin and there is nothing on inventory which
Amortization / Finance expenses are high
Dividend Yield
shareholder value
Order placed Raw material Production of Delivery of Market Surveys
This is how ‘tightening/ reducing of standards’ work
Being a performance Most of the INFO is there to relate your answer
would be useful as it could measure how much
Also useful for measuring performance of a
by customer purchased items items consultant / manager is like Actions are made, A system which ensures that the Performance Measurement to it keep this in mind
obsolescence and inventory write offs were costing Advantages
Achieving standard is NOT the target Achilty’, this would score two marks. manager who doesn’t have control over Very useful for comparison between companies (even from diff
Target is specific cost reduction figure Any business should aim to D - Define D - Define being a trainer for archery! period is passed organization’s goals are being If no INFO is given, don’t assume it is NOT equipment used in their department
Concerned with measuring of sectors)
Market Price
In Period 1: achieve zero defects up to 6 M - Measure M - Measure You train the organization to
Performance consistently achieved in an recorded by the business (examiner wants you to
performance only using
Standard cost = $5.6 std deviations or 3 defects per A - Analyze A - Analyze
hit the bulls eye (which is it’s is measured effective and efficient manner. use the INFO given to comment on) (you should
Incorporates: quantitative / qualitative KPIs also mention if further INFO is needed)
Target reduction = (5.6-5.5) = $1 million opportunities I - Improve D - Design
Deduction of desired
C - Control V - Verify
mission)! whole organization Note that determination of KPIs is Sensitivity Tell the % change in a If tax is given in Probability Simulation Discounted
Actual reduction = (5.6-5.48) = $1.2 variable that would question: Find after Using EVs
margin THREE Customer Requirements You do this by prescribing part of Performance Management
Variance = AR - TR = $0.2 fav Reactive Proactive Targets are departments Secured revenue (budgeted Analysis bring NPV to ZERO tax value for each
Analysis Payback
Basic / Necessary NOT Measurement
All to be done ‘Just In Time’ Standard cost would now be $5.48 system which includes set carefully employees revenue from long-term
Expectations
processes, etc. contracts) is a very good indicator
Advantages effected CF Advantages Advantages &
(Meaning in time allowed by customer) Target Cost In Periods 1, 3 and 4, variance is favorable
Beyond Expectations monitoring of indicators Identified critical variables Sensitivity to a variable Can assume multiple scenarios
Includes: of Maintainable revenue Incorporates risk into investment Risk
which will ensure Strategies and systems strategic management
Mission and Risk & = NPV / NET of PVs of appraisal with MULTIPLE variable changes
achievement of mission
Disadvantages Adjusted
Compared with Current
Ideally production shouldn’t are improved performance evaluation and Vision Uncertainty No decision rule related CFs * 100
Disadvantages Disadvantages
Cost of
start UNTIL cost gap is not assessment Doesn’t incorporate risk into investment appraisal. e.g. Can get TOO complex and costly
Estimated Cost Doesn’t work for ONE-OFF
eliminated OR a plan has been performance reporting May NOT convey true Mission has following elements: TWO type of questions relate to as Risk adjusted COC and probability analysis do Requires computer programs to Capital
Problem of Short-termism decisions
made to eliminate it during performance measurement Doesn’t assess the likelihood of a variable change run
priorities of organization States the Purpose of organization mission statement: Assumes that the decision maker
product’s life Primary Objective CSFs KPIs and monitoring through KPIs Using targets such as profit, could Assumes variable changes independently of each
Cost Gap Identified (actions may conflict Mentions organization’s key Stakeholders 1. Breaking up of mission
encourage short term view while is risk neutral
Sound managing information related with mission) statement: pick out key words other. This doesn’t happen in reality as e.g. change in
ROCE % to performance Advantages sacrificing the long term variable cost will be accompanied by change in SP
Financial and stakeholders
Cost Gap Closed Using Profit Margin % Help to avoid conflict performance of organization (both might be changed due to inflation)
Profit Performance Vision: A statement 2. Misalignment of organization’s
Cost Reduction Gives strategic direction to the company
Maximisation about how the proposed action with mission statement
Techniques
future would look like. Also shows organization’s values and culture Follow these steps for performing ratio
analysis of a company:
Financial
% of customer refunds To hit the bulls eye is like financial (normally includes NOT sure why it NPV Advantages Internal Rate Modified Internal
Customer
% of customer complaints CSF future imagination of
Disadvantages
Will become ineffective if it doesn’t
1. Calculate ratios Performance is included here
Company might be Uses cash flows of Return Rate of Return
Satisfaction 2. Consider whether it has increased /
% of repeat customers To train, improve your skill and orgnaization) represent organization’s true priorities
decreased using suitable comparative Indicators (FPIs) using ROCE for Uses time value of money
focus, investing in better In reality: Investment measuring shareholder Ans is absolute figure Advantages Represents the actual return
equipment, would be non financial 3. Explain the reason for increase /
generated by the project.
All costs are analyzed
MSs just become meaningless
decrease Appraisal value creation. As Uses cash flows
CSF statements Disadvantages Uses time value of money Is preferred than IRR.
4. Give conclusion, if required consultant you might
and every cost that is It could be to measure the Required calculation of Easy to understand
Used more for public relations than for have to suggest CF
not value adding is number of projects discount rate which gets Considers whole life of I don’t get how it works. NPV
planning Don’t include implications based methods for this
considered as ‘WASTE’ Planning complex project doesn’t get to ZERO
selected on the basis of such as NPV
This includes inventory Words of Peter Ducker
NPV Measure risk
cost and transportation Strategic “What gets measured For shareholder value creation. Advantages
cost. Critical Success Vision: Preferred
Goals:
gets done” ONLY cash flow based measures Disadvantages Uses two rates
future picture should be used Ans is NOT absolute figure ONE for borrowing
Factors Vision (Unquantified) Must be shown in: Doesn’t work with irregular
Tactical Tend to be more Key Performance 1. % NPV is the MOST SUPERIOR CFs
ONE for re-investment
Mission Can deal with irregular
CSFs: Areas in which
Monitoring CSFs: Used to monitor
the current level of performance. organization must succeed Strategy
Strategy:
Action Plan
longer-term than
objectives
Indicators 2. Number (quantity) of something
3. As last resort: monetary amount
investment appraisal method Assumes CFs are re-invested CFs
at IRR
E.g. labor turnover. May conflict with NPV Disadvantages
Opertational Control Internal CSFs: Those that are in Goals
Constructing CSFs: Used to expand Objectives: (Quantified) If calculated using May conflict with NPV
CONTROL of a manager.
the organization beyond current Objectives Specific, measurable interpolation: is an
External CSFs: Those that AREN’T in
level of performance. E.g. innovation statement of what will be done estimated figure
CONTROL of a manager. e.g. for a Critical Success Factors
to achieve goals within a When selecting
Fixed Budget Beyond Budgeting business to succeed, a specific raw
Key Performance Indicators defined time frame
“Tools for
KPIs, it is also IMP These are enablers of profitability in
material should be available Measurement”
to consider Businesses, whereas in NFPOs they are an end
Features of Beyond Problems in budgeting: When question is with model: Assume that there will be NO whether INFO can in itself
Fixed Budget Budgeting Fixed targets Marks are available for just 4) Suggest improvement in relation to: other category. be easily non-financial
Qualitative
Targets should be
relative
May lead to unethical behavior
May create conflict with increasing
looking at object from model Business performance Try to fit each question into collected for Non-Financial performance is a Why are they important? Issues: Others
lenses Performance measurement system one of these categories measuring NOT usually given much importance by
Used to set broad objectives
Spending should shareholder value
through that KPI Performance very important
determinant of the
Customer preferences are most of
the times qualitative. e.g. management
You do try to turn qualitative INFO into
quantified INFO .
be as needed Create inflexibility: only the budgeted
amount could be spent (Nokia example) Indicators (NFPIs) long-term success satisfaction level from service NOT compatible with information But there is a risk that it is not
Based on SINGLE activity level of any enterprise happiness level systems (machine doesn’t understand or representative of the real thing that
Sales targets could result in Must be used along side FPIs
emotional attachment process it) was to be measured.
overstatement of product features 3) Evaluate the current performance management system
Useful in controlling fixed
(mostly asked)
Million Dollar TWO types Employee motivation is also NO formula to calculate E.g. customer satisfaction is qualitative
costs 1) Theoretical explanation of models Shareholder wealth maximization is through Quantitative (CAN count) qualitative. e.g. Can ONLY BE estimated INFO, but you can measure it by scores.
(NO calculation required) (e.g. reviewing KPIs, CSFs, Mission Approach (recommending model by elaborating following: Capital Gains or Dividends Qualitative (cannot count) due to emotions If gathered can easily be incomplete or And this can not be very good
Performance Report Statements, etc. Checking whether KPIs are inline with MS, etc.)
With Model
(FOUR types of it’s advantages / disadvantages) demotivation inaccurate, e.g. if you ask students in representative of CS
Advantages
more realistic budgets
Disadvantages
Time consuming and & Dashboard Without Model Questions related (NO calculation required) Best measures for shareholder value: Optimum Mix Things to remember when selecting measures / evaluating current measures (key features of modern performance
measurement system)
enthusiasm class whether they are satisfied they It is sometimes as IMP as quantitative
Total Shareholder Return might all reply with YES, but the extent INFO but difficult to measure and
reduces uncertainty costly Performance report / dashboard (in-place of system) to Models) 1. must be linked to organization’s objectives and priorities Examples
Others Use this approach for critiquing a report in an exam question Economic Value Added of satisfaction would be difficult to report
management take management might 2. must measure performance of main managers / divisions of organization (Monza) Customer feedback
NOT VERY suitable measures: predict
Performance Report
One of the most common criticisms of reports is Purpose: Report must represent it’s fundamental purpose They don’t have direct measures, ONLY
budgeting more serious consider as non-value 3. must have a balance of: Customer satisfaction
that they present too much information and are If it is strategic performance report it’s purpose would be to help achieve ROCE Could be interrelated to each other (e.g. indirect measures that could indicate
even in uncertainty adding activity a. financial & non-financial (quantitative & qualitative) measures Student’s understanding
much too cluttered the organization’s mission / subsidiary aims figures not very objective and open to improving staff skills are likely to them
provides opportunity to Use this as a general rule: b. internal & external measures (e.g. measurement of business’s internal efficiency and external effectiveness) Impact of new tech on customer
There is always the suspicion that large volumes of mission and aims of organization SHOULD be reflected in the report (1st Result Comparable manipulation improve efficiency and morale) For example, in an effort to measure
M
2) Evaluate or assess the performance of
Flexible Budget Budgeting Rolling Budgets keep budget updated information have been deliberately provided to step is to check this when evaluating a PR) M - If the question didn’t asked for using a model
the business For a business having HIGH as not using cash hence doesn’t indicate c. short-term & long-term measures satisfaction
Staff skillset
Needs judgement in placing value on it enthusiasm an organization might
IMP derive goals and measures from mission statement 4. data can be easily collected for it (sometimes indicator is good but INFO for that indicator is NOT EASILY
obfuscate the facts and to blunt the message. Suitable KPIs should be present in report to gauge performance towards $ $ dividends measure when staff arrive in the
I
Calculation required (both FPIs & interest costs, financial gearing
Q1 Report includes more detailed INFO and Dashboard each element of mission Items I - If the question asked for a model then set goals
NFPIs) or interest cover is a must to It includes D + E, shareholders are ONLY available (PT)) (also consider whether INFO for a suitable comparative is easily available or not) Staff motivation level
Staff satisfaction
morning. However, the person who
Budget created for and measures for each area covered by the model concerned about Return on Equity (which 5. The less the number of measures and simpler they are the better it is (this helps avoid INFO overload)
Flexible Budget Rolling Budget whole year
Q2
includes summarized INFO
Is most likely to be tested in a 50-mark question
purpose can also be achievement of some other operational level goal
Audience: Report must be according to needs of it’s audience FPI % % S S (even though that area is not in mission)
With Model
Without Model
have as a FKPI.
Similarly for a business having can be calculated using ROE) 6. Learn to split measures into direct and indirect measures. E.g. training days is in indirect indicator of innovation. Effectiveness
always arrives early might simply be a
victim of an hourly train service: arrive
Indirect indicators should NOT be the primary indicators. Responsiveness
Q3 Summary budget figures and variance figures may Possible audience could be: BOD (if strategic PR), Tactical or operational Share price 40 minutes early or 20 minutes late.
VERY useful in uncertain Q4
aid the board in their role of overseeing management NFPI % % S S
HIGH fixed costs, operational
gearing is a must to have as a increase could be due to general inflation or 7. Measures should be clearly prioritized Reputation

performance (for senior management: report should be in summarized form e.g. figures trends in economy 8. consider different customer groups (for customer perspective)
Used as a controlling tool conditions / dynamic
industry
1st period
Y2 Q1 Just because something is measured and reported should be rounded off, %s data shown more, etc.) (for junior management: I I
FKPI,
9. Measures should be linked to targets set for employee motivation
expires at operational level doesn’t mean that even just a report should be detailed) Commentary
Based on MULTIPLE activity levels new period is added (month
/ quarter) and first period summary of it will not be needed at strategic level should use simple terminologies according to user - O O What if customer is not a main stakeholder in mission?
(e.g. a business that has monopoly) will we still set goals for In what cases can profit margins, ROCE and
report Information: must include right INFO - Do differentiate between leading USED in SERVICE industries due to If the business were known as a
If prepared at Actual activity
level, that budget is known
removed
budget is to be updated New period is added even something as simple as an adverse material should include financial as well as non-financial INFO also -
N N customer in BSC and PP?
and lagging indicators. ROE be used as primary measures as FPIs
Here are some advantages of profit margins:
following characteristics in service ‘cheap and cheerful’ supplier,
price variance needs an explanation about what for non financial INFO, both qualitative and quantitative measures should Leading indicators are industries: the measurement of quality
as ‘flexed budget’ every period into budget (and 1st Are indicators of profitability Cost per unit, a financial KPI or productivity?
alternative to periodic period removed) caused it (simply to report a variance without be present
Is BSC typically used for manufacturers?
Balanced indicators of future
Are indicators of efficiency in cost control
Simultaneity Building Blocks would be much less important
Answer: Performance
stating how it might have arisen is not going to help INFO should be complete and comparable available performance Heterogeneity but costs per unit would become
budgets
Make like with like
comparison possible the report’s recipient at all) balance between internal and external INFO is also needed Scorecard Lagging indicators are (profit margins DONOT represent growth) Intangibility Model more important.
it is a financial KPI in BSC Pyramid
Cost measures are financial KPIs
For trend analysis, previous period INFO is needed Layout: must help user understand the content of report easily P - purpose (1st mission 2nd aims) indicators of past Perishability
Can always comment on suitability of quantified consider whether there is too much or too little INFO (be careful about A - Audience (laid out according to audience’s needs) performance No transfer of ownership
qualitative INFO INFO overload) I - Information
N - necessary Horizontal Vertical
Don’t be afraid of recommending alternatives (with important amounts should be in face of report The Vertical Vector
Connections Connections
Activity Based justification) trends, results, and explanations can be read BA - balanced E.g. Goals Measures Goals Measures Dimensions
Incremental Budget Zero-Based Budget Some absolute figures are really helpful e.g. Graphical displays can be used to greatly enhance information C - comparable available
TWO resultants dimensions
Budgeting revenue figure and profit figure. This will be assess should also include commentary summarizing imp points Financial Perspective Shareholder Quality % of customer
Financial
Steps the profit from profit margin (Shareholder Value) Value
complaints
Market share %, Revenue growth, No. Vision Level 1
Suitability Suitability Competitiveness
Estimate ONE con of using % is that one cannot assess the Financial Perspective Customer Perspective of customers , etc.
When there is little to no potential for
Activity Based Budget
Products /
Incremental Budget Zero-Based Budget
Public sector organizations (as cost saving is production / (Shareholder Value) (Customer Value) FOUR determinants dimensions Objectives
size / scale of the figure it is related to
improvement more imp for them being NFPOs as increasing services No. of complaints, No. of repeat orders
sales If all figures are in %s one cannot gauge the Quality are set from Market Gross
processes are already optimized revenue is not an option) Customer Perspective Responsiveness Service units per employee, time per unit, No.
Estimate absolute scale of the business Strategic to share % profit %
environment is stable / mature industry Timeliness Resource Utilization
When there is room for improvement and (Customer Value) % of on time of client / partner, students per teacher
Previous budget / steadily growing $0 required no. comparable for each department / division is
deliveries Flexibility
Operational
Market Financial Level 2:
$ growth of driver units needed to do a like with like comparison (normally % on time delivery, No. of courses, overtime hours, etc. Level
/ actual results: business has been operating in this Activities Innovation Strategic
Advantages Determine with industry figures) No. of new successful services launched
Add: Inflation sector for long period Add: justified cost per If industry averages are not given, you can argue Internal Perspective
impact
$ spending on
$ very useful when spending is
driver Efficiency No. repeat Efficiency %
discretionary(e.g. as in marketing and R&D) that there is lack of external INFO which will make it (Internal Efficiency) customers of production
Advantages Goals Measures Goals Measures
Add / Less: Other justified activities (by using ZBB business will be able to identify Calculate difficult to assess the competitive position of the
VERY LESS time and resource consuming Customer
known changes: $ / ($) best marketing campaign each period) Resources budgeted cost business Operational Cycle time* Innovation No. of new Flexibility Productivity Level 3:
Prevents conflict between managers per activity Satisfaction
removes previous period’s problems / You most of the times NEED industry averages also products
Budget for the Budget for the Innovation & Learning Performance Standards Rewards Tactical
inefficiencies and resources as comparable to gauge the how is the business Skills developed
$ $ (Creating Future Value) Ownership Clarity Measures
year: Disadvantages year: performing as compared to it’s competitors Development Internal Perspective (Internal Innovation & Learning (Creating
Staff involvement are
Carries forward last period’s Efficiency) Future Value) Achievability Motivation % % delivery No. of days % idle
efficient allocation of resources identified
inefficiencies (as using previous period Equity Controllability complains on time time
Disadvantages Employee Labor from
figures are NOT justified) Implementation satisfaction turnover Staff % training Cycle Operational
Carries forward uneconomic activities very time and resource consuming development hours of total Quality Delivery Waste Level 4:
from last period (as no need to justify ranking can become subjective (e.g. what is 1. Develop Strategy e.g. cost leadership or time to Strategic
Is like an opposite to incremental
differentiation
hours Operational Level
them) more imp marketing or R&D) Advantages
budgeting
Motivates expansion of budget targets skills for construction of decision packages Better cost control as targets are set for each activity and it’s drivers 2. Select Measures: select measures appropriate
Budget is started from scratch (and Some important points Includes: Includes:
Help identifying and eliminating non-value adding activities to goals *time from order placed to order delivered
(more spending) every activity needs to be justified) are required of managers Competitiveness measures how competitive business is in the market External Customer Internal Flexibility
Doesn’t encourage new and innovative 3. Define and Refine: create management
Budget for each activity is prepared
Disadvantages reporting system and ensure:
Some other points Flexibility measures 3 things: Effectiveness satisfaction Efficiency Productivity
ways of doing things as if it is to be done the first time Steps are: FPIs can ALSO be present in other than financial perspective Speed Quality Cycle time
1. Establish decision packages (e.g. marketing NO manager could be held responsible alone for high cost of an a. monitoring organization is on track
and hence eliminates last periods Duplication of measures is possible but you must JUSTIFY it (e.g. using Response to customer requirements / specifications Delivery Waste
campaign) activity as activities are being used by many managers b. timely reporting is done
inefficiencies income from new products to measure whether innovation goal is Coping with demands
2. Rank the decision packages (priority is given Many fixed costs do not change with change in cost driver, hence ABB c. it is reviewed from time to time Some important points
achieved or not) (justification could be that this income could be very Standards are set for KPIs, and rewards are associated with those standards
to most required activity by the business) could provide misleading results in the short term Activity Based 4. Deal with People e.g. targets should be related
good indicator of how successful a business is in launching new Equity is about setting fair targets (not equal) Considers organization’s hierarchy (senior management to daily operations)
3. Allocate resources in order of ranking to rewards and career development (links whole organization’s and its areas targets to the mission)
Costing products and making them successful (by earning income from them))
FOUR perspectives can be modified according to company
Innovation is an important source of competitive advantage, hence
Flexibility is in order to meet business requirements and customer needs (and
measurement is very beneficial
By applying a model isn’t it hence includes innovation also)
Difficulties requirements and priorities Standards should be fair: Compare like with like
possible that we are ignoring the Flexibility can also be defined as: innovation and the ability to change to change
Vision & Strategy is linked with the FOUR perspectives, which are then Breakdown into geographical regions / departments / divisions is ONLY helpful if
Steps in ABC ABC is a type of absorption costing Suitability Conflicting targets: e.g. target for higher profit mission?
linked to CSFs and then to KPIs a comparable is given (for each area) (as was given in APX Accountancy) in external business environment
Apportionment has to be Identify activities and gather Main diff between TAC and ABC When OHs are significant margin would conflict with spending on For example by applying PP we just
BSC considers internal as well as external goals and measures Productivity means trying to find the most cost-effective way of meeting the
done using appropriate
Overheads their costs in cost pools TAC ONLY uses production activity operations are complex & automated (machine have to set targets for market
customer, process efficiency and on BSC considers short-term as well as long-term goals and measures other two needs (customer satisfaction and flexibility)
base. For example, staff Identify cost driver for each levels to absorb overheads. intensive environment) innovation Other Measures expansion and gaining new
Competitiveness measures can be included in financial perspective Cycle time is no. of days it takes an operation to perform e.g.
costs might be shared on activities ABC uses production as well as non- Product/service is bespoke Selecting right measures is difficult: we are Flexibility: Response to customer requirements: % of customers taking all customers and it doesn’t matter
Innovation and learning perspective is difficult to measure delivery: time from order placed to order delivered
the basis of staff time Calculate OAR for each production ALs to absorb overheads When OHs are NOT production-related more prone to selecting measures which are services from this business whether the organization wants to
Allocation & Customer perspective is about satisfying customer needs development: how many days it takes to develop a new product / service)
spent on each activity activity Wide range of products are manufactured easy to measure albeit less important Resource Utilization: % billable hours to total hours, No. of staff per client (you expand or not
Apportionment Internal perspective is about looking at ways to satisfy customer production: how much time it takes to produce a unit or provide a service
Absorb overheads into Robust Laptop Where there are some products being sold in small Manager may not correctly interpret the would want it to reduce)
needs An example of vertical link: increasing flexibility would increase productivity
products and units 36:00 - Report writing numbers it could be the case that the product is loss measure and take incorrect action (as many Innovation: time it takes to launch a new service once customer need is
Variance analysis (performance against budget) can be used as an hence helping achieve internal efficiency and would increase customer
ABC making and the business doesn’t find it out under TAC managers are not used to using non-financial identified, % of revenue generated from new services satisfaction hence achieving external effectiveness
Users of ABM and ABC often internal perspective measure in BSC
assume that all overhead costs INFO) The objective of the balanced scorecard is to provide top Half of the pyramid is internal efficiency (Vision, financial, flexibility,
ABM uses Cost pool Cost pool Cost pool Cost pool Advantages Disadvantages Management may NOT be fully committed to Advantages Disadvantages
Resources E.g. are variable. This is not the case, management with an integrated set of performance measures. productivity, cycle time and waste)
Costs (OHs) More FAIR allocation More time consuming and costly Encourages participation of Link with strategy is NOT clear
incur cost and Resources Machine hours and some overhead costs will be this INFO for Activity 1 for Activity 2 for Activity3 for Activity4 using scorecard leading it to be just a waste When deciding measure for internal perspective ask: what must we The other half of the pyramid is external effectiveness (Vision, market, customer
Considers drivers for ALL OHs Data collection about activities would incur more cost and not cost effective employees in target setting ONLY confined to service industries
i.e. overheads Labor hours fixed, so will not be saved if excel at? (this can then be linked to mission) satisfaction, flexibility, quality and delivery)
Links rewards with targets which is
Viewing
Results in more accurate cost per unit (detailed acc record) According to Lynch and Cross, PP will help organization to achieve it’s objectives
Space, etc. activities are reduced. Another way of looking at BSC:
Apportioning each Helpful in cost control (as driver for most costs NOT all costs can be allocated to specific activity / motivating for employees
Question: Monza Customer perspective – how do our customers see us? (if question asked for model then just assume it is true and the model suits Resit Orientation
are identified) (e.g. reducing no. of inspections cost pool
Organization as a
Driver Activity Performance cost pool to Activities Internal business process perspective – what must we excel at? organization and don’t try to make unnecessary links with mission) 53:00
Mistakes Question: APX Accountancy
ABM Analysis Analysis Evaluation products using and increasing inspection size will reduce OH Difficult to select cost driver
Learning (or innovation) and growth perspective – how can we Material usage variance can be useful indicator for waste
didn’t noticed that all current indicators are If a bonus is based on just the review of manager, it lacks clarity
cost driver INFO related to inspection) it is not possible to find a cost driver for each activity
Activities examples Set of Activities Costs can now be categorized by Business only needs to control the driver to
reduce the OH cost
(for that production related ALs are used to absorb
OH)
financial and historic
Didn’t answer TWO objects in question
continue to grow and change in the modern dynamic business
environment?
43:00
If the reward system is NOT equitable, it will lead to less motivation of staff
Supervision activities Products / Financial perspective – how do we look to shareholders? Advantages Disadvantages
Products / Product Line 1 Product Line 2 Product Line 3 recognizes that not all OHs are volume related not beneficial when OHs are insignificant or
SEPERATELY members at the unfair end
Inspection services Within each of the FOUR perspectives, management needs to identify: Considers all levels of Too much time will be consumed
Guidance on report writing: 21:00 All these models are
services easily applied to service industries also production (volume) -related only management and links the in developing measures and
material handling Absorbing OH into units Sales growth SHOULD NOT come under Objectives, CSFs and KPIs If bonus is based on profit margin, will that not effect controllability? (as higher supposed to be fully used
Organizations performs The following list shows examples strategic vision with day to day inputting data resulting in less
Cost of resources is charged to factory running OH cost per unit = OH customer perspective because it only measures Targets: what target should be set for each of the measure demand = higher sales = economies of scale = higher profit margin) by strategic management
hundreds of different activities of some of the activities that may operations time left for main business affairs
activities and added to cost pool setting up batch absorbed / units the results and NOT customer satisfaction Initiatives: what actions should be taken to improve the measures
ABB Hence, judgement has to be take place in a manufacturing Overall Feedback for PPQ: Alflonnso Each department will be assessed There may be conflict between
of that activity (e.g. supervisor maintenance (sales growth could solely be because of good The CSFs chosen for the FOUR areas SHOULD represent the Question: Kolmog Hotels
made as to what activities are organization: The question seemed very confusing even for calculations also. Where does employee in terms of their contribution measures such as cost and quality
salary charged to supervision) production, etc. marketing campaign) organization’s mission / strategy use of ratios comparing to revenue is a useful communication tool in showing
significant based on time/cost Schedule production jobs Units Units Units It included combination of lifecycle costing and ABC satisfaction comes in towards organization’s mission
Customer perspective measures SHOULD focus BSC not inline with organization’s objectives can come as common how resources/costs generate sales 29:00
Activity lists / dictionary are Set up machines Improvements under PP?
Initial stages on strategies which will achieve success in the issue To EVALUATE the performance report, use PAIL acronym
maintained. For some Receive materials Improve your understanding of data provided and this can help you with your confusion.
Identify the activities that the EYES OF CUSTOMERS rather than just KPI for sales department (internal perspective) could be enquiry Subsidiary aims may not be using here to mean secondary aims BEG Co
organizations they try to keep Run machines Also be more cautious about your time (and for example if you are seeing the calculation is more detailed than believe that it must
organization performs measuring the result of those strategies. e.g. no. conversion rate For the objective of increasing brand loyalty, measuring repeat customers will One thing different here was we had to evaluate forecasted performance
under 30 activities in it Support existing products be the case that there are more marks allotted to it and hence less marks will be available for commentary).
Calculate the cost of each activity of repeat sales of medicine be the direct measure Note that in model answer of requirement 2 by Sir Rizwan, performance
Introduce new products You have to make judgement about how many marks are available for each requirement and revise the judgement as you are
identify cost drivers for each activity Question: Pharmaceutical (PT) Having different areas of emphasis in budget for each department or measurement was no different than it had to be if there was no ‘platinum status’
Calculate the cost of the attempting the question.
NOW this INFO could be used for You had this question in mind that what geographical location should be very useful word in requirement. This could be because platinum status related INFO that
activities
ABC, ABM and ABB would government and insurers would want 1.01.40 could have been used in PM is not given. Also it could be case that examiner just
from PT as customer (but only payers, not New hotel types could be an indicator of performance towards innovation simply asks from the 4 categories covered by million dollar approach
users). The answer is quite clear they want Employee satisfaction should come under internal perspective 2:00
it to be less costly, so cost in comparison Staff turnover might not change even if employees are dissatisfied. This could
to competitors could be a KPI for customer be because they don’t have any better option. Hence staff turnover is an Cod
Activity Based perspective indirect measure for employee satisfaction Higher quality costs are indicator of inefficient production
Better indicator for employee satisfaction could be survey of staff attitudes
Management (completed by customers) (the happy and satisfied the staff is, the better they
Question: Royal Hospital
will treat the customers) (this also seems like an indirect measure)
13:00 I didn’t fully get why in Question Cod, in requirement 3, we only considered
ROCE will NOT be useful measure if most properties are on lease
48:00 i think the more the number of measures used by the board as part of performance system and not the measures
Overlearning Decisions regarding customers
Deals with management of Dibble Co 01:02:00 days are the more efficient hospital is
Is productivity / efficiency= resource utilization?
used at operational level
In traditional costing it is assumed that if a in using it’s staff Possible answer
activities to improve profitability customer generates positive contribution, Not exactly. Here is why?
Because it was the board asking to evaluate the system. Hence from board’s
Strategic ABM Operational ABM Customer Profitability Analysis (CPA) Efficiency is concerned with maximizing output to input ratio (e.g. maximizing
then servicing that customer must increase perspective, the system at operational level doesn’t exist
When ABC INFO is being eliminating or minimizing Reporting and analysis of revenue earned from units per hour)
Driver Activity Performance used by directors in non-value adding activities customers and costs incurred to earn those
the profits of the company. This is NOT But this means there has to be separate performance system for each level of
always the case, sometimes overheads Another aspect of efficiency is operational performance (how quick business
Analysis Analysis Evaluation boardroom (to customers / or not revenues performs it’s operations i.e. services or delivery for example)
management
constitutes a large proportion of serving a
Eliminating non-profitable profitable) Analysis of customer differences in revenues Resource utilization is concerned with maximizing resource used to resource
Why? What? How well? customer. This can ONLY be identified using
products Continually improving value- and costs can provide insight into why available ratio (e.g. maximizing hours worked to available hours)
ABC
Why an activity is What activity is How well is it Repricing products adding activities differences exist in the operating income Internal perspective in BSC is doesn’t purely measures efficiency. It just
Doing CPA in ABM have produced surprising
Analyze profitable Reducing cost driver earned from different customers measures how well organization is internally (e.g. it includes employee
important? important? being done? results for many businesses, where the 'best'
customers improving design (this is an satisfaction)
Reason for requiring Identifying most Measuring performance customers have often turned out to generate
Can do Customer imp way to reduce wastage Employee satisfaction could also be an indirect indicator of efficiency as
an activity effective activity of activities going on losses when ABM is employed.
Profitability Analysis and quality problems) satisfied employees could perform more quickly (but NOT necessarily)
(CPA) When you correct a wrong Resource utilization dimension in BBM can include efficiency measures also (as
Can do Direct Product being done you are Doing Decisions regarding products efficiency and utilization can overlap majorly where these are NOT separately
Profitability (DPP) Things Right Many organizations find that when they rank available)
Strategic ABM Operational ABM their products according to total profit, it is
Doing Right Things Doing Things Right Example typical that 20% of their products generate
Which products to Identifying non-value In the case of sales order processing, the cost driver 300% of the company’s profits. This means
produce / which adding activities and may be the number of orders processed; so whether a that between them, the remaining 80% of
customers to serve eliminating them sales order contains five line items, or 10 line items, products lose 200% of the company’s
Introducing better Improving existing the amount of time to process it will be the same. profits.
activities activities Hence customers that purchase in lower quantities The loss making products are normally
could become unprofitable if the order processing those that are produced in low volumes, or
costs are high require a high level of customization.
At operational level, attempts could be made to reduce If a product is loss making, it is usually not a
Drawbacks the costs or to encourage to buy more items on one go good solution to discontinue the product,
it ignores the IMPLICIT value of an activity more suitable solutions could be to increase
Example for strategic ABM: A supermarket might want to discontinue a product because the selling price or use target costing to
Others
of it’s low margin. But that might affect the sales of other products also because a reduce the cost gap
ABM uses ABC INFO for management purposes to improve strategic and operational decisions
specific customer range might stop coming to this supermarket at all
ABM Is implemented along with ABC. For 1st year ABC is implemented, now data about activities and drivers are
Example for operational ABM: Cleanliness and good environment in office might be seen
available so ABM could be implemented
as a non-value adding activity but the hidden impact it has on employee motivation
ABM aim is to achieve the same level of output with lower costs
could be very important
Advantage: ABM helps business improve profitability
ABM can be criticized for being too inwardly focused (It does not consider external factors)
Overheads will be controlled by managing the activities
Big improvements can typically be made on fragmented activities that involve many people from different
departments
ABM can be used with other performance improvement strategies such as: Six Sigma, TQM, etc.