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® ATC International became a part of Becker Professional Education in 2011. ATC International has
® ATC International became a part of Becker Professional Education in 2011. ATC International has

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2012 EDITION | Study System

ACCA

Paper P5 | ADVANCED PERFORMANCE

MANAGEMENT

to maximize their chances of success. 2012 EDITION | Study System ACCA Paper P 5 |
to maximize their chances of success. 2012 EDITION | Study System ACCA Paper P 5 |
to maximize their chances of success. 2012 EDITION | Study System ACCA Paper P 5 |

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ACCA

PAPER P5

ADVANCED PERFORMANCE MANAGEMENT

STUDY SYSTEM

JUNE 2012

P5 ADVANCED PERFORMANCE MANAGEMENT STUDY SYSTEM JUNE 2012 ® ©2012 DeVry/Becker Educational Development Corp. All
P5 ADVANCED PERFORMANCE MANAGEMENT STUDY SYSTEM JUNE 2012 ® ©2012 DeVry/Becker Educational Development Corp. All

®

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SESSION 00 – CONTENTS

CONTENTS

 

Page

Introduction

(iv)

Syllabus

(v)

Study Guide

(ix)

Exam technique

(xvi)

1 Introduction to Strategic management accounting

0101

2 Performance management and control of the organisation

0201

3 Changes in business structure and management accounting

0301

4 Effect of IT on modern management accounting

0401

5 Other environmental and ethical issues

0501

6 External influences on organisational performance

0601

7 Performance management information systems

0701

8 Information recording and reporting

0801

9 The performance hierarchy

0901

10 Performance measurement in the private sector

1001

11 Divisional performance evaluation

1101

12 Transfer pricing

1201

13 Not-for-profit organisations

1301

14 Non-financial performance indicators and quality

1401

15 Human aspects of performance management

1501

16 Alternative views of performance management

1601

17 Complex business structures

1701

18 Current developments

1801

Index

1901

SESSION 00 – INTRODUCTION

Introduction

This Study System has been specifically written for the Association of Chartered Certified Accountants fundamentals level examination, Paper P5 Advanced Performance Management.

It provides comprehensive coverage of the core syllabus areas and is designed to be used both as a reference text and and is designed to be used both as a reference text and as to provide you with the knowledge, skill and confidence to succeed in your ACCA examinations.

About the author: Nick Ryan is ATC International’s lead tutor in performance management and has more than 10 years’ experience in delivering ACCA exam-based training.

How to use this Study System

You should first read through the syllabus, study guide and approach to examining the

syllabus provided in this session to familiarise you with the content of this paper. The

sessions which follow include:

An overview diagram at the beginning of each session.

An overview diagram at the beginning of each session.

This provides a visual summary of the topics covered in each Session

and how they are related.

 

The body of knowledge which underpins the syllabus. Features of the

text include:

Definitions

Terms are defined as they are introduced.

Definitions Terms are define d as they are introduced.

Illustrations

These are to be read as part of the text. Any solutions

Illustrations These are to be read as part of the text. Any so lutions
 

to numerical illustrations follow on immediately.

 

Examples

These should be attempted using the proforma

  Examples These should be attempted using the proforma
 

solution provided (where applicable).

 

Key points

Attention is drawn to fundamental rules and

  Key points Attention is drawn to fundamental rules and
 

underlying concepts and principles.

 

Commentaries

These provide additional information.

  Commentaries These provide additional information.

Focus

These are the learning outcomes relevant to the session, as published in ACCA’s Study Guide.

F o c u s These are the learning outcomes relevant to the session, as published

Example solutions are presented at the end of each session.

A bank of practice questions is contained in the Study Question Bank provided. These are linked to the topics of each session and should be attempted after studying each session.

SESSION 00 – SYLLABUS

SYLLABUS

Aim

To apply relevant knowledge, skills and exercise professional judgement in selecting and applying strategic management accounting techniques in different business contexts and to contribute to the evaluation of the performance of an organisation and its strategic development.

Main capabilities

On successful completion of this paper, candidates should be able to:

A Use strategic planning and control models to plan and monitor organisational performance;

B Assess and identify relevant macro economic, fiscal and market factors and key external

influences on organisational performance;

C Identify and evaluate the design features of effective performance management

information and monitoring systems;

D Apply appropriate strategic performance measurement techniques in evaluating and

improving organisational performance;

E Advise clients and senior management on strategic business performance evaluation

and on recognising vulnerability to corporate failure;

F Identify and assess the impact of current developments in management accounting and

performance management on measuring, evaluating and improving organisational

performance.

Syllabus structure BA (P3) APM (P5) PM (F5) MA (F2)
Syllabus structure
BA (P3)
APM (P5)
PM (F5)
MA (F2)

SESSION 00 – SYLLABUS

Relational diagram of main capabilities

Strategic planning and control (A)

Strategic planning and control (A)

Economic, fiscal, market and environmental factors (B)

(A) Economic, fiscal, market and environmental factors (B) Performance measurement systems and design (C) Strategic
(A) Economic, fiscal, market and environmental factors (B) Performance measurement systems and design (C) Strategic

Performance measurement systems and design (C)

Strategic performance measurement (D)

and design (C) Strategic performance measurement (D) Performance evaluation and corporate failure (E) Current
Performance evaluation and corporate failure (E)
Performance evaluation and corporate failure (E)

Performance evaluation and corporate failure (E)

Current developments and emerging issues in management accounting

and performance management (F)

Rationale

The Advanced Performance Management syllabus further develops key aspects introduced

in Paper F5, Performance Management, at the skills level and draws on aspects of the material

covered from a more strategic and operational planning perspective in Paper P3, Business

Analysis.

The syllabus introduces candidates to the strategic role of management accounting as a

discipline for planning and controlling performance so that strategic objectives can be set,

monitored and controlled. It also covers the impact of external factors on strategic

management issues, such as macro economic, fiscal, market and environmental impacts on

performance. From appreciating the strategic context of performance management and the impact of wider factors, the syllabus examines, at an operational level, the issues relating to

performance measurement systems and their design.

The syllabus then moves from performance management systems and their design to the scope and application of high-level performance measurement techniques in a variety of contexts, including not-for-profit organisations and multinational businesses. Having covered the strategic aspects of performance management and operational systems for the measurement and control of performance in a variety of contexts, candidates are then expected to synthesise this knowledge in the role of an advisor to senior management or independent clients on how to assess and control the performance of an entity, including the recognition of whether a business is facing difficulties or possibly failure.

Finally, the syllabus deals with current developments in performance management and with emerging issues as they might affect or influence the management of performance within organisations.

SESSION 00 – SYLLABUS

DETAILED SYLLABUS

A. Strategic planning and control

1. Introduction to strategic management accounting

2. Performance management and control of the organisation

3. Changes in business structure and management accounting

4. Effect of Information Technology (IT) on strategic management accounting

5. Other environmental and ethical issues

B. External influences on organisational Performance

1. Changing business environment

2. Impact of external factors on strategy and performance

C. Performance measurement systems and design

1. Performance management information systems

2. Sources of management information

3. Recording and processing methods

4. Management reports

D. Strategic performance measurement

1. Performance hierarchy

2. Strategic performance measures in private sector

3. Divisional performance and transfer pricing issues

4. Strategic performance measures in not-for-profit organisations

5. Non-financial performance indictors

6. The role of quality in management information and performance measurement systems

7. Performance measurement and strategic human resource management issues

8. Performance measurement and the reward systems

9. Other behavioural aspects of performance measurement

E. Performance evaluation and corporate failure

1. Alternative views of performance measurement and management

2. Strategic performance issues in complex business structures

3. Predicting and preventing corporate failure

F. Current developments and emerging issues performance management

1. Current developments in management accounting techniques

2. Current issues and trends in performance management

SESSION 00 – SYLLABUS

Approach to examining the syllabus

Paper P5 builds on paper F5, Performance Management, and candidates are expected to have a thorough understanding of the paper F5 syllabus. In addition, candidates will also be required to apply the principles and techniques covered in paper F2, Management Accounting.

Paper P5 has a link with Paper P3, Business Analysis, in the areas of strategic planning and control and performance measurement

Structure of the examination paper

The examination paper will comprise two sections:

Section A

Section A will comprise two compulsory questions comprising between 50 and 70 marks in

total. Each question will comprise of between 25 and 40 marks.

Section B

In section B candidates will be asked to answer two from three questions comprising of

between 15 and 25 marks each.

Total 100 marks

ACCA Support

For examiner’s reports, guidance and technical articles relevant to this paper see

http://www2.accaglobal.com/students/acca/exams/p5/

The ACCA’s Study Guide which follows is referenced to the Sessions in this Study System.

SESSION 00 – STUDY GUIDE

STUDY GUIDE

A

STRATEGIC PLANNING AND CONTROL

1.

Introduction to strategic management accounting

Explain the role of strategic performance management in strategic planning and control.

Discuss the role of corporate planning in clarifying corporate objectives, making strategic decisions and checking progress towards the objectives.

Compare planning and control

between the strategic and

operational levels within a business

entity.

Assess the use of strategic

management accounting in the

context of multinational companies.

Discuss the scope for potential

conflict between strategic business

plans and short-term localised

decisions.

Evaluate how SWOT analysis may

assist in the performance

management process.

Evaluate the methods of bench

marking performance.

2. Performance management and

control of the organisation

Evaluate the strengths and weaknesses of alternative budgeting models and compare such techniques as fixed and flexible, rolling, activity based, zero based and incremental.

Assess how budgeting may differ in not-for-profit organisations from profit-seeking organisations.

Evaluate the impact to an organisation of a move beyond budgeting.

Ref:

1

3. Changes in business structure and management accounting

Identify and discuss the particular information needs of organisations adopting a functional, divisional or network form and the implications for performance management.

Assess the influence of Business Process Re-engineering on systems development and improvements in organisational performance.

Discuss the concept of business

integration and the linkage between

people, operations, strategy and

technology.

Identify and discuss the required

changes in management accounting

systems as a consequence of

empowering staff to manage sectors

of a business.

4. Effect of Information Technology

2

(IT) on strategic management

accounting

Assess the changing accounting

needs of modern service orientated

businesses compared with the

needs of traditional manufacturing

industry.

Discuss how IT systems provide the opportunity for instant access to management accounting data throughout the organisation and their potential impact on business performance.

Discuss how IT systems facilitate the remote input of management accounting data in an acceptable format by non-finance specialists.

Ref:

3

4

SESSION 00 – STUDY GUIDE

Explain how information systems provide instant access to previously unavailable data that can be used for benchmarking and control purposes and help improve business performance.

Assess the need for businesses to continually refine and develop their management accounting and information systems if they are to maintain or improve their performance in an increasingly competitive and global market.

5.

Other environmental and ethical

issues

Discuss the ways in which

stakeholder groups operate and

how they affect an organisation and

its strategy formulation and

implementation.

Discuss the ethical issues that may

impact on strategy formulation and

business performance.

Discuss the ways in which

stakeholder groups may influence

business performance.

B

EXTERNAL INFLUENCES ON

ORGANISATIONAL

PERFORMANCE

1.

Changing business environment

Assess the continuing effectiveness of traditional management accounting techniques within a rapidly changing business environment.

Evaluate how risk and uncertainty play an important role in long term strategic planning and decision- making that relies upon forecasts of exogenous variables.

Ref:

2. Impact of external factors on strategy and performance

Discuss the need to consider the environment in which an organisation is operating when assessing its performance, including:

Political climate

Market conditions

Funding.

Assess the impact of governmental regulations and policies on performance measurement

5 techniques used and the

C

performance levels achieved (for

example, in the case of utility

services and former state

monopolies).

PERFORMANCE

MEASUREMENT SYSTEMS AND

DESIGN

1. Performance management

6

information systems

Identify the accounting information

requirements and describe the

different types of information

systems used for strategic planning,

management control and

operational control and decision-

making.

Discuss, with reference to performance management, ways in which the information requirements of a management structure are affected by the features of the structure.

Evaluate the compatibility of the objectives of management accounting and management accounting information.

Ref:

6

7

SESSION 00 – STUDY GUIDE

 

Ref:

Discuss the integration of management accounting information within an overall information system, for example the use of enterprise resource planning systems.

Evaluate whether the management information systems are lean and value of the information that they provide.

Define and discuss the merits of, and potential problems with, open

and closed systems with regard to

the needs of performance

management.

Highlight the ways in which

contingent (internal and external)

factors influence management

accounting and its design and use.

Advise how anticipated human

behaviour will influence the design

of a management accounting

system.

Discuss the impact of responsibility

accounting on information

requirements.

8

2.

Sources of management

information

Identify and discuss the principal

internal and external sources of

management accounting information.

Demonstrate how these principal sources of management information might be used for control purposes.

Identify and discuss the direct data capture and process costs of management accounting information.

Identify and discuss the indirect costs of producing information.

Discuss the limitations of using externally generated information.

Demonstrate how the information might be used in planning and controlling activities (e.g. benchmarking against similar activities).

Discuss those factors that need to be considered when determining the capacity and development potential of a system.

3.

Recording and processing methods

Demonstrate how the type of business entity will influence the recording and processing methods.

Discuss how IT developments (e.g.

unified corporate databases and

network technology) may influence

management accounting systems.

Discuss the difficulties associated

with recording and processing data

of a qualitative nature.

4.

Management reports

Discuss the principal controls

required in generating and

distributing internal information.

Discuss the procedures that may be

necessary to ensure security of

highly confidential information that

is not for external consumption.

Evaluate the output reports of an

information system in the light of best practice and avoiding the problem of information overload.

D

STRATEGIC PERFORMANCE MEASUREMENT

1.

Performance hierarchy

Discuss how the purpose, structure and content of a mission statement impacts on business performance.

Discuss the ways in which high- level corporate performance objectives are developed.

Ref:

8

8

8

9

SESSION 00 – STUDY GUIDE

Identify strategic objectives and discuss how they may be incorporated into the business plan.

Discuss how strategic objectives are cascaded down the organisation via the formulation of subsidiary performance objectives.

Discuss social and ethical obligations that should be considered in the pursuit of corporate performance objectives.

Explain the performance “planning gap” and evaluate alternative

strategies to fill that gap.

Apply critical success factor

analysis in developing performance

metrics from business objectives.

Identify and discuss the

characteristics of operational

performance.

Discuss the relative significance of

planning as against controlling

activities at different levels in the

performance hierarchy.

2. Strategic performance measures in

private sector

Demonstrate why the primary

objective of financial performance

should be primarily concerned with

the benefits to shareholders.

Justify the crucial objectives of survival and business growth.

Discuss the appropriateness of, and apply different measures of performance, including:

Return on Capital Employed (ROCE)

Return on Investment (ROI)

Earnings Per Share (EPS)

Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA)

Ref:

Residual Income (RI)

Net Present value (NPV)

Internal rate of return and modified internal Rate of Return (IRR, MIRR).

Discuss why indicators of liquidity and gearing need to considered in conjunction with profitability.

Compare and contrast short and long run financial performance and the resulting management issues.

Explore the traditional relationship

between profits and share value

with the long-term profit

expectations of the stock market

and recent financial performance of

new technology companies.

Assess the relative financial

performance of the organisation

compared to appropriate

benchmarks.

Discuss and apply Six Sigma

measures of performance.

3. Divisional performance and transfer

10 pricing issues

Describe, compute and evaluate

performance measures relevant in a

divisionalised organisation

structure including ROI, RI and

Economic value added (EVA).

Discuss the need for separate measures in respect of managerial and divisional performance.

Discuss the circumstances in which a transfer pricing policy may be needed and discuss the necessary criteria for its design.

Demonstrate and evaluate the use of alternative bases for transfer pricing.

Ref:

11

11

12

12

SESSION 00 – STUDY GUIDE

Explain and demonstrate issues that require consideration when setting transfer prices in multinational companies.

4.

Strategic performance measures in not-for-profit organisations

Highlight and discuss the potential for diversity in objectives depending on organisation type.

Discuss the need to achieve objectives with limited funds that may not be controllable.

Identify and discuss ways in which

performance may be judged in not-

for profit organisations.

Discuss the difficulties in

measuring outputs when

performance is not judged in terms

of money or an easily quantifiable

objective.

Discuss how the combination of

politics and the desire to measure

public sector performance may

result in undesirable service

outcomes.

Assess “value for money” service

provision as a measure of

performance in not-for-profit

organisations and the public sector.

5.

Non-financial performance indicators

Discuss the interaction of non- financial performance indicators with financial performance indicators.

Discuss the implications of the growing emphasis on non-financial performance indicators.

Discuss the significance of non- financial performance indicators in relation to employees.

Ref:

12

13

Identify and discuss the significance of non-financial performance indicators in relation to product/service quality (e.g. customer satisfaction reports, repeat business ratings, customer loyalty, access and availability).

Discuss the difficulties in interpreting data on qualitative issues.

Discuss the significance of brand awareness and company profile and their potential impact on

business performance.

6. The role of quality in management

information and performance

measurement systems

Discuss and evaluate the

application of Japanese business

practices and management

accounting techniques, including:

Kaizen costing,

Target costing,

Just-in-time, and

Total Quality Management.

Discriminate between quality,

quality assurance, quality control

and quality management.

Assess the relationship of quality

management to the performance

Ref:

14

14 management strategy of an organisation.

Advise on the structure and benefits of quality management systems and quality certification.

Justify the need and assess the characteristics of quality in management information systems.

SESSION 00 – STUDY GUIDE

7.

Performance measurement and strategic Human Resource Management issues

Explain how the effective recruitment, management and motivation of people is necessary for enabling strategic and operational success.

Discuss the judgemental and developmental roles of assessment and appraisal and their role in improving business performance.

Advise on the relationship of performance management to

performance measurement

(performance rating) and determine

the implications of performance

measurement to quality initiatives

and process redesign.

8.

Performance measurement and the

reward systems

Explore the meaning and scope of

reward systems.

Discuss and evaluate different

methods of reward practices.

Explore the principles and difficulty

of aligning reward practices with

strategy.

Advise on the relationship of

reward management to quality

initiatives, process re-design and

harnessing of e-business opportunities.

Assess the potential beneficial and adverse consequences of linking reward schemes to performance measurement, for example, how it can affect the risk appetite of employees.

9

Other behaviour aspects of performance measurement

Discuss the accountability issues that might arise from performance measurement systems.

Ref:

15

Evaluate the ways in which performance measurements systems may send the wrong signals and result in undesirable business consequences.

Demonstrate how management style needs to be considered when designing an effective performance measurement system.

E PERFORMANCE EVALUATION AND CORPORATE FAILURE

1. Alternative views of performance measurement and management

Evaluate the “balanced scorecard”

approach as a way in which to

improve the range and linkage

between performance measures.

Evaluate the “performance

15 pyramid” as a way in which to link

strategy, operations and

performance.

Evaluate the work of Fitzgerald and

Moon that considers performance

measurement in business services

using building blocks for

dimensions, standards and

rewards.

Discuss and apply the Performance

Prism.

Discuss and evaluate the application of activity-based management.

Evaluate and apply the value-based management approaches to performance management.

2. Strategic performance issues in complex business structures

Evaluate the use and the

Ref:

16

17

15 application of strategic models in assessing the business performance of an entity, such as Ansoff, Boston Consulting Group and Porter.

SESSION 00 – STUDY GUIDE

Discuss the problems encountered in planning, controlling and measuring performance levels (e.g. productivity, profitability, quality and service levels) in complex business structures.

Discuss the impact on performance management of the use of business models involving strategic alliances, joint ventures and complex supply chain structures.

3.

Predicting and preventing corporate failure

Assess the potential likelihood of

corporate failure, utilising

quantitative and qualitative

performance measures.

Assess and critique quantitative

and qualitative corporate failure

prediction models.

Identify and discuss performance

improvement strategies that may be

adopted in order to prevent

corporate failure.

Discuss how long-term survival

necessitates consideration of life-

cycle issues.

Identify and discuss operational

changes to performance

management systems required to

implement the performance improvement strategies.

Ref:

F. CURRENT DEVELOPMENTS AND EMERGING ISSUES IN PERFORMANCE MANAGEMENT

1. Current developments in management accounting techniques

Discuss the ways through which management accounting practitioners are made aware of new techniques and how they evaluate them.

Discuss, evaluate and apply

17

environmental management accounting.

 

Discuss the use of benchmarking in

 

public sector performance (league

tables) and its effects on operational

and strategic management and

client behaviour.

 

Discuss the issues surrounding the

use of targets in public sector

organisations.

Ref:

18

18

2. Current issues and trends in

performance management

Assess the changing role of the

management accountant in today’s

business environment as outlined

by Burns and Scapens.

Discuss contemporary issues in

performance management.

Discuss how changing organisation’s structure, culture and strategy will influence the adoption of new performance measurement methods and techniques.

SESSION 00 – EXAM TECHNIQUE

EXAM TECHNIQUE

Reading and planning time

The following is the suggested approach to the reading and planning time for paper P5.

Read the requirements of all parts of all questions.

Decide which order you will do the questions in. This also means deciding which of the Section B questions to do.

Plan you time. Remember you have to allocate 1.8 marks of exam time to each mark available. On the front page of your question paper, write down the time that you will start each question.

With any remaining time left, start to read the scenario from one of the long Section A questions, and start to plan. It is unlikely you will have time to plan it completely

during reading and planning time.

Overall exam strategy

For most candidates, it is probably best to do the two Section A questions first, while you are

relatively fresh. If you suffer badly from exam nerves however, you may wish to do your

best question from Section B first, to get you settled into the exam. At any rate, you are not

advised under any circumstances to do the Section A questions last.

Do stick to your time allocation, and do attempt all questions. Even if a question looks

difficult, there will always be easy marks.

Remember that in P5, the examiner is looking for you to apply your knowledge to real life

scenarios and not just to regurgitate what is in your text book. Do refer to the case scenarios

in your answers.

Section A questions

Section A will be scenario type questions. The examiner has said that there will be a lot of

reading required.

During the planning time

Briefly read the initial paragraphs to gain a broad understanding of the scenario.

Read the requirements of all parts of the question.

Read through the scenario briefly to get a quick understanding of the case.

Think about what is required. What do you need to do?

Read the scenario more slowly. This time underline key information, make any relevant notes and reference to the relevant parts of the question.

SESSION 00 – EXAM TECHNIQUE

For numerical parts of the question, think about your route to get to the answer. What calculations will you perform, how will your workings be laid out. It there a simpler way? The current P5 examiner does not generally require too much calculation however.

Ensure that you have incorporated “hints” and facts from the scenario, particularly in written questions. Remember, this examiner does not normally provide superfluous information in his scenarios. If information is provided, it is there for a reason!

Section B

Numerical questions

Before starting a computation, picture your route. Do this by jotting down the steps you are going to take and imagining the layout of your answer.

Set up a pro-forma structure to your answer before working the numbers.

Use a columnar layout if appropriate. This helps to avoid mistakes and is easier for the

marker to follow.

Include all your workings and cross-reference them to the face of your answer.

A clear approach and workings will help earn marks even if you make an arithmetic

mistake.

If you do spot a mistake in your answer, it is not worthwhile spending time amending

the consequent effects of it. The marker of your script will not punish you for errors

caused by an earlier mistake.

Don’t ignore marks for written recommendations or comments based upon your

computation. These are easy marks to gain.

If you could not complete the calculations required for comment then assume an answer

to the calculations. As long as your comments are consistent with your assumed

answer you can still pick up all the marks for the comments.

Written questions

Planning

Read the requirements carefully at least twice to identify exactly how many points you are being asked to address.

Jot down relevant thoughts on your plan

Give your plan a structure which you will follow when you write up the answer.

SESSION 00 – EXAM TECHNIQUE

Presentation

Use headings, indentation and bullet points to give your answer structure and to make it more digestible for the marker.

Use short paragraphs for each point that you are making.

Use “bullet points” where this seems appropriate.

Separate paragraphs by leaving at least one line of space between each one.

SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING OVERVIEW Objective To introduce strategic management

OVERVIEW

Objective

To introduce strategic management accounting.

STRATEGIC PERFORMANCE MANAGEMENT Management accounting Traditional management accounting Strategic management
STRATEGIC
PERFORMANCE
MANAGEMENT
Management accounting
Traditional management accounting
Strategic management accounting
Strategic management accounting tools
Role of corporate planning
Overall planning framework
CORPORATE
External analysis
PLANNING &
Internal analysis
STRATEGY
Setting objectives
Gap analysis
Selection of strategies
Strategic control
PLANNING AND
CONTROL AT
DIFFERENT LEVELS
Anthony’s model
BENCHMARKING
MULTINATIONAL
SWOT
COMPANIES
ANALYSIS
Internally set standards
Types of benchmarking
Stages
Benefits of benchmarking
Difficulties
Role of management accounting
Different types of organisation
Internal and external analysis
Benefits
POTENTIAL
CONFLICTS
Formal approach to strategic planning
Reasons for conflict
Potential solutions to the conflict

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

1

STRATEGIC PERFORMANCE MANAGEMENT

1.1

Management accounting

Management accounting is concerned with the provision of information to enable management to:

formulate policies;

plan and control activities (including safeguarding assets);

make decisions on alternative courses of action.

Paper P5 Advanced Performance Management is an advanced management accounting paper, which looks at the nature of management accounting and discusses whether or not that information helps organisations to improve their performance. Performance management

involves designing systems for measuring the performance of organisations and the people who work in those organisations. Performance is measured based on how well the organisation is meeting its strategic objectives. The paper also looks at the latest

developments in management accounting.

1.2

Traditional management accounting

1.2.1

Meaning of traditional management accounting

Traditional management accounting includes areas such as:

Cost accounting;

Budgeting;

Variance analysis.

Many of these techniques were developed in the late nineteenth century.

Commentary

were developed in the late nineteenth century. Commentary You should already be familiar with traditional management

You should already be familiar with traditional management accounting techniques

from earlier ACCA studies.

1.2.2 Lost relevance of traditional management accounting techniques

In the latter part of the twentieth century, many management writers argued that management accounting had lost its relevance. In particular, it was criticised for being too inwardly focused. As the business world in which organisations exist has become increasingly competitive and dynamic, it is essential for managers to focus on both internal and external factors.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

1.3 Strategic management accounting (Strategic performance management)

Since the 1980s management writers have proposed that management accounting should become broader in focus, and more strategic in nature. The term “Strategic management accounting” or “Strategic performance management” has been widely used since then to refer to an extended role of management accountants. There is no universally accepted definition of the scope of strategic management accounting – the term means different things to different writers. In general terms it is usually taken to mean:

The provision of information to support strategic planning and decision making in organisations;

The provision of information that is external as well as internal;

The use of non-financial as well as financial information;

The provision of information to support the competitive advantages of an organisation.

1.4

Some strategic management accounting tools

The following tools are examples of strategic management accounting:

The use of activity based costing and activity based management;

Analysis of competitors – using tools such as Benchmarking;

Value chain analysis to gain competitive advantage.

These are covered in later sessions.

2 CORPORATE PLANNING & STRATEGY

2.1 Role of corporate planning

Corporate planning involves formulating an organisation’s strategy, and converting this into

shorter term objectives, possibly by way of a formal plan. Targets may then be set, and the

performance of an organisation is measured against these targets. Performance

Management is all about defining the organisation’s strategy, and measuring how the

organisation is performing in relation to achieving its strategy.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

2.2 Overall planning framework

The following basic model of financial planning demonstrates how corporate objectives may be formulated, and strategies developed to achieve these objectives.

EXTERNAL INTERNAL ANALYSIS ANALYSIS POSITION ANALYSIS (SWOT) MISSION, STAKEHOLDER OBJECTIVES, SPECIFIC
EXTERNAL
INTERNAL
ANALYSIS
ANALYSIS
POSITION
ANALYSIS
(SWOT)
MISSION,
STAKEHOLDER
OBJECTIVES,
SPECIFIC
OBJECTIVES
GAP OVERALL STRATEGY INTERNAL INVESTMENT FINANCING STRATEGY STRATEGY STRATEGY
GAP
OVERALL
STRATEGY
INTERNAL
INVESTMENT
FINANCING
STRATEGY
STRATEGY
STRATEGY

This approach to planning is outward looking, since it considers the external as well as the internal environment and enables realistic objectives to be set and the development of strategies which follow logically from the current position.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

2.3

External analysis

This requires a review of environmental influences on the organisation such as:

Political situation;

Legal framework pollution controls;

Economic factors interest rates, exchange controls;

Socio-cultural factors demography of the market;

Technology new production processes;

Competitive environment new entrant to the market, substitute products, etc.

This analysis should reveal external opportunities and threats. External analysis is covered in more detail in Session 5.

2.4

Internal analysis

Looking at the organisation’s past and present activities and resources:

Products;

Organisation structure;

Systems and processes;

Marketing;

Distribution;

Finance;

Research and development;

Use of new technology.

This analysis should reveal the organisation’s internal strengths and weaknesses.

2.5 Setting objectives

Having analysed the external environment, the management will then clarify the objectives

of the organisation.

It is common for objectives to be given a hierarchy. Higher level objectives, such as the

Mission Statement, are broad statements which deal with the overall aims of the

organisation. Moving down the hierarchy, the objectives become more specific.

Mission Main Supporting ©2012 DeVry/Becker Educational Development Corp. All rights reserved.
Mission
Main
Supporting
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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

2.5.1 Main objectives

These can be mission statements or statements of intent to particular stakeholders (e.g. shareholders or employees).

2.5.2 Supporting objectives

These convert the main objectives into a series of targets for the business. These typically include profit or sales targets for immediate implementation. Sub-objectives can be passed further and further down the organisation resulting in short-term objectives for particular departments, such as reducing costs by a given percentage or signing up a particular level of customers each month.

Illustration 1

Mission statement – To increase the wealth of shareholders by maintaining our

position as the leading provider in the industry.

Main objectives – to maintain the satisfaction of all customers.

Specific objectives – customer returns must account for less than 2% by value

of products sold.

must account for less th an 2% by value of products sold. This hierarchy of objectives

This hierarchy of objectives is sometimes referred to as the “performance hierarchy” and is

discussed in more detail in Session 8.

2.6 Gap analysis

Gap analysis involves comparing the objectives of the business (where we would like to be)

with what the business is achieving at the moment. Gap analysis could for example focus on

the gap between desired and actual market share, desired or actual revenue, or desired or

actual profits.

Gap analysis is discussed in more detail in Session 8.

2.7 Selection of strategies

Management must make strategic choices. These determine how the organisation will go about meeting its objectives.

2.7.2 Internal strategies

These focus on what the organisation needs to be good at internally to succeed. For example, a low cost airline develops strategies to save costs, such as reducing parking time at airports, and using lower cost airports.

2.7.3 Investment strategies

These look at the whole area of what to invest in. This may include decisions such as whether to expand by buying up competitors (mergers and acquisitions) or to grow organically. It also covers methods used for investment appraisal.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

2.7.4 Financing strategy

This looks at how to finance the organisation. Typical decisions include the appropriate mix of equity and debt and dividend strategies. (Such strategies are covered in paper F9 Financial Management. )

2.8 Strategic control

Having set the corporate objectives, senior management will be involved in controlling the organisation.

Definition

be involved in controlling the organisation. Definition Control is the process of ensuring that a firm’s

Control is the process of ensuring that a firm’s activities conform to its plan and that its objectives are achieved.

Performance management focuses on designing systems for measuring the performance of

an organisation. Performance measures are developed, and progress is continually

monitored by comparing actual results against targets for the performance measures.

Performance measures are used at all levels of the organisation.

Strategic control involves ensuring that the organisation in on track to meet its long term

strategic objectives. A successful system of strategic control should therefore:

Focus attention on what matters in the long term.

Identify the drivers of success. Many businesses identify critical success factors, and use

key performance indicators to measure their progress in meeting these.

Include reward schemes that are based on achieving the critical success factors.

Definition

based on achieving the critical success factors. Definition Critical success factors are the limited number of

Critical success factors are the limited number of areas where things must go

right if the organisation is to flourish.

3

PLANNING AND CONTROL AT DIFFERENT LEVELS

3.1

Anthony’s model

Robert Anthony described three levels of management within an organisation:

Strategic – involved in setting goals and objectives for the organisation over the long term.

Tactical management – involved in management control. This means ensuring resources are obtained and used effectively and efficiently in accomplishing the objectives of the organisation.

Operational management – ensuring that day to day tasks are carried out.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Planning info Strategic Tactical Control Operational info
Planning
info
Strategic
Tactical
Control
Operational
info

A comparison of the three levels of management is given below:

3.1.1 Strategic planning

Deciding which products or markets to be in.

Investment decisions.

Planning for environmental changes.

Identifying the competitive advantage of the organisation.

Longer term timescale – could be years.

3.1.2 Tactical planning

Implementing the strategic decisions, often via a long term plan.

Preparation of annual budgets, and comparison of actual results with budgets on a

monthly basis.

Recruitment of staff.

Shorter time period for planning – typically one year ahead.

Use of both internal and external information.

3.1.3 Operational planning

Routine planning (e.g. staff rotas).

Programmed decisions (e.g. ordering inventory when inventory levels fall to re-order

levels).

Based on internal, transaction based information.

3.1.4 Strategic control measures

Profits by business segment.

External factors influencing the organisation.

Present and potential market studies.

Investment appraisal.

3.1.5 Tactical control measures

Analysis of sales by product/customer/geographical location.

Inventory levels.

Cash flow projections.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

3.1.6 Operational control measures

Variances (e.g. materials and labour).

Receivables/payable levels.

Payroll details.

Customer complaints.

Output records.

Example 1

Vacation Lodge runs a chain of three star hotels throughout the world. The company’s head office is in New York, where the executive and non-executive directors are based.

Each hotel has a management team headed by the general manager. The other members of the management team are the financial controller, the rooms

division manager, the food and beverage manager, the sales and marketing

manager and the head of security.

Each hotel has an executive chef, responsible for the restaurants. The executive

chef reports to the food and beverage manager of the hotel.

Required:

Describe the types of plan that will be prepared by the directors, the

management teams and the executive chef. For each plan, describe control

measures which can be used to see how well the plan is being achieved.

Solution

Board of directors

Management team

Executive chef

Plans

Controls

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Management team Executive chef Plans Controls ©2012 DeVry/Becker Educational Development Corp. All rights re served. 0109

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

4

MULTINATIONAL COMPANIES

4.1

Role of management accounting

Management accounting is used by multinational companies to coordinate and integrate their activities in different countries. Such coordination normally takes place through the systems of budgeting, performance measurement and currency management.

Issues of particular importance include the following:

Currency management – the volatility of exchange rates makes measuring the performance of the various parts of the organisation more complex.

Managing relationships with host governments over areas such as tax breaks and subsidies. Many management accounting systems measure the performance of managers of foreign operations based on after tax profits rather than pre-tax.

Transfer pricing may be used as a method of transferring profits from high tax to lower

tax states. This is covered in more detail in a later session.

4.2

Different types of multinational organisation

Porter suggests that multinationals may be classed into three types:

(1)

The global firm – an organisation that covers many different states, where the activities

carried out in each state are interdependent. For example, some components may be

made in one country, some in another, and final assembly may take place in yet another

country.

(2)

The multidomestic firm is made up of a number of subsidiaries in different countries,

where the activities of one subsidiary are largely independent of others.

(3)

Exporting firms tend to carry out most of their operations in the domestic market, and

sell into foreign markets via agents.

The differences in the approach to management accounting in the global firm and the

multidomestic firm can be summarised by the following table:

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Issue

Global firm

Multidomestic firm

Strategy

To internationalise the value chain

To balance risk through portfolio management

Role of headquarters

To develop and coordinate subsidiaries in an integrated effort. Coordination of subsidiaries is strong.

To enhance the management of financial resources. Corporate coordination of subsidiaries is weak.

Role of subsidiary

To carry out and support a detailed strategy developed at headquarters.

To develop its own strategy towards market and production.

Role of budgeting

To integrate activities across subsidiaries with an

To establish targets for each

individual subsidiary with

emphasis on products and

an emphasis on

markets

accountability

Performance evaluation

Many and diverse financial

Relatively few, but

and non-financial

aggregated financial

performance measures

performance measures

oriented towards products

oriented towards individual

and markets.

organisational entities.

Source: “Management Accounting in Global Firms” by Jan Mouritsen.

5 POTENTIAL CONFLICTS

5.1 Formal approach to strategic planning

The strategic planning model described above assumes a “top down” approach to strategic

planning, whereby a central board of directors sets the strategy, the rest of the organisation

is expected to achieve it. Where local decisions are being made by managers (e.g. in the case

of a decentralised organisation) there is a risk that the decisions made locally may not be consistent with the strategy.

5.2 Reasons for conflict

There are several reasons why conflicts arise between strategic plans and short-term local decisions:

Managers’ incentive schemes may not be aligned with the strategy of the organisation. For example, managers’ bonuses may depend on the current year’s profits which could be increased at the expense of longer-term strategic objectives, such as quality.

Local managers may have better knowledge of local opportunities than the directors who set the strategy.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Long term plans are prepared long before the period to which they apply. Actual conditions may be quite different.

Local managers may feel that the formal strategic plan stifles their own creativity or ideas – it may not be flexible enough to allow unplanned opportunities to be adopted.

5.3 Potential solutions to the conflict

A “parenting” style may provide the solution to the conflict between strategic planning and

local decision making. Under such an approach, business units may formulate their own strategies, while head office may set broader targets for the business units to achieve.

6

SWOT ANALYSIS

6.1

Internal and external analysis

In the corporate planning model described in section 2 above, one of the first things the

management do when planning is to perform analysis of the internal and external

environment. One tool which is commonly used for such an exercise is SWOT analysis.

Definition

used for such an exerc ise is SWOT analysis. Definition SWOT analysis is a critical asse

SWOT analysis is a critical assessment of an organisation’s Strengths and

Weaknesses (identified from internal analysis) and Opportunities and Threats

(identified from external analysis) in order to establish its condition prior to the

preparation of any long-term plans.

By identifying the company’s strengths and weaknesses during the planning process,

management can ensure that they plan to focus on performing those activities which the

company is good at, while avoiding those areas where the company lacks the relevant

skills or resources to compete effectively.

Opportunities represent business opportunities that the company may wish to exploit,

provided that it has the relevant skills. Thus it attempts to match the company’s

strengths with the opportunities available.

Threats represent threats from outside. This could include a variety of things – competitors, new government regulations which threaten the industry, changes in social attitudes and so on.

Swot analysis is often performed using a table with four quadrants. The strengths, weaknesses, opportunities and threats are then listed in the appropriate quadrants.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Example 2

Brilliant Airlines is the national airline of a small country in the European Union. It is one of the oldest and most respected airlines in the world.

The company is based at Schiphoven airport; one of the busiest airports in the world. This, coupled with alliances that the company has made with other airlines, means that the airline can take advantage of passengers from other less well connected airports, which connect at Schiphoven for longer flights.

Recently the company has been suffering stiff competition on certain routes from low cost airlines, who offer a “no frills” service. Due to their lower cost base, these low cost airlines are able to offer passengers much lower fares than Brilliant Airlines charges.

The European Union is now introducing a tax on fuel in an attempt to reduce

the impact of greenhouse gasses caused by airlines. This will significantly

increase the costs of the airline.

Required:

Based on the information provided above, perform a SWOT analysis on

Brilliant Airlines, and suggest any opportunities that the airline may focus on.

Solution

a ny opportunities that the airl ine may focus on. Solution Strengths Weaknesses Opportunities Threats 6.2

Strengths

Weaknesses

Opportunities

Threats

6.2 Benefits of SWOT analysis

The focus on internal strengths and weaknesses ensures that strategic decisions are taken which are appropriate for the organisation.

It focuses the attention of management on external factors (threats and opportunities). Thus management can plan how to deal with changes, such as a decline in the market.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

7

BENCHMARKING

7.1

Problems with internally set standards

One of the core tools of traditional management accounting is variance analysis, which involves the setting of a standard cost. One potential problem with this is that setting the standard normally involves considering what was used in earlier periods and not considering what other organisations are achieving – so the standards set are not challenging enough.

Benchmarking is a tool which involves comparison of the performance of an organisation against other organisations. The focus is therefore external.

Definition

organisations. The focus is therefore external. Definition Benchmarking (also “best practic e benchmarking” or

Benchmarking (also “best practice benchmarking” or “process benchmarking”)

is a process used in management and particularly strategic management, in

which organizations evaluate various aspects of their processes in relation to

best practice, usually within their own sector. This then allows organizations

to develop plans on how to adopt such best practice, usually with the aim of

increasing some aspect of performance.

7.2

Types of benchmarking

Competitive benchmarking – comparing performance with competitors. Can be

difficult to obtain information about competitors however.

Commentary

to obtain information about competitors however. Commentary This was pioneered by Xerox when Japanese competitors sold

This was pioneered by Xerox when Japanese competitors sold copiers into US at less

than Xerox’s manufacturing cost – costing Xerox half their market share.

Internal benchmarking – comparing one operating unit or function with another within

the same organisation in order to establish best practice.

Process benchmarking – focusing on qualitative information around specific business processes.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

7.3 Stages

(1)

Planning and organisation (e.g. setting up a steering group and setting out aims and objectives).

(2)

Identification of key internal processes for analysis:

Practices – steps in a process; Metrics – measures of times and outcomes (e.g. cost, quality, speed, reliability).

(3)

Researching potential partners (those perceived to be the best). Collecting information and investigating metrics for comparison.

(4)

Making agreements and developing plans for exchange visits. Formulating a common program for internal data collection and its presentation and analysis.

(5)

Partner site visits by benchmarking teams collect dataand ensure comparability.

(6)

Analysing data and developing plans for improvements.

(7)

Implementation and monitoring.

Illustration 2

An organisation wishes to benchmark the effectiveness of its finance function.

It may identify the following metrics that it wishes to use. These would then

be compared against industry best practice:

Cost of finance function as a percentage of revenue;

Cycle time – time taken (days) to perform annual close;

Staff productivity (e.g. number of invoices processed per member of staff);

Error rate (e.g. percentage of payroll processing errors).

7.4 Benefits of benchmarking

of payroll processing errors). 7.4 Benefits of benchmarking Provides focus for change within an organisation.

Provides focus for change within an organisation.

Identifies opportunities for improvement.

Helps to establish best practice.

Should lead to long term improvement in profits.

7.5 Difficulties of benchmarking

Competitors will not wish to share information.

Complexity of the information collected – too much data can be difficult to interpret.

Short term improvements may have unintended longer term consequences.

Quantitative information provided may miss important qualitative.

The time taken to implement the results of benchmarking may mean that the organisation continues to lag behind the competitor.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Key points

INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING Key points Strategic management accounting is a broad term,

Strategic management accounting is a broad term, encompassing an approach to management accounting that is more externally focused, to assist management in formulating and implementing strategy.

Strategic planning may follow the modern approach – which involves analysing the organisations strengths and weaknesses, and then clarifying the objectives of the organisation, before deciding on the strategic actions required.

Strategic control means monitoring the performance of the organisation to ensure that it will meet its long term strategic objectives.

Organisational planning takes place at different levels. Anthony’s model

defines three levels of planning – Strategic, Tactical and Operational.

Strategic management accounting is more challenging in multinational

organisations. The objectives of control differ depending on the

organisational structure of the multinational.

There is always scope for conflict between strategic plans developed by

the board of directors and the short term decisions made by local

managers. Organisations should identify ways to remove this conflict,

such as adopting a parenting style.

SWOT analysis is a useful tool in developing the objectives of an

organisation.

Benchmarking provides organisations with a more external focus when

setting standards of performance.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

FOCUS

You should now be able to:

MANAGEMENT ACCOUNTING FOCUS You should now be able to: explain the role of strategic performance management

explain the role of strategic performance management in strategic planning and control;

discuss the role of corporate planning in clarifying corporate objectives, making strategic decisions and checking progress towards the objectives;

compare planning and control between the strategic and operational levels within a business entity;

assess the use of strategic management accounting in the context of multinational companies;

discuss the scope for potential conflict between strategic business plans and short term

localised decisions;

evaluate how SWOT analysis may assist in the performance management process;

evaluate the methods of benchmarking performance.

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SESSION 01 – INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

EXAMPLE SOLUTIONS

Solution 1 — Planning and control

The following is not an exhaustive list of the plans and controls – any other reasonable plans and controls are also relevant.

Board of directors

Management team

Executive chef

Plans Five year financial plan New hotel openings

Annual budget

Staff Headcount

Menus

Staff rotas

Controls Actual profits v plan monitoring progress

Compare actual against budget Occupancy rates Actual v plan

Food wasted

Staff attendance

Solution 2 — SWOT analysis for Brilliant Airlines

Strengths

Weaknesses

The National Airline – “flag carrier”

Higher cost base

Good reputation – particularly among

business passengers

Good location at major Airport

Alliances with other airlines

Opportunities

Threats

Focus on business passengers – less

Competition from low cost airlines

price sensitive

Additional fuel taxes

Commentary

price sensitive Additional fuel taxes Commentary Questions such as these are judgemental by nature; there is

Questions such as these are judgemental by nature; there is no single “right answer” (particularly as regards to the opportunities). In the exam, the examiner awards marks for sensible suggestions.

0118

©2012 DeVry/Becker Educational Development Corp. All rights reserved.

SESSION 02 – PERFORMANCE MANAGEMENT AND CONTROL OF THE ORGANISATION

– PERFORMANCE MANAGEMENT AND CONTROL OF THE ORGANISATION OVERVIEW Objective To appraise alternative method s for

OVERVIEW

Objective

To appraise alternative methods for budgeting for control.

ALTERNATIVE BUDGETING MODELS Top down v bottom up Fixed v flexible Rolling budgets Incremental budgeting
ALTERNATIVE
BUDGETING
MODELS
Top down v bottom up
Fixed v flexible
Rolling budgets
Incremental budgeting
Zero based budgeting (ZBB)
Activity based budgeting (ABB)
BUDGETING IN
NOT-FOR-PROFIT
BEYOND
ORGANISATIONS
BUDGETING
How budgeting may differ
Criticisms of traditional budgeting
Traditional approach
Beyond Budgeting Model
Planning, programming budgeting

systems (PPBS)

©2012 DeVry/Becker Educational Development Corp. All rights reserved.

0201

SESSION 02 – PERFORMANCE MANAGEMENT AND CONTROL OF THE ORGANISATION

1

ALTERNATIVE BUDGETING MODELS

1.1

Top down v bottom up budgeting

Top down budgeting is where budgets are prepared centrally, usually by senior management. These are then imposed on more junior managers.

Bottom up budgeting means that managers prepare their own budgets initially. These are then reviewed by the finance department – some negotiation may take place before the final budget is achieved.

Example 1

State the advantages of top down budgeting and the advantages of bottom up budgeting.

1.1.1 McGregor’s theories of human behaviour

budgeting. 1.1.1 McGregor’s theor ies of human behaviour McGregor suggests that the circu mstances in which

McGregor suggests that the circumstances in which top down or bottom up budgeting

would be more appropriate depends on the nature of the employees. The two types of

employees are the Theory X and Theory Y employees:

Theory X

people dislike work;

 

people dislike responsibility;

they are only motivated by money;

they must be told what to do.

Theory Y

people seek responsibility;

they want to participate in decision making.

The type of employee working for an organisation therefore has implications for the

budgetary process.

Employee type

X

Y

Motivated by

Does participation increase motivation?

Money

No

Many factors

Yes

increase motivation? Money No Many factors Yes Management style Authoritarian approach Participative

Management style

Authoritarian

approach

Participative