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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 6 June 2013 The Association of Chartered Certified AccountantsSection A This ONE question is compulsory and MUST be attempted1 Kolmog Hotels is a large, listed chain of branded hotels in Ostland. Its stated mission is: to become the No.

2 1 hotelchain in Ostland, building the strength of the Kolmog brand by consistently delighting customers, investing inemployees, delivering innovative products/services and continuously improving performance . The subsidiary aims ofthe company are to maximise shareholder value, create a culture of pride in the brand and strengthen the brand loyaltyof all stakeholders. The hotels in the Kolmog chain include a diverse range of buildings and locations serving different customer groups(large conference venues, city centre business hotels and country house hotels for holidays). For reporting purposes,the company has divided itself into the four geographical regions of Ostland as can be seen in a recent example ofthe strategic performance report for the company used by the board for their annual review (see appendix 1).

3 At theoperational level, each hotel manager is given an individual budget for their hotel, prepared in the finance department,and is judged by performance against budgeted is planning a strategic change to its current business model. The board has decided to sell many of the hotelsin the chain and then rent them back. This is consistent with many other hotel companies who are focusing on themanagement of their hotels rather than managing a large, property portfolio of order to assist this strategic change, the chief executive officer (CEO) is considering introducing the balancedscorecard (BSC) across Kolmog. He has tasked you, as a management accountant in the head office, with reviewingthe preliminary work done on the development of the scorecard in order to ensure that it is consistent with the goalof meeting the strategic objectives of the company by tying operational and strategic performance measurement intoa coherent CEO is worried that the BSC might be perceived within the organisation as a management accounting techniquethat has been derived from the manufacturing sector.

4 In order to assess its use at Kolmog, he has asked you to explainthe characteristics that differentiate service businesses from manufacturing executives at the head office of Kolmog have drawn up a preliminary list of perspectives and metrics as anoutline of the balanced scorecard in table 1:Ta b l e 1 Key strategic perspectiveMetricStrategic financial performance financial performance benchmarked to Kolmog s main competitors(share price and return on capital employed)Customer satisfaction customer satisfaction survey scoresHotel performance against budget variance analysis for each hotelEmployee satisfaction staff turnoverThe history of rewards at Kolmog has not been good, with only 1% of staff receiving their maximum possible bonusin previous years and 75% of staff receiving no bonus.

5 This has led to many complaints that targets set for the rewardsystem are too challenging. Under a new performance reward system, employee targets are to be derived from the above BSC strategic measuresdepending on the employee s area of responsibility. The new system is for hotel managers to be given challengingtargets based on their hotel s performance against budgeted profit, industry wide staff turnover and the company saverage customer satisfaction scores. The hotel managers will then get up to 30% of their basic salary as a bonus,based on their regional manager s assessment of their performance against these targets. The CEO wants you to useFitzgerald and Moon s building block model to assess the new system. He is happy with the dimensions ofperformance but wants your comments on the standards and rewards being applied 1 Strategic performance report for reviewKolmog Hotels Year to 31 Mar 2013 EastWestNorthSouthTotalTotalAs % of RegionRegionRegionRegion2012revenue$m$m$ m$m$m$mfor 2013 Revenue235244313193985926 Cost of sales2830372111611011 78% Gross profit207214276172869816 Staff costs6165785425824526 19%Other operating costshotels6870975428927029 34%head office15815016 04% Operating profit78791016416415116 60% Financing costs78737 92% Profit before tax86788 73% GrowthYear on YearCapital employed$1,132m$1,065m6 29%EPS$1 36$1 277 09%Share price$12 34$11 764 93%ROCE14 49%14 18%Required.

6 Write a report to the CEO to:(i) explain the characteristics that differentiate service businesses from manufacturing ones, using Kolmog toillustrate your points; (5 marks)(ii) evaluate the current strategic performance report and the choice of performance metrics used (Appendix 1);(8 marks)(iii) evaluate the outline balanced scorecard (Table 1) at Kolmog, suggesting suitable improvements;(12 marks)(iv) describe the difficulties in implementing and using the balanced scorecard at Kolmog;(7 marks)(v) explain the purpose of setting targets which are challenging, and evaluate the standards and rewards for thehotel managers performance reward system as requested by the CEO. (14 marks)Professional marks will be awarded for the format, style and structure of the discussion of your answer.

7 (4 marks)(50 marks)3[ B TWO questions ONLY to be attempted2 Navier Aerials Co (Navier) manufactures satellite dishes for receiving satellite television signals. Navier supplies themajor satellite TV companies who install standard satellite dishes for their customers. The company also manufacturesand installs a small number of specialised satellite dishes to individuals or businesses with specific needs resultingfrom poor reception in their locations. The chief executive officer (CEO) wants to initiate a programme of cost reduction at Navier. His plan is to use activity-based management (ABM) to allocate costs more accurately and to identify non-value adding activities. Thefirst department to be analysed is the customer care department, as it has been believed for some time that the currentmethod of cost allocation is giving unrealistic results for the two product types.]

8 At present, the finance director (FD) absorbs the cost of customer care into the product cost on a per unit basis usingthe data in table 1. He then tries to correct the problem of unrealistic costing, by making rough estimates of the coststo be allocated to each product based on the operations director s impression of the amount of work of the fact, he simply adds $100 above the standard absorbed cost to the cost of a specialised dish to cover the assumedextra work involved at customer care. The cost accountant has gathered information for the customer care department in table 2 from interviews with thefinance and customer care staff. She has used this information to correctly calculate the total costs of each activityusing activity-based costing in table 3. The CEO wants you, as a senior management accountant, to complete thework required for a comparison of the results of the current standard absorption costing to activity-based costing forthe standard and specialised this is done, the CEO wants you to consider the implications for management of the customer care process ofthe costs of each activity in that department.

9 The CEO is especially interested in how this information may impact onthe identification of non-valued added activities and quality management at Dishes (information for the year ending 31 March 2013)Customer care (CC) departmentTable 1: Existing costing data$ 000 Salaries400 Computer time165 Telephone79 Stationery and sundries27 Depreciation of equipment36 707 Note:1CC cost is currently allocated to each dish based on 16,000 orders a year, where each order contains an averageof 5 5 dishes. Table 2: Activity-costing dataActivities of CC deptStaff CommentstimeHandling enquiries and preparing quotes for potential orders40%relates to 35,000 enquiries/quotes per yearReceiving actual orders10%relates to 16,000 orders in the yearCustomer credit checks10%done once an order is receivedSupervision of orders through manufacture to delivery15%Complaints handling25%relates to 3,200 complaints per yearNotes:1 Total department cost is allocated using staff time as this drives all of the other costs in the of both enquiries and orders are for standard dishes.

10 The remainder are for specialised enquiries and preparing quotes for specialised dishes takes 20% of staff time allocated to this process for receiving an order, checking customer credit and supervision of the order is the same for both aspecialised dish order and a standard dish of the complaints received are for specialised dish standard dish order contains an average of six specialised dish order contains an average of one 3: Activity-based costsTotalStandardSpecialised$$$Handling enquiries and preparing quotes282,800226,24056,560 Receiving actual orders70,70063,6307,070 Customer credit checks70,70063,6307,070 Supervision of order through manufacture to delivery106,05095,44510,605 Complaints handling176,75088,37588,375 Total707,000537,320169,680 Required:(a) Evaluate the impact of using activity-based costing, compared to the existing costing system for customercare, on the cost of both types of product.