ACCA P5 Advanced Performance Management

Lesco Group Limited, April 2015 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.

Answer:

DEC2013 Q1

To: Board of Lopten From: A. Accountant Date: December 2013 Subject: KPIs for Lopten in Beeland Introduction This report calculates the KPIs suggested by the board and evaluates their effectiveness in addressing identified external environmental issues, their ability to cover the CSFs chosen for the Beeland operations and how they address the key functions of senior management to plan and control Lopten. Finally, the report evaluates the gap between the target profit and the results of the two suggested marketing strategies.

(i) Calculations are in the appendix1 Cheerful Profit Average price/unit Contribution/unit Market share Margin of safety ROCE Total quality costs Consumer awards 42 400 145 12% 26% 13% 28 1 Posh 45 700 375 33% 27% 18% 19 4

(ii) Political: Grant Government has supported new entrant with grant.

But none of the KPIs would address this issue and this will lead to increased competitors profit. Economic: People in Beeland are becoming wealthier but there is no measure of competitor activity like their sales units.

There are also no KPIs relating to growth rate in that area.

The current KPUs dont reflect foreign exchange risk as well and this is not suitable because Lopten is a foreign company which surely suffers foreign exchange rate risk.

Social: As People in Beeland are becoming wealthier then they would more favor more expensive products but there are not sufficient KPIs to measure this. By introducing KPIs such as inflation of average price per unit would help with this.

Technology: The development in new features would require continued product development at Lopten but there are no existing KPIs relating to this. The new technology in manufacturing would further improve contribution per unit because costs would be lower, ie, increased production automation. But the use of contribution to measure this is not appropriate as this would be affected by selling price and hence a measure of manufacturing cost/unit would be better.

(iii)
Obtain a dominant market presence This can be measured by market share. Posh product has obtained high market share, about 1/3 of the market.

But Lopten would need to have its competitors market share in order to judge whether this is dominant.
Lopten could chose to cut prices in order to drive up volumes and the contribution per unit shows how far the selling price can be cut before breakeven is reached (= average price contribution).

Maximize profits within acceptable risk The KPI for profit is given and hence a trend analysis about this would indicate optimization.
The trends in average price per unit would show the effectiveness of marketing. The trends in average cost per unit would show the effectiveness of production activities. The risk taken is measured by the margin of safety which shows how far current sales would have to fall to result in a breakeven profit situation.

Maintain the brand image of Lopten for above average quality products.
The most direct measure of brand can be gained through the consumer awards as they show the impression being made on the customers by the products. The total quality costs figure gives an indication of the spend on quality but without an external benchmarking, this figure is difficult to interpret.

There is no KPI on the marketing spending which would be a common support for the brand.

(iv) KPIs would be set when setting up strategy for the company because this identifies the CSFs for the company and they need to be measured using KPIs. Margin of safety addresses the risk of making a loss going forward and the size of the margin will give the board comfort that they can afford to take strategic risks without risking the survival of the Beeland operation.

The awards won which should give the company ability to build volume and also profits in the future.

Control activities mean to compare actual results with planned result and any actions would be needed to close this gap. KPIs calculated above will need their benchmark comparators to be given.

(v) Performance gap analysis(see appendix2) If Lopten maintain Plan A, then there is a gap in performance of $21m($135m-$114m) compared to the target profit in two years time.

if Lopten adopts Plan B, then the company can achieve its target profit in two years.

The success of Plan B depends on the achievement of a high growth rate of 15% p.a. which would depend on continued improvement of economy because this would create wealth to generate demand for such high contribution product.

It would also depend on the success of the increased marketing spend on promoting Posh.

Conclusions The current KPIs do not cover many of the external factors in Loptens business environment and link weakly to the CSFs. The balance of the KPIs is towards control when the balance of the boards work will be forward looking towards planning the future of the business. A revision of the KPIs used should be undertaken in order to address these concerns. The current marketing plan for Beeland will fall short of the target profit and so it should shift to emphasising the higher margin Posh products (Plan B) which will achieve the target provided the growth assumptions are realistic.

Appendix1: Cheerful Revenue [given] -VC Materials(costXunits) $90/u X1.12 $120/u X0.44 Labour $60/u X1.12 $80/u X0.44 Variable overhead $40/u x1.12 $50/u X0.44 Distribution costs $45/u X1.12 $45/u X0.44 Quality costs $20/u X1.12 $30/u X0.44 Contribution 162 165 22 13 50 20 45 22 67 35 101 53 448 Posh 308

-FC Admin Distribution Quality 18 16 6 18 16 6

Marketing Total FC Profit: (contribution-FC) Breakeven sales units ($m) Fixed cost Contribution/unit 120/(162/1.12) 165/(120/0.44) ROCE Profit/capital employed 42/326 45/250 Average price/unit 448/1.12 308/0.44 Market share 1.12/9.33 0.44/1.33 Total quality costs $20/u X 1.12 +6 $30/u X0.44 +6

80 120 42 0.83

80 120 45 0.32

13%

18%

400

700

12%

33%

28

19

Appendix2: (5marks!!!) Target profit(in 2 years time)=$135m

Plan A: Now $m Contribution Cheerful Posh Fixed costs Profits 162 165 240 87 162X1.04=169 165X1.04=172 240 100 169X1.04=176 172X1.04=178 240 114 Year1 Year2

Plan B: Now $m Contribution Cheerful Posh Fixed costs Profits 162 165 240 87 162 165X1.15=190 240 112 162 190X1.15=218 240 141 Year1 Year2

Q2 (a) General comment about model:

The pyramid views a range of objectives from the strategic to the operational, linking these through the themes of external effectiveness and internal efficiency. The strategic level concerns relate to market and financial factors and these are fed by the tactical level drivers of customer satisfaction, flexibility and productivity. These objectives will reflect that business systems at this level will cross functional boundaries and so cannot be drawn into the specifics of the operational details.

Evaluation: Vision
At Graviton, the company objective is to maximise shareholder wealth by being flexible in response to market demand and controlling the production chain closely but the current performance measures are not comprehensive.

Financial
Return on capital employed (ROCE) is reported but this is not directly measuring shareholder wealth and it is surprising that there is no mention of measures such as total shareholder return which will cover dividends and share price growth. The failure to provide a dividend measure may be a reason why the dividend growth is weak. Financial measures are lacking a focus on costs through profit margins (such as gross margin) or key cost headings such as labour costs which would highlight the higher costs of designers.

Customer satisfaction
Market satisfaction is driven by customer satisfaction and flexibility. Customer satisfaction can be considered to be measured through the revenue growth and indirectly through the winning of design awards but the failure to address quality may detract from this in the long term. Measures of quality such as level of complaints should be made as well.

Flexibility
Flexibility in manufacturing is measured through the time to market for new designs.

But the ability of the manufacturing chain to replenish successful lines and so take advantage of a fast-selling product is not measured.

Productivity
Productivity measures of waste are likely to be important as designs become obsolete in this market quickly.

Inventory write-offs would measure such waste.

(b) Myopia This is short-sightedness leading to the neglect of longer-term objectives. Management has not invested in new NCA and uses old assets and this would decrease the capital employed and hence increase ROCE. The adverse variance in equipment repairs account would show this because it shows that company has spent lots of money in fixing old assets.

Gaming This means to deliberate distortion of a measure to secure some strategic advantage. There is evidence at factory site 1 of this behaviour where a manager is manipulating revenue and profit across the accounting cut-off. This behaviour can be dealt with by emphasizing a culture of honesty in the organisation and by ensuring that the manager is rewarded for average gains over long periods rather than single period.

Ossification This means an unwillingness to change the performance measure scheme once it has been set up especially when it shows good results are being achieved. The board is clearly exhibiting this problem in resisting change at Graviton. The CEO will need to persuade them that there are issues in the omissions from the current set of performance measures which will lead to long-term difficulties in achieving their overall goal of enhancing shareholder wealth. The targets and remuneration of the board should be set so that the board is rewarded if current good performance is sustainable in the future after the change takes place.

DEC2013 Q3

(a) Costs and benefits The costs of hardware and software to set up the system and then ongoing operation of the system in terms of maintenance, consumables and employee time are often considerable. These costs can be offset against the efficiency savings of lost employee time in searching for tagged items and quality improvements in patient care which will result from that quicker access.

Information It can promote accuracy because this is real-time nature of the information and its updated automatically is one of these batches is opened. And the relevant staff will need to be trained to access and use the information in this new system. It would appear that many medical staff will need access and so terminals will need to be available throughout the hospital.

Performance reporting Performance reporting will change as weekly inventory check reports will no longer be filed for the high-value drugs and instead there will be real-time, screen-based information.

Improved control It will be easier to ensure that they are all in secure locations which will reduce the opportunity for theft.

Knowing the date of delivery it will easier to identify items which may become obsolete and so they can more easily be used first, thus reducing wastage.

Regarding the items of equipment, identification of location will reduce staff time in searching and also allow the items to be placed in the stores where they are most often accessed, thus further reducing searching time.

This will improve quality of patient care due to a faster response.

(b) Definition: Lean system means: To get right things to the right place at the right and 1st time; To minimize waste; To be open to change.

Application: The location information will allow assets to be in the right location. The reduction in obsolescence and staff time help to minimise waste The introduction of such a different process will require a culture of change in the organisation.

Five S concept: Sort This means to Introduce order where possible. Thinking about optimal locations for storage of the tagged items will help to do this at Quark.

Systemise This means to set up a system to get things done in order. The new RFID system will help to arrange and identify items for ease of use.

Sweep This means to be tidy. There is danger that the easy availability of the knowledge of the location of items may lead to a lack of care with them.

But by training staff that they will be judged on storing items in useful locations, this information can be used as a control tool by management.

Standardise This means to be consistent in the approach taken.

Self-discipline This means to maintain through motivation. The system should report by exception to management on a daily basis about any items misplaced and so corrective action can be taken.

(c) They are high-status individuals and if they see the system as spying on them and take this as an insult to their professionalism and they would resist the system. The reports will need to be carefully designed with input from the medical staff in order that they find the system easy to learn and use, as this is often a major barrier to the uptake of a new system.

Responsibility and accountability It may be possible to make specific staff (e.g. nursing staff) responsible for the storage of drugs and specific specialist doctors responsible for the storage of equipment related to their field of expertise.

So the control procedure to this is to undertake Regular checks on the position of assets. It may be necessary to break the hospital into departments or wards in order to identify the relevant responsible individuals.

It will be important to select the correct individuals and groups to be responsible as there will be a demotivating effect if a staff member(lower level staff) is being criticised for not securing an item when a higher status member of staff (e.g. medical specialist) has over-ridden their decision.

DEC2013 Q4 (a)
The measure doesnt consider value for money and this should include economy, efficiency and effectiveness. Other indicators: (2marks) Other indicators: Number of police per 10,000 population(NO OF POLICE/POPULATION) Cost per population member(COST/POPULATION MEMBER) Formula (5marks) Tackle the underlying causes of crime and achieve long-term sustainable solutions which is measured by Rank 1 for the number of reported crimes. Bring perpetrators to justice which is measured by Rank 2 which measures the detection rate of crimes. Provide protection and support for individuals and communities at risk of harm which is measured through the user satisfaction score (Rank 3). Respond to community needs by being accessible and engaging with their concerns which is measured through the user satisfaction score (Rank 3) and the responsiveness is measured by call handling speed (Rank 4). Match (3marks) None of these ranks will perfectly measure all aspects of each of the goals but there is a broad coverage present. For example, an improvement might be to include a measure of community engagement through the number of public meetings between police and the community or a measure of community-based policing initiatives. Simple (1) The formula used is simple as it recognises only four input variables and weights these equally. Weightings (1) No explanation of the logic of the weightings has been offered. Example :(2) The difference between each force in their call answering is not great with three percentage points separating best and worst but this generates a complete difference in the forces final FS for each region. C 49.6 3232 D 48.9 3311 E 50 3365 F 52.7 3400

(b) General evaluation(4marks) This would effectively benchmarks performance and can have a positive effect on behavior. The sharing of data on performance can indicate areas of best practice and so improve performance across all forces. The use of league tables gives a single figure which gives a clear, immediate answer to questions of performance. Tables will often try to include comparable bodies from outside the area of control of the government (foreign police forces) but to get comparable data in order to calculate a force score for a foreign police force will be difficult. Introduction of table: (2marks) If the police staff do not feel that they can control the force score, then they will not be held accountable by it. And hence they may ignore the table. Behaviours: (4marks)

Once the system is in use, the force score can be used as a target for the leaders of each force. But it can lead to over-focusing by employees on the variables in the FS to the exclusion of other relevant issues, i.e. only doing what gets measured. The police staff may be demotivated by the league tables if they feel: (i) that the FS does not reflect the valuable work which they do or (ii) that the FS is driven by factors outside their control. (For example, there may be a link between the number of crimes reported and the economic conditions in the forces area which they do not have power to affect.) Schools: (1mark) The comparison between police forces and schools may not be valid, as school league tables are helpful where parents have some choice in the school to which they send their children while with only four forces covering the country.