Paper 3.
Performance Management
AIM
To ensure candidates can apply judgement
and technique in the analysis of relevant
data to provide management with the
information required to contribute to a
range of strategic planning, control and
decision-making situations.
OBJECTIVES
On completion of this paper candidates
should be able to:
• understand the objectives of preparing
management information and the need
to adapt techniques in a changing
commercial environment
• identify the information needs of
management and contribute to the
development of appropriate systems
• evaluate the strategic performance of a
business and recommend appropriate
performance measures
• understand the significance of the
relationship between financial and non-
financial indicators of business
performance
• apply techniques to evaluate management
decisions in relation to costing, pricing,
product range and marketing strategy
• identify and apply appropriate budgeting
techniques to enable management to
control the business
• demonstrate the skills expected in Part 3.
3.3 Performance Management
2.4 Financial Management and Control
1.2 Financial Information for Management
POSITION OF THE PAPER IN THE
OVERALL SYLLABUS
Candidates will require a thorough
understanding of the management accounting
section of Paper 2.4 Financial Management
and Control. Candidates will also be required
to apply the principles and techniques covered
in Paper 1.2 Financial Information for
Management. An understanding of
how to interpret accounting information, as
addressed in Paper 1.1 Preparing Financial
Statements and Paper 2.5 Financial
Reporting, is assumed.
SYLLABUS CONTENT
1 Developments in management
accounting
(a) Objectives of management
accounting information in relation to:
(i) short-term planning and strategic
planning
(ii) control and decision making
(iii) effective use of management
accounting techniques
3.7 Strategic Financial Management
(b) The conceptual framework for
changes in management accounting
(i) contingency theory
(ii) institutional theory
(c) Trends and developments in
management accounting techniques
and methods
(i) evaluation and promotion of
change in techniques and
methods used
(ii) evaluation of the effect of the rate
of change in technology and
products on management
accounting
(iii) current issues in management
accounting principles and their
relevance and application
(iv) activity-based management.
(d) Impact of changes in business
structures
(i) appraisal of continued use of
management accounting
techniques (e.g. standard costing)
PAGE 1
 Paper 3.3: Performance Management (Continued)
Performance Management (Continued)
(ii) impact on management accounting
of changes in business processes
and management techniques
(iii) changes in business structure
and management accounting
(e.g. team/project focus).
2 Design of management accounting
systems
(a) System objectives and the uses of
information in relation to:
(i) short-term and strategic planning
(ii) control and decision making
(iii) effective use of management
accounting techniques.
(b) Sources of information
(i) from within the organisation
(ii) from suppliers and customers
(iii) by comparison with competitors
(iv)from government and other
statistical sources.
(c) Recording and processing methods
(i) collection and recording of
monetary and non-monetary
information
(ii) identification of requirements for
different purposes
(iii) influence of management
accounting principles and
techniques
(iv) influence of IT systems
(v) effect of type of business entity.
(d) Format of reports
(i) analysis and dissemination to
relevant individuals/groups
PAGE 2
(ii) effect of management structure
and style
(iii) frequency, timing and degree of
accuracy
(iv) influence of trend, materiality
and controllability issues.
3 Performance measurement
(a) Performance hierarchy
(i) mission statement and the
fulfilment of a vision
(ii) corporate planning and the
achievement of strategic objectives
(iii) the accomplishment of
operational plans
(iv) the attainment of specific
departmental targets.
(b) The scope of performance
measurement
(i) financial performance –
profitability, liquidity, activity and
gearing
(ii) non-financial business indicators
(iii) performance measurement for
non-profit seeking organisations
(iv) performance measurement for
public sector service provision
(v) long and short run performance
(vi) performance measurement models
such as the balanced scorecard (to
improve the range and linkage
between performance measures)
and the performance pyramid (to
relate strategy and operations).
(c) External considerations
(i) economic/market conditions
(ii) financial, environmental and
service quality regulation from
government agencies.
(d) Management impact on performance
measurement
(i) accountability issues
(ii) benefits and problems of
performance measurement
(iii) reward schemes and
performance measurement
(iv) management style and
performance measurement.
4 Planning and control
(a) Strategic management accounting
(i) corporate v operational strategy
(ii) life cycle issues
(iii) SWOT analysis
(iv) benchmarking
(v) consideration of risk and
uncertainty.
(vi) strategic management
accounting in the context of
multinational companies
(b) Budgeting and budgetary control
(i) the appraisal of alternative
approaches to budgeting
– incremental, rolling, ABB etc
(ii) budgeting as a planning and
control device
(iii) quantitative aids and risk analysis
(iv) behavioural aspects
(v) current developments in budgeting.

5 Decision making
(a) Pricing strategies and the evaluation
of pricing decisions
(i) price/demand relationships
(ii) relevant costs and pricing decisions
(iii) pricing and product life cycles
(iv) target costing and pricing
(v) transfer pricing and decision
making.
(vi) transfer pricing in the context of
multinational companies
(b) Information for decision making
(i) relevant costs analysis
(ii) CVP analysis and profit
maximisation
(iii) product profitability and limiting
factor analysis
(iv) customer profitability analysis,
including activity-based
(v) theory of constraints and
throughput accounting
(vi) accounting for uncertainty
(vii) DCF techniques.
EXCLUDED TOPICS
The syllabus content outlines the areas for
assessment. No areas of knowledge are
specifically excluded from the syllabus.
KEY AREAS OF THE SYLLABUS
The key topic areas are as follows:
• the contribution of management
accounting systems towards the
achievement of corporate objectives
• identifying appropriate performance
indicators for particular business
situations
• abstracting relevant information from
Performance Management (Continued)
financial reports to assess performance
• identifying and processing costs as an
aid to decision making.
APPROACH TO EXAMINING THE
SYLLABUS
The examination is a three hour paper
constructed in two sections. The Section A
questions will contain a mix of
computational and discursive elements.
Section B questions will comprise at least
one question that is purely discursive and
other(s) will incorporate both
computational and discursive components.
Number
of Marks
Section A: Two compulsory questions
(no single question will exceed
45 marks) 60
Section B: Choice of 2 from 3
questions (20 marks each) 40
100
ADDITIONAL INFORMATION
The Study Guide provides more detailed
guidance on the syllabus.
RELEVANT TEXTS
There are a number of sources from which
you can obtain a series of materials written
for the ACCA examinations. These are
listed below:
ACCA's approved publishers:
BPP Professional Education
Contact number: +44(0)20 8740 2222
Website: www.bpp.com
Kaplan Publishing Foulks Lynch
Contact number: +44(0)118 989 0629
Website: www.kaplanfoulkslynch.com
Additional reading:
Accountancy Tuition Centre (ATC)
International
Contact number: +44(0)141 880 6469
Website: www.atc-global.com
Candidates may also find the following texts
useful:
D Ashton, T Hopper and R W Scapens
Issues in Management Accounting (2nd
Edition) Prentice Hall ISBN 0131892509
C Drury Management and Cost Accounting
(5th Edition) International Thomson Business
Press ISBN 1861525362
C Emmanuel, D Otley Accounting for
Management Control Chapman and Hall
ISBN 1861522118
J Hope, R Fraser Beyond Budgeting (Ist
Edition) Harvard Business School Press
ISBN 1578518660
M W E Glautier and B Underdown
Accounting Theory and Practice Pitman
ISBN 027362444X
Wider reading is also desirable, especially
regular study of relevant articles in ACCA's
student accountant.
PAGE 3
Performance Management (Continued)
STUDY SESSIONS
1 Strategic Planning and Decision
Making
(a) Identify the characteristics of
strategic planning and decision
making
(b) Contrast strategic planning with
short term /operational planning
(c) Identify the areas of management
accounting information which are of
importance in strategic management
(d) Evaluate the relevance of discounted
cash flow principles in information
for strategic decision making
(e) Select and analyse costs and
revenues relevant to strategic
planning and decision making in a
range of situations
2 Short Run Decision Making and Control
(a) Explain the significance of
endogenous information sources in
relation to short run decision making
and control
(b) Identify the characteristics of short
term non-strategic activities
(c) Identify the areas of management
accounting information appropriate
for short term decision making
(d) Explain the differences between
management control and operational
control in the context of short run
decision making and control
PAGE 4
3 Changes in management accounting
(a) Explain the contingency theory of
management accounting: Otley
(b) Explain how institutional theory
presents a framework for
understanding changes in, and the
implications for, management
accounting: Powell and Di Maggio
4 Trends in Management Accounting
Techniques and Methods
(a) Discuss the expansion in the scope
of management accounting in the
last 40 years
(b) Identify and discuss some recently
adopted management accounting
techniques
(c) Explain how new techniques may be
evaluated
(d) Discuss the ways in which
management accounting
practitioners are made aware of new
techniques
(e) Illustrate how an organisation’s
structure, culture and strategy will
influence the adoption of new
methods and techniques
(f) Assess the continuing effectiveness
of traditional techniques within a
rapidly changing business
environment
(g) Explain and demonstrate activity
based management
5 Technological Change and Management
Accounting
(a) Discuss the changing accounting
information needs of modern service
orientated business compared with
the needs of traditional
manufacturing industry
(b) Discuss how modern IT systems
provide the opportunity for instant
access to management accounting
data throughout an organisation
(c) Discuss how modern IT systems
facilitate the remote input of
management accounting data in an
acceptable format by non-finance
specialists
(d) Explain how modern information
systems provide instant access to
previously unavailable data that can
be used for benchmarking and
control purposes
(e) Discuss the need for businesses to
continually refine and develop their
management accounting systems if
they are to prosper in an increasingly
competitive and global market
6 Changes in Business Structure and
Management Accounting
(a) Identify the particular information
needs of organisations adopting a
team /project focus
(b) Discuss the concept of business
integration and the linkage between
people, operations, strategy and
technology

(c) Explain the influence of Business
Process Re-engineering on systems
development
(d) Identify and discuss the required
changes in management accounting
systems as a consequence of
empowering staff to manage sectors
of a business
7 System Design and System Objectives
(a) Identify the accounting information
requirements for strategic planning,
management control and operational
control and decision making
(b) Describe, with reference to
management accounting, ways in
which the information requirements
of a management structure are
affected by the features of the
structure
(c) Evaluate the objectives of
management accounting and
management accounting information
(d) List and explain the attributes and
principles of management
accounting information
(e) Explain the integration of
management accounting information
within an overall information system
(f) Define and discuss the merits of, and
potential problems with, open and
closed systems
(g) Suggest the ways in which
contingent (internal and external)
factors influence management
accounting and its use
Performance Management (Continued)
(h) Illustrate how anticipated human
behaviour will influence the design
of a management accounting system
(i) Explain and discuss the impact of
responsibility accounting on
information requirements
8 Internal Sources of Information
(a) Identify the principal internal sources
of management accounting
information
(b) Illustrate how these principal
sources of information might be used
for control purposes
(c) Identify the direct data capture and
process costs of internally generated
management accounting information
(d) Identify the indirect costs of
producing internal information
(e) Explain the principal controls
required in generating and
distributing internal information
(f) Discuss the factors that need to be
considered when determining the
capacity and development potential
of a system
(g) Explain the procedures that may be
necessary to ensure security of
highly confidential information that
is not for external consumption
9 External Sources of Information
(a) Identify common external sources of
information e.g. suppliers,
government, trade associations,
customers, database suppliers
(b) Identify the costs associated with
these external sources
(c) Discuss the limitations of using
externally generated information
(d) Identify the categories of external
information that are likely to be a
useful addition to an organisation’s
management accounting system
(e) Illustrate how the information might
be used in planning and control
activities e.g. benchmarking against
similar organisations
10 Recording and Processing Information
(a) Identify the stages in the information
processing cycle in the context of
accounting information
(b) Identify how the collection and
analysis of information is influenced
by management accounting
principles and techniques being used
by the organisation
(c) Describe the systems involved in the
collection and recording of monetary
and non-monetary information
(d) Illustrate how the type of business
entity will influence the recording
and processing methods
(e) Explain how IT developments e.g.
spreadsheets, accountancy software
packages and electronic mail may
influence recording and processing
systems
(f) Discuss the difficulties associated
with recording and processing data
of a qualitative nature
PAGE 5
Performance Management (Continued)
11 Performance hierarchy
(a) Discuss the purpose of a mission
statement and the pursuit of a vision
(b) Discuss the structure and content of
a mission statement
(c) Explain how high level corporate
objectives are developed
(d) Identify strategic objectives and how
they may be incorporated into the
corporate plan
(e) Explain how strategic objectives are
cascaded down the organisation via
the formulation of subsidiary
objectives
(f) Identify any relevant social and ethical
obligations that should be considered
in the pursuit of corporate objectives
(g) Discuss the concept of the ‘planning
gap’ and alternative strategies to ‘fill
the gap’
(h) Identify the characteristics of
operational performance
(i) Contrast the relative significance of
planning as against controlling
activities at different levels in the
performance hierarchy
12 Financial Performance in the Private
Sector
(a) Explain why the primary objective of
financial performance should be
concerned with the benefits of the
shareholders
(b) Discuss the crucial objectives of
survival and business growth
(c) Discuss the appropriateness of
differing measures of profitability
PAGE 6
e.g. ROCE, EPS, ROI, sales margin,
EBITDA, Residual Income, NPV, IRR
(d) Explain why indicators of liquidity
and gearing need to be considered
alongside profitability
(e) Compare and contrast short and long
run financial performance and the
resulting management issues
(f) Contrast 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/
communication companies
13 Non-Financial Performance Indicators
for Business
(a) Discuss the interaction of NFPI’s
with financial performance indicators
(b) Discuss the implications of the
growing emphasis on NFPI’s
(c) Identify and comment on the
significance of NFPIs in relation to
employees e.g. staff turnover,
sickness rates
(d) Identify and comment on the
significance of NFPIs in relation to
product/service quality e.g. customer
satisfaction reports, repeat business
ratings, customer loyalty, access and
availability
(e) Discuss the difficulties in interpreting
data on qualitative issues
(f) Discuss the significance of brand
awareness and company profile
14 Performance Measurement For Non-
Profit Seeking Organisations
(a) Discuss the potential for diversity in
objectives depending on organisation
type
(b) Comment on the need to achieve
objectives with limited funds that
may not be controllable
(c) Identify and explain ways in which
performance may be judged in non-
profit seeking organisations
(d) Comment on the difficulty in
measuring outputs when
performance is not judged in terms
of money or an easily quantifiable
objective
(e) Explain how the combination of
politics and the desire to measure
public sector performance may result
in undesirable service outcomes
(f) Comment on ‘value for money’
service as a not-for-profit sector goal
15 Performance – A Broad Perspective
(a) Comment on the need to consider the
environment in which an organisation
is operating when assessing its
performance e.g. What are the
prevailing market conditions? Is
funding relatively easy or difficult to
secure? Does the strength of the
national currency impact on the
organisation's performance? Is the
prevailing political climate particularly
favourable or unfavourable towards the
organisation currently? How have
these issues changed over time?

(b) Consider the impact of governmental
regulation on the performance
measurement techniques used and the
performance levels achieved (for
example, in the case of utility services
and former state monopolies)
16 Alternative Views of Performance
Measurement
(a) Discuss the ‘balanced scorecard’ as a
way in which to improve the range and
linkage of performance measures
(b) Discuss the ‘performance pyramid’
as a way in which to link strategy
and operations
(c) Discuss the work of Fitzgerald and
Moon that considers performance
measurement in business services
using building blocks for dimensions,
standards and rewards
17 Management Behaviour and
Performance
(a) Explain the relationship between
performance measurement systems
and behaviour
(b) Discuss how performance
measurement systems can influence
behaviour
(c) Consider the accountability issues
arising from performance
measurement systems
(d) Identify the ways in which
performance measurement systems
may send the ‘wrong signals’ and
result in undesirable business
consequences
Performance Management (Continued)
(e) Comment on the potential beneficial
and adverse consequences of linking
reward schemes to performance
measurement
(f) Explain how management style
needs to be considered when
designing an effective performance
measurement system
18 Strategic Planning and Control
(a) Compare strategic with operational
planning and control
(b) Explain how organisational survival
in the long term necessitates
consideration of life cycle issues
(c) Identify the role of corporate
planning in clarifying corporate
objectives, making strategic
decisions and checking progress
towards the objectives
(d) Explain the structure of corporate
planning
(e) Discuss the combining of strategic
planning with freewheeling
opportunism in a fast changing
business environment
(f) Comment on the potential conflict
between strategic plans and short
term localised decisions
(g) Explain the principles of SWOT
analysis
(h) Explain how SWOT analysis may
assist in the planning process
(i) Explain the principles of the
following strategic analysis models
and how they may assist in the
strategic planning process:
(i) Ansoff's growth vector matrix
(ii) Boston Consulting Group matrix
(iii) Porter's Five Forces model
(j) Comment on the benefits and
difficulties of benchmarking
performance with best practice
organisations
(k) Explain how risk and uncertainty
play an especially important role in
long term strategic planning that
relies upon forecasts of exogenous
variables
(l) Explain aspects of strategic
management accounting in the
context of multinational companies
19 Budgeting and Budgetary Control I
(a) Describe the internal and external
sources of planning information for
an organisation
(b) List the information used in the
preparation of the master budget
and in its functional components
(c) Contrast the information used in the
operation of zero based budgeting
and incremental budgeting
(d) Explain and illustrate the use of
budgeting as a planning aid in the
coordination of business activity
(e) Explain and illustrate the relevance
of budgeting in the coordination of
business activities
(f) Explain and quantify the application
of positive and negative feedback in
the operation of budgetary control
(g) Explain and quantify the application
PAGE 7
Performance Management (Continued)
of feed-forward control in the
operation of budgeting
20 Budgeting and Budgetary Control II
(a) Identify quantitative aids which
may be used in budgetary planning
and control
(b) Discuss and evaluate methods for
the analysis of costs into fixed and
variable components
(c) Give examples to demonstrate the
use of forecasting techniques in the
budgetary planning process
(d) Explain the use of forecasting
techniques in the budgetary planning
process
(e) Describe the use of learning curve
theory in budgetary planning and
control
(f) Implement learning curve theory
(g) Identify factors which may cause
uncertainty in the setting of budgets
and in the budgetary control process
(h) Identify the effects of flexible
budgeting in reducing uncertainty in
budgeting
(i) Illustrate the use of probabilities in
budgetary planning and comment on
the relevance of the information thus
obtained
(j) Explain the use of computer based
models in accommodating
uncertainty in budgeting and in
promoting ‘what-if’ analysis
PAGE 8
21Budgeting and Budgetary Control III
(a) Identify the factors which affect
human behaviour in budgetary
planning and control
(b) Compare and contrast ways in which
alternative management styles may
affect the operation of budgetary
planning and control systems
(c) Explain budgeting as a bargaining
process between people
(d) Explain the conflict between
personal and corporate aspiration
and its impact on budgeting
(e) Explain the application of
contingency theory to the budgeting
process
(f) Discuss the impact of political,
social, economic and technological
change on budgeting
(g) Critically review the use of budgetary
planning and control
(h) Enumerate and evaluate the
strengths and weaknesses of
alternative budget models such as
fixed and flexible, rolling, activity
based, zero based and incremental
(i) Identify the effects on staff and
management of the operation of
budgetary planning and control
(j) Identify and appraise current
developments in budgeting
22 Short Run Decisions I
(a) Distinguish between relevant and
irrelevant information using
appropriate criteria
(b) Identify cost classification(s) in
decision making
(c) Explain how quantitative and
qualitative information is used in
decision making
(d) Evaluate and assess the frequency,
timing, format, and degree of
accuracy in the provision of decision
making information
(e) Describe the basic decision making
cycle for business decisions
(f) Classify problems for the purpose of
modelling into simple, complex and
dynamic problems
(g) Explain the relevance of endogenous
and exogenous variables, policies
and controls, performance measures
and intermediate variables in model
building
(h) Explain the nature of CVP analysis
and name planning and decision
making situations in which it may be
used
(i) Compare the accounting and
economic models of CVP analysis
(j) Explain the assumptions of linearity
and the principle of relevant range in
the CVP model
(k) Prepare breakeven charts and profit-
volume charts and interpret the
information contained within each,
including multi-product situations
(l) Comment on the limitations of CVP
analysis for planning and decision
making including multi-product
situations

23 Short Run Decisions II
(a) Explain the use of avoidable cost,
incremental cost, marginal cost and
variable cost in decision making
(b) Describe the relationship between
fixed cost and the time horizon used
in a decision situation
(c) Explain how opportunity cost is used
in making decisions
(d) Identify and calculate relevant costs
for specific decision situations from
given data
(e) Explain the meaning of throughput
accounting and its use in decision
making
(f) Explain and illustrate the impact of
limiting factors in decision making
(g) Solve problems involving changes in
product mix, discontinuance of
products or departments
(h) Explain and demonstrate activity-
based customer profitability analysis
(i) Make decisions as to whether to
further process a product before sale
using relevant costs and revenues
(j) Use relevant costs and revenues in
decisions relating to the operation of
internal service departments or the
use of external services
24 Pricing I
(a) Identify and discuss market
situations which influence the
pricing policy adopted by an
organisation
(b) Explain and discuss the variables
(including price) which influence
Performance Management (Continued)
demand for a product or service
(c) Explain the price elasticity of demand
(d) Manipulate data in order to
determine an optimum price/output
level
(e) Calculate prices using full cost and
marginal cost as the pricing base
(f) Compare the use of full cost pricing
and marginal cost pricing as
planning and decision-making aids
25 Pricing II
(a) Calculate prices using activity based
costing in the estimation of the cost
element
(b) Contrast and discuss the
implications of prices using the
activity based costing technique with
those using volume related methods
in assigning costs to products
(c) Take informed pricing decisions in
the context of special orders and
new products
(d) Discuss pricing policy in the context
of skimming, penetration and
differential pricing
(e) Explain the problems of pricing in
the context of short life products
(f) Explain the operation of target
pricing in achieving a desired market
share
26 Risk and Uncertainty
(a) Define and distinguish between
uncertainty and risk preference
(b) Explain ways in which uncertainty
may be allowed for by using
conservatism and worst/most likely/
best outcome estimates
(c) Explain the use of sensitivity
analysis in decision situations
(d) Explain the use of probability
estimates and the calculation of
expected value
(e) Explain and illustrate the use of
maximin, maximax and minimax
regrets techniques in decision
making
(f) Describe the structure and use of
decision trees
(g) Apply joint probabilities in decision
tree analysis
(h) Illustrate the use of decision tree
analysis in assessing the range of
outcomes and the cumulative
probabilities of each outcome
27 Transfer Pricing I
(a) Describe the organisation structure in
which transfer pricing may be
required
(b) Explain divisional autonomy,
divisional performance measurement
and corporate profit maximisation
and their link with transfer pricing
(c) Formulate the “general rule” for
transfer pricing and explain its
application
(d) Describe, illustrate and evaluate the
use of market price as the transfer
price
PAGE 9
Performance Management (Continued)
(e) Assess where an adjusted market
price will be appropriate for
transfer business
(f) Assess the impact of market price
methods on divisional autonomy,
performance measurement and
corporate profit maximisation
(g) Calculate an appropriate transfer
price from given data
28 Transfer Pricing II
(a) Describe the alternative cost based
approaches to transfer pricing
(b) Identify the circumstances in which
marginal cost should be used as the
transfer price and determine its
impact on divisional autonomy,
performance measurement and
corporate profit maximisation
(c) Illustrate methods by which a share
of fixed costs may be included in the
transfer price
(d) Comment on these methods and
their impact on divisional autonomy,
performance measurement and
corporate profit maximisation
(e) Discuss the advantages which may
be claimed for the use of standard
cost rather than actual cost when
setting transfer prices
(f) Explain the relevance of opportunity
cost in transfer pricing
(g) List the information which must be
centrally available in order that the
profit maximising transfer policy may
be implemented between divisions
PAGE 10
where intermediate products are in present value and residual income
short supply where annuity depreciation is used
(h) Illustrate the formulation of the in the residual income calculations
quantitative model for a range of (e) Compare and contrast net present
limiting factors from which the value with payback and accounting
corporate profit maximising rate of return in the evaluation of
transfer policy may be calculated investment opportunities.
(i) Analyse the concept of shadow
price in setting transfer prices for
intermediate products that are in
short supply
(j) Illustrate the corporate maximising
transfer policy where a single
intermediate resource is in short
supply and a limited external
source is available and explain the
information which must be available
centrally in order that the transfer
policy may be formulated
(k) Explain and demonstrate the issues
that require consideration when
setting transfer prices in
multinational companies
29 Long Term Decisions
(a) Define and illustrate the concepts of
net present value and internal rate of
return
(b) Calculate the net present value and
internal rate of return in the
evaluation of an investment
opportunity
(c) Explain the use of DCF techniques
for decisions involving cash outlays
over long periods
(d) Explain the relationship between net