Paper P5 - ACCA Global

1 Professional Level Options ModuleTime allowedReading and planning: 15 minutesWriting:3 hoursThis Paper is divided into two sections:Section A This ONE question is compulsory and MUST be attemptedSection B TWO questions ONLY to be attemptedPresent Value and Annuity Tables are on pages 10 and NOT open this Paper until instructed by the reading and planning time only the question Paper may be annotated. You must NOT write in your answer booklet untilinstructed by the question Paper must not be removed from the examination P5 Advanced PerformanceManagementThursday 5 December 2013 The Association of Chartered Certified AccountantsSection A This ONE question is compulsory and MUST be attempted1 Lopten Industries is one of the largest, listed consumer durables manufacturers in the world, making washingmachines, tumble dryers and dishwashers.

2 It has recently expanded into Beeland which is a developing countrywhere incomes have risen to the point where demand is increasing for Lopten s goods among the growing middle-class population. Lopten believes in the economies of scale of large manufacturing sites with dispersed selling branches in the marketsin which it operates. Therefore, it has entered the Beeland market by setting up a local sales force and supportingthem with a national marketing campaign. The company is currently selling only two products in Beeland (both aretypes of washing machines): a basic product (called Cheerful) with functions which are comparable with the existing local competitors outputand a premium product (called Posh) which has functions and features similar to Lopten s products in otherdeveloped products are manufactured and imported from its regional manufacturing hub, which is in the neighbouringcountry of competitive environment in Beeland is changing rapidly.

3 The washing machine market used to be dominated bytwo large local manufacturers who make simple, cheap and reliable machines. There are two other major internationalmanufacturers apart from Lopten. One of these has already opened a factory in Beeland and is producing machinessimilar to Cheerful to compete directly with the existing local producers. The government of Beeland has supportedthis new entrant with grants, as it is keen to encourage inward investment by foreign companies and the resultingexpertise and employment which they provide. The other international competitor is now considering entering theBeeland market with more highly specified machines similar to Lopten s Posh brand. Lopten s stated mission is to be the most successful manufacturer of its type of products in the world.

4 The board hasset the following critical success factors (CSFs) for Lopten s Beeland operations:1. to obtain a dominant market presence 2. to maximise profits within acceptable risk3. to maintain the brand image of Lopten for above average quality board is considering using the following key performance indicators (KPIs) for each product: total profit, averagesales price per unit, contribution per unit, market share, margin of safety, return on capital employed (ROCE), totalquality costs and consumer awards won. (Note: Margin of safety has been defined as [actual sales units breakeven sales units]/actual sales units.)The board has asked you as a consultant to assess its current performance measurement systems. They want a reportwhich calculates the various indicators suggested above and then assesses how the key performance indicatorsaddress issues in the external environment.

5 The report should assess the balance between planning and controllingrepresented by the KPIs as they want to ensure that these match what they should be doing at the strategic level inLopten. Also, it should evaluate how the KPIs fit with the CSFs which have been selected. The data given in Appendix 1 has been collated for your , the board is considering two new marketing strategies going forward:Plan A is to continue operations as at present allowing for 4% growth in volumes of both Cheerful and B is to dramatically reduce the marketing spend on Cheerful and to reallocate resources to focus the marketingon Posh. This is expected to lead to an anticipated growth in volume of 15% for Posh and flat sales for target operating profit for the Beeland operation in two years time is set at $135m and the board wants anevaluation of these strategies in meeting that target.

6 2 Appendix 1 Beeland operation s information for the most recent financial yearCheerfulPoshTotalVariable costs$ per unit$ per unitMaterials90120 Labour6080 Overheads4050 Distribution costs4545 Quality costs2030 Fixed costs$m$m$mAdministration costs181836 Distribution costs161632 Quality costs6612 Marketing costs8080160 Other data$m$m$mRevenue448308756 Capital employed326250576 Units Units Units Total market size (millions)9 331 3310 66 Beeland operation s sales (millions)1 120 441 56 Notes:1. Cheerful has won one best buy award from the Beeland Consumer Posh has won four best buy awards from the Beeland Consumer The allocations of fixed costs are based on a recent activity-based costing exercise and are considered to be :Write a report to the board of Lopten which:(i) calculates the key performance indicators (KPIs) suggested by the board for the assessment of performanceof the Beeland operations;(11 marks)(ii) uses PEST analysis to identify issues in the company s external environment and then evaluates theeffectiveness of the suggested KPIs in addressing these issues;(11 marks)(iii) takes each critical success factor (CSF) in turn and evaluates how the suggested KPIs fit to the CSFs given.

7 (10 marks)(iv) assesses the extent to which the suggested KPIs would be suitable for use in planning rather than controlling;(5 marks)(v) evaluates whether the two proposed marketing strategies result in a performance gap.(9 marks)Professional marks will be awarded for the format, style and structure of the discussion of your answer.(4 marks)Note: All figures are real for the purpose of this scenario so that inflation can be ignored. Also, round to the nearest$million as appropriate.(50 marks)3[ B TWO questions ONLY to be attempted2 Graviton Clothing (Graviton) is a listed manufacturer of clothing with a strong reputation for producing desirable,fashionable products which can attract high selling prices. The company s objective is to maximise shareholderwealth.]

8 Graviton s products are sold through its own chain of stores. Graviton s markets demand designs which arein tune with current fashion trends which can alter every few weeks. Therefore, the business s stated aim is to focusproduction on these changing market trends by maintaining flexibility to adapt to that market demand through closecontrol of all stages of the supply chain (design, manufacture and distribution).The chief executive officer (CEO) is unhappy with the current performance measurement system at Graviton. Thesystem was created about five years ago by the finance director who has subsequently retired. The aim of the systemwas to provide the company with a list of measures which would cover performance at the strategic, tactical andoperational levels of management.

9 An example of the most recent performance report is given in Table 1. Ta b l e 1 Graviton Performance DashboardReport for the year to Sep 2013 Change2013201220112013/2012 FinancialRevenue ($m)1,7231,5701,4139 7%Operating Profit ($m)3203143081 9%ROCE15 8%15 9%15 9%DesignDesign awards won32350 0%ManufactureAverage time to market (days)22 222 322 1 0 4%DistributionDeliveries on time87 0%86 8%87 3%0 2%Commentary: The revenue growth of the business remains strong in a difficult market. Return on capital employed matches the industry average of about 16%. Time to market for new designs has been maintained at 22 days by paying overtime to designers in order to meetproduction press reports about Graviton have been mixed, with positive comments about the innovative new designs andmuch admiration over the growth of sales which the business has achieved.

10 However, there has been some criticismfrom customers of the durability of Graviton s clothes and from institutional investors that the dividend growth is CEO believes that there are major gaps in the current list of key metrics used by Graviton. She wants an evaluationof the current system and suggestions for improvements. However, she has warned you that the board wants areasoned argument for each measure to be included in the list in order to avoid overloading each level of managementwith too much rapidly growing, Graviton has had some problems in the last few years which have appeared on recentinternal audit reports. It was found that a senior manager at factory site 1 has been delaying invoicing for completedorders in order to ensure that profit targets are met in both the current and the next accounting period.