Albacore Chess Stores （Albacore) is a chain of 12 shops specialising in selling items asso

Section B – TWO questions ONLY to be attempted

Bluefin School (Bluefin) is a school for 12 to 17-year-old pupils. It currently has 1,000 pupils attending drawn from its local area. The school is run by an executive group comprising the head of school and two deputy head teachers. This group reports to a board of governors who are part-time and selected from the local community and parents. The school is wholly funded by the government.

The school’s ethos is ‘to promote learning, citizenship and self-confidence among the pupils. This is developed from a consensus, led by the board of governors and the head of school and informed by the views of the pupils’ parents.’

The school information systems are highly decentralised. Each department keeps its own records on a stand-alone PC using basic word processing and spreadsheet packages. The school’s administrative department has a small network in its own offices with compatible applications and also a database and financial recording and reporting package for use in schools (provided by the government).

The school is broken down into 11 academic departments such as mathematics, science and history. Each department head must prepare information for reporting to the board by inputting and processing the data. They obtain some help from an administrator who visits each department to spend a few hours per week helping in the recording and preparation of the departmental information. The department heads have different approaches to reporting their performance, with some using average marks in the annual exams for each class and some using pass rates of the annual exams. Some department heads present graphs of their data while most use tables of figures.

The information is passed from each department to the school administration office on a memory stick (USB flash drive). The school administration office prints out the information for each department and adds it to a financial report creating a governors’ pack of usually about 13 pages for the annual review board meeting. The financial report is a detailed income and expenditure statement for the period under review (usually a two page print-out from the reporting package). An example of one of the 11 departments’ report is given in the Appendix.

The board of governors meets every quarter and reviews the governors’ pack once a year. The board are concerned that the information that they are receiving is not meeting their needs and that there are a number of problems with the control and security of some of the data.

It has been suggested that the school should consider improving its information systems by installing a network across the school to link the departmental computers and the administration department. A single database would be created to store all the performance information. The computers would then be linked to the internet in order to facilitate data transfer to other schools in the region and to the government.

Appendix

Bluefin School

Mathematics department

Notes:

Each year contains pupils of the same age.

Annual national exams are set in years 4, 5 and 6.

Each year group is divided into different classes in order to ensure that classes do not exceed 35 pupils.

(Not all pupils take every subject each year.)

Average marks are for the annual examinations.

Required:

(a) With reference to the current situation at Bluefin School, discuss the controls and security procedures that are necessary for management information. (9 marks)

(b) Using the limited information available, evaluate the usefulness of the pack that is provided to the board of governors. (6 marks)

(c) Evaluate the improvements suggested to the information systems at Bluefin. (5 marks)

ropean domestic appliance manufacturers. Their motors are used in appliances such as washing machines and refrigerators. Cod has been in business for over 50 years and has obtained a reputation for producing reliable, low cost motors.

Cod has recently rewritten its mission statement, which now reads:

‘Cod Electrical Motors is committed to providing competitively priced, high quality products, with service exceeding customer expectations. We will add value to our business relationships by investing in product development and highly trained personnel.’

The board have recognised that their existing key performance indicators (KPIs) do not capture the features of the corporate mission. They are worried that the staff see the mission statement as a public relations exercise rather than the communication of Cod’s vision.

The monthly board papers contain a simple performance summary which is used as the key performance measurement system at that level.

Example of board papers for November 2011:

Cod Electrical Motors

Key performance indicators for November 2011

Notes:

(a) The year end is 31 December.

(b) The comparative figure is for the same month in the previous year.

(c) ROCE is an annualised figure.

(d) YTD means year to date.

There are additional performance indicators not available to the board that line management use for a more detailed picture.

Additional performance information:

Notes:

1 Figures are year to date with comparatives from the previous year quoted on the same basis.

2 FTE = Full-time equivalent staff numbers.

3 Post is considered vacant if unfilled for more than four months.

4 Complaints are logged and classified into the four categories given when received.

5 Number of customers where Cod holds preferred supplier status.

Required:

(a) Assess whether the current key performance indicators (KPIs) meet the expected features of a modern performance measurement system. (7 marks)

(b) Explain how the performance pyramid (Lynch and Cross) can help Cod’s board to reach its goal of a coherent set of performance measures. (6 marks)

(c) Evaluate the current system using the performance pyramid and apply the performance pyramid to Cod in order to suggest additional KPIs and a set of operational performance measures for Cod. (12 marks)

Section A – BOTH questions are compulsory and MUST be attempted

Mackerel Contracting (Mackerel) is a listed defence contractor working mainly for its domestic government in Zedland. At present, Mackerel is considering tendering for a contract to design and develop a new armoured personnel vehicle (APV) for the army to protect its soldiers during transport around a battlefield. The invitation to tender from the government specifies that the APV should take two years to develop and test, and be delivered for a full cost to Mackerel of no more than $70,000 per unit at current prices before Mackerel’s profit element. Normally, government contracts are approximately priced on a cost plus basis with Mackerel aiming to make a 19% mark-up.

At the last briefing meeting, the institutional shareholders of Mackerel expressed concern about the volatility of the company’s earnings (currently a $20·4m operating profit per annum) especially during the economic downturn which is affecting Zedland at present. They are also concerned by cuts in government expenditure resulting from this recession. The Zedland minister for procurement has declared ‘In the current difficult economic conditions, we are preparing a wide ranging review of all defence contracts with a view to deciding on what is desirable within the overall priorities for Zedland and what is possible within our budget.’ The government procurement manager has indicated that the government would be willing to commit to purchase 500 APVs within the price limit set but with the possibility of increasing this to 750 or 1,000 depending on defence commitments. In the invitation to tender document, the government has stated it will pay a fixed sum of $7·5m towards development and then a 19% mark-up on budgeted variable costs.

Mackerel’s risk management committee (RMC) is considering how much to spend on design and development. It has three proposals from the engineering team: a basic design package (Type 1) and two other improved design packages (Type 2 and Type 3). The design packages will have different total fixed costs but are structured to give the same variable cost per unit. The basic design package will cost $7·5m to develop which will satisfy the contract specification. It is believed that the improved design packages will increase the chances of gaining a larger government order but it has been very difficult to ascertain the relevant probabilities of different order volumes. The RMC need a full appraisal of the situation using all suitable methods.

The risk manager has gathered information on the APV contract which is contained in appendix A. She has identified that a major uncertainty in pricing the vehicle is the price of steel, as each APV requires 9·4 tonnes of steel. However, she has been successful in negotiating a fixed price contract for all the steel that might be required at $1,214 per tonne. The risk manager has tried to estimate the effect of choosing different design packages but is unsure of how to proceed to evaluate the different options.

You are a consultant brought in to advise Mackerel on the new contract. The RMC need a report which outlines the external factors affecting the profitability of the project and how these factors can be built into the choice of the design budget which is ultimately set.

Required:

Write a report to the risk management committee to:

(i) Analyse the risks facing the management of Mackerel and discuss how the management team’s attitude to risk might affect their response; (9 marks)

(ii) Evaluate the APV project using metrics and methods for decision-making under risk and uncertainty and assess the suitability of the different methods used; (19 marks)

(iii) Recommend an appropriate choice of method of assessing the project and, therefore, a course of action for the APV contract. (3 marks) Professional marks will be awarded for the format, style. and structure of the discussion of your answer. (4 marks)

ry with a large and growing oil exploration and production business which supplies PLX with crude oil. Currently, the refinery has the capacity to process 200,000 barrels of crude oil per day and makes profits of $146m per year. It employs about 2,000 staff and contractors. The staff are paid $60,000 each per year on average (about twice the national average pay in Kayland).

The government of Kayland has been focused on delivering rapid economic growth over the last 15 years. However, there are increasing signs that the environment is paying a large price for this growth with public health suffering. There is now a growing environmental pressure group, Green Kayland (GK), which is organising protests against the companies that they see as being the major polluters.

Kayland’s government wishes to react to the concerns of the public and the pressure groups. It has requested that companies involved in heavy industry contribute to a general improvement in the treatment of the environment in Kayland.

As a major participant in the oil industry with ties to the nationalised oil exploration company (Kayex), PLX believes it will be strategically important to be at the forefront of environmental developments. It is working with other companies in the oil industry to improve environmental reporting since there is a belief that this will lead to improved public perception and economic efficiency of the industry. PLX has had a fairly good compliance record in Kayland, with only two major fines being levied in the last eight years for safety breaches and river pollution ($1m each).

The existing information systems within PLX focus on financial performance. They support financial reporting obligations and allow monitoring of key performance metrics such as earnings per share and operating margins. Recent publications on environmental accounting have suggested there are a number of techniques (such as input/output analysis, activity-based costing (ABC) and a lifecycle view) that may be relevant in implementing improvements to these systems.

PLX is considering a major capital expenditure programme to enhance capacity, safety and efficiency at the refinery. This will involve demolishing certain older sections of the refinery and building on newly acquired land adjacent to the site. Overall, the refinery will increase its land area by 20%.

Part of the refinery extension will also manufacture a new plastic, Kayplas. Kayplas is expected to have a limited market life of five years after which it will be replaced by Kayplas2. The refinery accounting team have forecast the following data associated with this product and calculated PLX’s traditional performance measure of product profit for the new product:

All figures are $m’s

Subsequently, the following environmental costs have been identified from PLX’s general overheads as associated with Kayplas production.

Additionally, other costs associated with closing down and recycling the equipment in Kayplas production are estimated at $18m in 2016.

The board wishes to consider how it can contribute to the oil industry’s performance in environmental accounting, how it can implement the changes that this might require and how these changes will benefit the company.

Required:

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

(b) Explain and evaluate how the three environmental accounting techniques mentioned can assist in managing the environmental and strategic performance of PLX. (9 marks)

(c) Evaluate the costing approach used for Kayplas’s performance compared to a lifecycle costing approach, performing appropriate calculations. (7 marks)

. The company’s objective is the maximisation of shareholder wealth for its family owners. It has four divisions:

1. Restaurants

2. Cafes

3. Bars

4. Dance clubs

Recently, ENT’s board have identified that there are problems in managing such a diversified company. They have employed consultants who have recommended that they should perform. a Boston Consulting Group (BCG) analysis to understand whether they have the right mix of businesses. The chief executive officer (CEO) has questioned whether using this analysis is helpful in managing the group’s performance. A business analyst has prepared information on each division in the table below.

In Teeland, the economy is generally growing at about 2% per annum. The restaurant, cafe and bar sectors are all highly fragmented with many small operators. Consequently, a market share of more than 3·0% is considered large as that is comparable to the share of the largest operators in each sector. There are fewer small late night dance club operators and the market leader currently holds a 15·0% market share. There have not been many new developments within the divisions except for a new wine bar format launched by the bars division which has surprised the board by its success.

Each of the division’s performance is measured by economic value-added (EVA?). The divisional managers have a remuneration package that is made up in two equal parts by a salary set according to industry norms and a bonus element which is based on achieving the cost budget numbers set by the company board. The chairman of the board has been examining the consistency of the overall objective of the business, the divisional performance measure and the remuneration packages at divisional level. He has expressed the worry that these are not properly aligned and that this might lead to dysfunctional behaviour by the divisional management.

Required:

(a) Perform. a BCG analysis of ENT’s business and use this to evaluate the company’s performance. (7 marks)

(b) Critically evaluate this BCG analysis as a performance management system at ENT. (7 marks)

(c) Evaluate the divisional managers’ remuneration package in light of the divisional performance system and your BCG analysis. (6 marks)

Section B – TWO questions ONLY to be attempted

APX Accountancy (APX) is an accountancy partnership with 12 branches covering each of the main cities of Emland. The business is well established, having organically grown over the last 40 years to become the second largest non-international practice in Emland. The accountancy market is mature and expands and contracts along with the general economic performance of Emland.

APX offers accountancy, audit, tax and business advisory services. The current business environment in Emland is dominated by a recession and the associated insolvency work is covered within the business advisory area of APX.

At present, the practice collects the following information for strategic performance evaluation:

The above figures are for the most recent financial year and illustrate the metrics used by APX. Equivalent monthly figures are produced for each of the monthly partner meetings which review practice performance.

The staff are remunerated based on their grade, with non-partners obtaining a bonus of up to 10% of basic salary based on their line managers’ annual review. The partners receive a fixed salary with a share of profit which depends on their contractual responsibilities within the partnership.

The managing partner of APX is dissatisfied with the existing performance management system, as she is not convinced that it is helping to achieve the long-term goal of expanding and ultimately floating the business on the national stock exchange. Therefore, she has asked you to consider the impact of applying Fitzgerald and Moon’s building block approach to performance management in the practice.

Required:

(a) Briefly describe Fitzgerald and Moon’s building block model of performance management. (4 marks)

(b) Evaluate the existing performance management system at APX by applying the building block model. (8 marks)

(c) Explain the main improvements the introduction of a building block approach to performance management could provide, and suggest specific improvements to the existing system of performance measures at APX in light of the introduction of the building block model. (8 marks)

eland. It is one of the 100 largest listed companies on the national stock exchange. The company focuses on buying prospective drugs that have shown initial promise in testing from small bio-engineering companies. PT then leads these through three regulatory stages to launch in the general medical market. The three stages are:

1. to confirm the safety of the drug (does it harm humans?), in small scale trials;

2. to test the efficacy of the product (does it help cure?), again in small scale trials; and

3. finally, large scale trials to definitively decide on the safety and efficacy of the product.

The drugs are then marketed through the company’s large sales force to health care providers and end users (patients). The health care providers are paid by either health insurance companies or the national government dependent on the financial status of the patient.

The Beeland Drug Regulator (BDR) oversees this testing process and makes the final judgement about whether a product can be sold in the country.

Its objectives are to protect, promote and improve public health by ensuring that:

– medicines have an acceptable balance of benefit and risk;

– the users of these medicines understand this risk-benefit profile; and

– new beneficial product development is encouraged.

The regulator is governed by a board of trustees appointed by the government. It is funded directly by the government and also through fees charged to drug companies when granting licences to sell their products in Beeland.

PT has used share price and earnings per share as its principal measures of performance to date. However, the share price has underperformed the market and the health sector in the last two years. The chief executive officer (CEO) has identified that these measures are too narrow and is considering implementing a balanced scorecard approach to address this problem.

A working group has drawn up a suggested balanced scorecard. It began by identifying the objectives from the board’s medium term strategy:

– Create shareholder value by bringing commercially viable drugs to market

– Improve the efficiency of drug development

– Increase shareholder value by innovation in the drug approval process

The working group then considered the stakeholder perspectives:

– Shareholders want a competitive return on their investment

– Purchasers (governments, insurers and patients) want to pay a reasonable price for the drugs

– Regulators want an efficient process for the validation of drugs

– Doctors want safe and effective drug products

– Patients want to be cured

Finally, this leads to the proposed scorecard of performance measures:

– Financial – share price and earnings per share

– Customer – number of patients using PT products

– Internal business process – exceed industry-standard on design and testing; time to regulatory approval of a product

– Learning and growth – training days undertaken by staff; time to market of new product; percentage of drugs bought by PT that gain final approval.

The balanced scorecard now needs to be reviewed to ensure that it will address the company’s objectives and the issues that it faces in its business environment.

Required:

(a) Describe how the implementation of a balanced scorecard delivers a range of performance measures aligned with the corporate strategy. (4 marks)

(b) Evaluate the performance measures proposed for PT’s balanced scorecard. (10 marks)

(c) Identify and analyse the influence of four different external stakeholders on the regulator (BDR). (6 marks)

(d) Using your answer from part (c), describe how the application of the balanced scorecard approach at BDR would differ from the approach within PT. (7 marks)

been successful over the last five years and has built and maintained a loyal customer base by making a high quality machine backed by a three-year warranty. The warranty states that JHK will recover and repair any machine that breaks down in the warranty period at no cost. Additionally, JHK always maintains sufficient spare parts to be able to quote for a repair of any of its machines made within the previous 10 years.

JHK is structured into two divisions: manufacturing/sales (M/S) and service. The board are now considering ways to improve coordination of the activities of the divisions for the benefit of the company as a whole.

The company’s mission is to maximise shareholder wealth. Currently, the board use total shareholder return (TSR) as an overall corporate measure of performance and return on investment (ROI) as their main relative measure of performance between the two divisions. The board’s main concern is that the divisional managers’ performance is not being properly assessed by the divisional performance measure used. They now want to consider other measures of divisional performance. Residual income (RI) and economic value addedhave been suggested.

A colleague has collected the following data which will allow calculation of ROI, RI and.

All operating costs are tax deductible.

In addition to the divisional performance measures, the board want to consider the position of the service division. The standard costs within the service division are as follows:

overheads are allocated by labour hours

Currently, the service division does two types of work. There are repairs that are covered by JHK’s warranty and there are repairs done outside warranty at the customer’s request. The service division is paid by the customer for the out-of-warranty repairs while the repairs under warranty generate an annual fee of $10m, which is a recharge from the M/S division. The company sells 440,000 units per year and in the past, 9% of these have needed a repair within the three-year warranty. Parts are charged by the M/S division to the service division at cost and average $75 per repair. A repair takes two hours, on average, to complete.

The board are considering amending this existing $10m internal recharge agreement between M/S and service. There has been some discussion of tailoring one of the two transfer-pricing approaches (market price or cost plus) to meet the company’s objectives.

Although the service division has the capacity to cover all of the existing work available, it could outsource the warranty service work, as it is usually straightforward. It would retain the out-of-warranty service work as this is a higher margin business. It would then begin looking for other opportunities to earn revenue using its engineering experience. A local engineering firm has quoted a flat price of $200 per warranty service repair provided that they obtain a contract for all of the warranty repairs from JHK.

Finally, the board are also considering a change to the information systems at JHK. The existing systems are based in the individual functions (production, sales, service, finance and human resources). The board are considering the implementation of a new system based on an integrated, single database that would be accessible at any of the company’s five sites. The company network would be upgraded to allow real-time input and update of the database. The database would support a detailed management information system and a high-level executive information system.

Required:

Write a report to the finance director to:

(a) Evaluate the divisional performance at JHK and critically discuss the proposed measures of divisional performance. (12 marks)

(b) Outline the criteria for designing a transfer pricing system and evaluate the two methods discussed of calculating the transfer price between the service and M/S divisions. (Perform. appropriate calculations) (12 marks)

(c) Evaluate the potential impact of the introduction of the new executive information system at JHK on performance management. (5 marks)

Professional marks will be awarded for the format, style. and structure of the discussion of your answer. (4 marks)

d C. Each of them uses a pre-operative injection given by a nurse before the surgery. Thin Co currently rent an operating theatre from a neighbouring government hospital. Thin Co does have an operating theatre on its premises, but it has never been put into use since it would cost $750,000 to equip. The Managing Director of Thin Co is keen to maximise profits and has heard of something called ‘throughput accounting’, which may help him to do this. The following information is available:

1 All patients go through a five step process, irrespective of which procedure they are having:

– step 1: consultation with the advisor;

– step 2: pre-operative injection given by the nurse;

– step 3: anaesthetic given by anaesthetist;

–step 4: procedure performed in theatre by the surgeon;

– step 5: recovery with the recovery specialist.

2 The price of each of procedures A, B and C is $2,700, $3,500 and $4,250 respectively.

3 The only materials’ costs relating to the procedures are for the pre-operative injections given by the nurse, the anaesthetic and the dressings. These are as follows:

4 There are five members of staff employed by Thin Co. Each works a standard 40-hour week for 47 weeks of the year, a total of 1,880 hours each per annum. Their salaries are as follows:

– Advisor: $45,000 per annum;

– Nurse: $38,000 per annum;

– Anaesthetist: $75,000 per annum;

– Surgeon: $90,000 per annum;

– Recovery specialist: $50,000 per annum.

The only other hospital costs (comparable to ‘factory costs’ in a traditional manufacturing environment) are general overheads, which include the theatre rental costs, and amount to $250,000 per annum.

5 Maximum annual demand for A, B and C is 600, 800 and 1,200 procedures respectively. Time spent by each of the five different staff members on each procedure is as follows:

Part hours are shown as decimals e.g. 0·24 hours = 14·4 minutes (0·24 x 60).

Surgeon’s hours have been correctly identified as the bottleneck resource.

Required:

(a) Calculate the throughput accounting ratio for procedure C.

Note: It is recommended that you work in hours as provided in the table rather than minutes. (6 marks)

(b) The return per factory hour for products A and B has been calculated and is $2,612·53 and $2,654·40 respectively. The throughput accounting ratio for A and B has also been calculated and is 8·96 and 9·11 respectively.

Calculate the optimum product mix and the maximum profit per annum. (7 marks)

(c) Assume that your calculations in part (b) showed that, if the optimum product mix is adhered to, there will be excess demand for procedure C of 696 procedures per annum. In order to satisfy this excess demand, the company is considering equipping and using its own theatre, as well as continuing to rent the existing theatre. The company cannot rent any more theatre time at either the existing theatre or any other theatres in the area, so equipping its own theatre is the only option. An additional surgeon would be employed to work in the newly equipped theatre.

Required:

Discuss whether the overall profit of the company could be improved by equipping and using the extra theatre.

Note: Some basic calculations may help your discussion. (7 marks)

ment. Historically, the company has used solely financial performance measures to assess the performance of the company as a whole. The company’s Managing Director has recently heard of the ‘balanced scorecard approach’ and is keen to learn more.

Required:

Describe the balanced scorecard approach to performance measurement. (10 marks)

(b) Brace Co is split into two divisions, A and B, each with their own cost and revenue streams. Each of the divisions is managed by a divisional manager who has the power to make all investment decisions within the division. The cost of capital for both divisions is 12%. Historically, investment decisions have been made by calculating the return on investment (ROI) of any opportunities and at present, the return on investment of each division is 16%.

A new manager who has recently been appointed in division A has argued that using residual income (RI) to make investment decisions would result in ‘better goal congruence’ throughout the company.

Each division is currently considering the following separate investments:

The company is seeking to maximise shareholder wealth.

Required:

Calculate both the return on investment and residual income of the new investment for each of the two divisions. Comment on these results, taking into consideration the manager’s views about residual income. (10 marks)