Examiner’s report

Performance Management (PM)

July 2020
The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.
This report should be used in conjunction with the published March/June 2020 sample exam. Due
to the COVID-19 pandemic, the June 2020 exam was postponed and sat in July 2020. This report
labelled July 2020 refers to this exam.

General comments

The Performance Management (PM) exam is offered as a computer-based exam (CBE). The
model of delivery for the CBE exam means that candidates do not all receive the same set of
questions. In this report, the examining team share their observations from the marking process to
highlight strengths and weaknesses in candidates’ performance, and to offer constructive advice
for future candidates.

• Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at the key challenge areas for this
section in the exam.
• Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A

Here are TWO Section A questions which proved to be particularly difficult for candidates.

Example 1

Which of the following statements is NOT true about a sales mix variance?
Options:

A. If actual sales revenues from two products are in the same ratio as the budgeted sales
revenues there is no measurable sales mix variance
B. If all products have the same budgeted margin there is no measurable sales mix variance
C. If actual sales volumes are in the same ratio as the budgeted sales volumes there is no
measurable sales mix variance
D. If the actual sales volumes of all products are 10% above the budgeted sales volumes, there
is no measurable sales mix variance

Examiner’s report – PM July 2020

What does this test?

✓ The understanding of the sales mix variance.

What is the correct answer?

✓ The correct answer is A.

The first thing to notice about this question is that it asks which of the four options is NOT true. The
best way to answer this type of question is to go through all of the options and identify the three
statements which are true – the remaining one false and is the correct answer.

This question relies on knowledge of the sales mix variance. The sales mix variance is calculated
as the difference between the actual quantities sold in the actual mix and the actual quantities sold
in the standard mix, multiplied by the standard margin.

To have a measurable sales mix variance, the standard margins of the products must be different,
and the actual proportions of units sold have to be different from the standard proportions.

If all products have the same budgeted margin there is no measurable sales mix variance,
therefore option B is true.

If actual sales volumes are in the same ratio as the budgeted sales volumes, there is no
measurable sales mix variance, therefore option C is true.

If the actual sales volumes of all products are 10% above the budgeted sales volumes, there is no
measurable sales mix variance. Here, there is no change in the proportion of units sold, therefore
there is no sales mix variance. Option D is true.

Option A is not true as it talks about sales revenues and not sales units. Sales mix variance is
based on the difference in sales volume as a result of changes in the proportions of each product
sold, not the sales revenue. The proportion of sales revenue can stay the same, but this can hide a
change in the volume of units sold. Option A is the correct answer.

Example 2

Lauda Co has two divisions with the following results in the table below:

Division A Division B
$ million $ million
Sales revenue 1,000 1,240
Variable costs 400 500
Contribution 600 740
Divisional fixed costs 650 600

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Allocated Head Office costs 50 150
Divisional net loss (100) (10)

If a division is shut down, then Lauda Co will avoid all the division's specific costs and half of the
Head Office costs allocated to the division.

What will be the revised total divisional net loss if Lauda Co chooses to shut down Division
A?

$ ____________ million

What does this test?

✓ Relevant costs in a shut down decision

What is the correct answer?

✓ The correct answer is $35m.

Go through each of the figures in Division A and decide how they will be affected if the division is
shut down.

Division A
$ million
Lost revenue (1,000)
Saved variable costs 400
Saved divisional fixed costs 650
Saved allocated Head Office costs (50%) 25
Overall saving 75

The current total divisional net loss is $110m ($100m + $10m). If Division A is shut down there will
be an overall saving of $75m, therefore the revised total divisional net loss will be $110m - $75m =
$35m.

It is important to read the requirements of the question carefully. A common mistake was to give
the answer as $75m, which showed that candidates did not fully read the requirements.

Section B

Section B tests candidates’ knowledge on a number of topics in more detail than section A, with
three case questions containing five two-mark objective test questions. The range of topics
covered in the July 2020 examination was:

• Learning curve

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 • Activity based costing
• Relevant costing
• CVP analysis
• Mix and yield variance
• Target costing

A few key points that came out of section B were:

• Read the case scenario and requirements very carefully. This goes for the whole exam, but
any objective test question is ‘all or nothing’ – if a candidate misreads the requirement or
misses a vital piece of information from the scenario and get the answer incorrect, they
score zero for that question.
• Close reading is also important for identifying the instructions in the question on how to
round answers. Please take care with Fill in the Blank questions which have rounding
instructions as candidates should ensure that the answer input meets those rules. See
Example 1 under Section A above.
• Cover the whole syllabus. The list above should highlight this – PM has a large syllabus
which can seem daunting, but it is essential to have a broad knowledge. If, for example, a
section B OT case covering variances comes up and a candidate hasn’t covered this in
their studies, the 10 marks available are left to chance.
• Be able to apply knowledge of theories/techniques to the scenario given, as in the OT case
questions these areas will often be examined in the context of the case. It is important that
candidates are able to apply the logic of a concept or theory to a problem and so they need
to understand the method and why they are doing the calculations and not just focus on
how to do the calculations.

Section C

Candidates were presented with questions drawn from the areas of:

- Performance management
- Variance analysis and budgeting
- Pricing

Budgeting and variance analysis

There were three questions covering this subject area in the July exam diet. The first of these was
focussed more upon the completion and interpretation of budgetary control statements and
therefore examining the total variances that are recorded in such statements. The second was
focussed on variance calculation and interpretation in the context of material prices and quantities.
The third focussed on activity-based budgeting. Useful published articles covering these topics can
be found on the ACCA’s website through the following links:

https://www.accaglobal.com/us/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/technical-articles/budgeting1.html

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https://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/technical-articles/mat-yield.html

https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/technical-articles/budgeting3.html

As regards the first of these questions involving variances and budgetary control statements,
candidates tend to either know what is needed, and use the spreadsheet effectively to produce
accurate calculations, or have little idea how to complete it.

- For those that find themselves somewhere in the middle, common errors on the numbers often
include:
- Not being able to deal with any semi-variable or stepped fixed costs.
- Not providing signage for their variances.
- Not providing workings or using the formulae in the spreadsheet to show the calculation -
thus losing potential marks.

When it comes to the written parts of such questions, a common problem is still that candidates
answer the question that they think they are being asked rather than what they are actually being
asked.

Regarding mix and yield variances, questions on this area could be similar to the published
September/December 2018 question, ‘Kappa Co’, although the written elements could focus on a
variety of topics, including assessing actual performance using mix and yield variances.

Candidates should note that when they are asked to explain what, for example, a mix variance is,
they must mention how the variance is valued i.e. at standard cost. It is not enough to simply
restate the quantities in the formula. ‘Explain’ means more than just restate a formula as well, even
if the explanation required is only brief.

As is often the case in variance questions, the most common error in the calculations is failing to
flex the standard quantities to the actual production level. This always occurs on questions which
examine quantity type variances. The whole basis of variance analysis relies on assessing
managers for costs which they can control. Therefore, it is never useful to compare any costs to
what the costs would have been if the original production levels had remained the same as
budgeted. Such calculations provide no insight on performance.

The third question on this area covered activity-based budgeting. It was a balance of some
straight-forward knowledge requirements testing activity-based budgeting and some basic
calculations. It was really good to see that candidates’ performance in this area has really
improved dramatically, performing particularly well on the interpretive part of this question.
Candidates that are less comfortable with this area should note that using activities as a basis for
budgeting is very similar, easier really, than using them for costing. Instead of working out
individual product costs, questions of this nature could focus on calculating production
requirements and comparing these to the resources available. For example, a question might ask
candidates to calculate the number of machine set-ups that are possible each week within a
business and then compare this to the number required to produce a particular number of each
product each week.

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Performance management in a private sector context
Questions in this area include ones like the published ‘Jungle Co’ in September 2016’s exam.

Overall, candidates tend to perform well in terms of calculations, with many preparing a selection of
financial ratios for both years, where this is required. Candidates need to consider accurately
rounding their answers, however, and ensuring the level of rounding enables effective comparisons
and comments; some candidates tend to over-round.

When it comes to non-financial performance ratios, candidates often seem to be less confident
with their calculations. Please note that marks will not generally be awarded for simply subtracting
one number from another because such calculations rarely add value to the discussion.

As regards the discursive parts of questions in this area, discussion needs to add value to the
information provided and the recognition of an increase or a decrease in a percentage should be
accompanied by a justification or demonstration, using information provided in the scenario, as to
why this change occurred. For example, a candidate might recognise that sales in a particular area
of the business have increased from year-to-year by 10%, which could look good on the face of it.
However, if the scenario states that growth in the market is 25% and the candidate does not
compare their growth rate to this, they will not score the discussion marks.

Performance management in a public sector or Not for Profit Organisation context

These questions will sometimes focus on the three Es: economy, efficiency and effectiveness. The
knowledge part of such questions requiring, for example, an explanation of what these terms
means is usually well-answered. However, problems sometimes arise in the application part of
such questions when candidates expect to see a certain requirement, and therefore answer the
requirement they are expecting, rather than the requirement that is there. It is important to read the
actual requirement in any question properly and keep referring back to it throughout, to be sure of
answering what is actually being asked. Also, if any requirement asks for the answer to be
structured using certain headings, it is critical that those headings are used in order to score the
maximum number of marks.

Performance management in a divisional context

As regards divisional performance management, the calculations in these types of questions often
focus on measures such as the return on investment (ROI) and residual income (RI). To see an
example of one of these types of questions, please see the published question ‘Sports Co’ from
September-December 2017.
Whilst in that particular question annual profit figures were given; sometimes only monthly figures
are given and the candidate is then asked to calculate an ‘annualised’ return on investment figure.
Please note that this means that the profit figure needs to be multiplied by twelve and often
candidates do not do this. Also, if the question asks for the return on investment or residual income

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of a particular investment, this means that the rest of the company’s profits and assets should be
excluded from these calculations.
When it comes to discussion on divisional performance management, questions sometimes ask a
requirement that requires consideration of the use of ROI/RI for a particular purpose, for example,
for comparing performance, as in requirement b(ii) of Sports Co. It is important to note that this
means that any discussion that focuses on, for example, the fact that ROI may lead to the wrong
investment decision being made is NOT answering the requirement and will not be awarded
marks. The focus in this type of requirement should be, for example, on the fact that different
accounting policies may be used which will make figures incomparable between two divisions.

Pricing

The pricing decision was tested – both as a calculation and discussion. As has been the case in
the past, responses were mixed on the calculations. The MR=MC optimum price method is one
that is regularly examined in Section A or B; however, it can be incorporated into longer questions.
Although it can seem daunting to less mathematically minded candidates, the steps required can
be learned and practiced, and any fears regarding the algebra can be overcome well in advance of
the exam.

On the discursive side, it was clear that most candidates were familiar with the different pricing
strategies available, and able to discuss the appropriateness of these in different situations.

There are many resources available on the ACCA’s website to help practice – for example the
published question from September-December’s exam 2017’s paper ‘TR Co’.

Exam technique

As always, exam technique is an important aspect of success in any exam. Throughout this report
the importance of reading and interpreting requirements very carefully has been reiterated many
times; failure to do this is often the cause of poor scores. The tendency for some candidates is to
answer the question that they want to get rather than answering the question which they have
been given.

Candidates should ensure that they have read all the requirements and noted the mark allocation
for each requirement; this is especially important in CBE as the requirements might be split over
several screens. Each requirement should be properly broken down so that it can be established
what is being asked. A recommended approach to this would be that at the start of an answer,
candidates should do a small plan in which they have broken down a requirement and asked
themselves how many things they are being asked to do, making sure that they consider all
aspects of the requirement.

It is easier to be more focused when answering a question using word processing and
spreadsheets, as the mere fact that what has been written or calculated can be seen more clearly,
which helps candidates to avoid the temptation to discuss things which are irrelevant. Also, if

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candidates realise that they have missed a point out from an earlier part of a question, it is easier
to go back and insert it in the correct place.

Finally, please remember to use the spreadsheet functionality available. Totals should be
calculated by inserting formulae rather than typing in the number.

Guidance and Learning Support resources to help you succeed in your exam

Preparing for the PM examination may appear daunting but there are many support resources
available to help candidates. There are technical articles available on many of the topics discussed
in this report and all the past exams referred to (and many more) are available on ACCA’s website.
Candidates should refer to these regularly when studying for their exams. These resources are
provided to help candidates develop confidence in their knowledge and understanding of PM.

http://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5.html

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