Principles of ABB

The aim of activity-based budgeting (ABB) is to ensure that the

amount of resources available accurately reflects the activities
required by an organisation's expected production and sales
volumes.
ABB requires an organisation to take action to adjust the level of
resources available to match the projected production and sales
requirements.
ABB aims to eliminate activities which are not value-adding. This is
an important area of difference between ABB and incremental
budgeting, because looking to remove activities which do not add
value means ABB has an inherent focus on increasing efficiency
which incremental budgeting does not have.
Another key principle of ABB is that organisations should control the
causes of costs (cost drivers), rather than the costs themselves. The
logic for this is that activities drive costs.
Therefore, if an organisation understands and manages the
activities better, this should help it to reduce the costs resulting
from those processes.
However, this understanding is not fully exploited unless
management can use it to make changes in the way the
organisation goes about its business. The most significant of the
cost-beneficial changes can only be made if incorporated into
budgets through discussion and performance review
Discussion of the impact of spare
capacity/shortage on production - one mark per
relevant point
Production machine time
The production line appears to be operating close to its current
capacity, with only five production machine hours 'spare' each
month.
Having a small amount of spare capacity each month would appear
to be prudent, in case there are any unexpected disruptions (for
example, defects in the process which require production to be
halted whilst they are fixed).
As such, the balance between demand and capacity appears to be
well-matched, with little scope to make any further efficiencies.
Quality control inspectors

The 'budgeted' resource requirements identify an important

resource shortage in relation to quality control inspections. This is
because having only two quality control inspectors does not appear
sufficient to carry out the level of checks required. The resource
budget suggests there is a shortage of 37.5 hours per month,
equivalent to 25% of one full-time inspector's monthly hours.
If the inspectors have to rush to try to complete inspections in less
than the 2.5 hours that each should take, this is likely to mean that
the inspections are not as thorough as they should be. If inspectors
are rushing their inspections and consequently fail to identify
substandard shoes, this could be a factor in the recent increase in
the number of complaints.
However, the extent of the shortage does not seem to be large
enough to justify recruiting an additional inspector on a full-time
basis. Therefore, the division should consider other alternatives,
which could include:
• Employing an additional inspector on a part-time basis.
However, this would increase cost, which would seem to contradict
the FD's desire to increase profitability.
• Using inspectors from other parts of the business if they have
any spare capacity.
• Assessing if the checking process itself can be re-designed, to
make it quicker, without compromising quality.
Shipping administrators
By contrast, there appears to be a significant level of spare capacity
among the shipping administrators. 45 hours per month is almost
one-third of one administrator's monthly hours.
This level of spare capacity or idle time indicates inefficiency. If
there are similar activities with spare capacity across the company,
this would support the FD's belief that the company is not operating
as efficiently as it could.
However, the surplus capacity does not appear so high that the
division could afford to only have one shipping administrator. It is
possible one of the administrators would be prepared to work part
time thereby reducing wage costs. Alternatively, it may be possible
for the administrators to assist other areas of the business.
Discuss whether or not including fixed costs in a
transfer price is a sensible policy.

Fixed costs can be accounted for in a number of ways. As such,

including the fixed cost within the transfer price could lead to
manipulation of overhead treatment. For example, employing
absorption costing or activity-based costing.
Including the fived costs in the transfer price will benefit the
manufacturer, who can ensure that all costs incurred during the
manufacturing process are covered. Assuming the fixed overhead
absorption calculations are accurate, the manufacturing division
should be guaranteed a profit.
The main problem with this pricing strategy is fixed costs are
effectively treated as variable costs from the perspective of the
stores, as they are included within the variable buy-in price.
This could lead to poor decision-making from a group perspective.

Discuss whether the retail stores should be

allowed to buy in from outside suppliers if the
prices are cheaper than those charged by Nail.
Manogers of the retail stores are likely to be more motivated if they
are given freedom in which to operate and are able to purchase
from outside suppliers if prices are cheaper.
In addition, the performance of store managers will be easier to
assess in an environment in which managers are able to control
greater elements of the business.
Price differences are perhaps to be expected, given that products
are rarely identical. There is a risk that store managers purchase
cheaper shears of inferior quality to those produced internally
(whilst claiming they are comparable) in order to achieve a greater
margin. Such scenarios jeopardise the reputation of the brand for
the benefit of individual stores.
Allowing store managers to purchase from cheaper suppliers could
result in Hammer losing control of its business as retail stores could
potentially stock different shears and other products from a range of
different suppliers. On the other hand, flexibility is increased and
profits could increase as store managers find bargain prices.
In a competitive market, it is unlikely that suppliers will offer
products significantly cheaper to Hammer for a sustained period of
time. Any cheap prices accessed by store managers are likely to be
the result of a sale or special promotion. If this is the case, it would
not be advisable for Hammer to grant store managers the power to
purchase from cheaper external suppliers in the long term.
Overall profitability of the company is key. The retail stores and Nail
should be working in a way that is best for the company overall. This
is known as goal congruence.
Explain the problem for not for profit
organisation

The primary objective of commercial organisations is to maximise

the wealth they generate for their owners (shareholders). In
contrast, the objectives of NFPO's are often non-financial and reflect
the interests which the various stakeholders have in an organisation.
These stakeholders often have varying interests in the organisation,
meaning that the organisation will also have a number of different
objectives.
These conflicts may make it difficult to set clear objectives on which
all stakeholders agree.
Consequently, the organisation's management will face a dilemma
when trying to decide which objectives are most important and
therefore prioritised in the course of strategic planning and decision-
making. This can be a particular problem when different objectives
make different demands on resources or require different courses of
action.
Another problem is that these organisations often do not generate
revenue but simply have a fixed budget for spending which they
have to keep to and are often subject to strong external influences
which will influence the setting of objectives, eg political factors.

(b) Performance assessment of tonford school

Note. This solution is longer than one which candidates would need
to produce to score the marks available. However, it is intended to
illustrate the range of relevant points candidates could have
identified from the scenario, and therefore the number of marks
potentially available in this question.
Objective 1 - Strive for continuous improvement in performance
standards.
The percentage of pupils achieving the target grades is not only
below the national target, it is also lower than Tonford School
achieved five years ago. As such, the school's does not appear to be
achieving continuous improvement.(Not able to Achieve their target)
However, exam results alone are not necessarily an accurate
indicator of a school's performance. For example, exam results will
reflect the underlying ability of the pupils, as well as the quality of
the teaching they receive.
There is a danger that if Tonford School focuses only on exam
results it will become 'selective' and will only accept the most
academically gifted pupils. However, such an approach would
contradict the objective to provide 'all children' with access to high
quality education, regardless of their background.
Pupil progress may be a more valuable measure than exam results,
because the extent to which pupils' performance improves provides
an indication of the value added by the school,
rather than pupils' inherent ability.
Given the typical range of scores, Tonford School's performance in
this respect (+0.4) is significantly above the national target (+0.25)
and is at the upper end of the range.
The fact that pupil numbers have increased seems likely to suggest
that the school is becoming more popular with parents. Given that
parents can choose which school to select for their children, the
increase in pupil numbers is likely to reflect a perception among
parents that the school is performing well.

The results of the recent inspection visit would seem likely to

reinforce this perception.
Note. An alternative interpretation could be that all the other
schools in the area are already full, and Tonford has spare capacity,
which is why its pupil numbers increased. However, such an
explanation seems less likely given the context of the other
performance indicators.
Objective 2 - Provide a supportive learning environment, which
encourages a high standard of pupil achievement. (provide better
environment)
The pupil progress' score suggests the school is providing children
with a high quality education and a learning environment which
encourages a high standard of pupil achievement. The fact that
Tonford School's 20X7 score is higher than its 20X2 score also
suggests an improvement in the learning environment (although
here again, to some extent the scores may reflect pupils aptitude for
learning as well as the efforts of the school.
The school's inspection grade is higher than five years ago, and is
above the national target, which suggests the school is improving,
and is performing relatively well. Although there is no indication that
the DoE gives any more weighting to any single aspect of the
performance data compared to other areas, the inspection grades
could potentially be the most important indicator of how well as
school is performing.
However, although Tonford School's grading is "Very good' this
suggests there is still room for further improvement, because the
school did not achieve the top grade: 'Excellent.
Tonford School's teacher/pupil ratio has remained essentially the
same over the last five years
- at 19 pupils per teacher, which is favourable compared to the
national target of 22 pupils per teacher.
20X7: 662 pupils/35 members of teaching staff = 18.9 pupils per
member of staff
20X2: 627 pupils/33 members of teaching staff = 19 pupils per
member of staff
Having a low teacher pupil ratio is likely to be beneficial because it
will allow teachers to give more time to each pupil, thereby
providing a supportive learning environment.
Given that the school is funded by the DoE, it seems likely that the
DoE would have had to authorise the budget needed to recruit the
additional teachers. On this basis, the fact that Tonford School has
been able to increase the number of teachers it employs suggests
that the DoE is pleased with the way it is performing, and therefore
authorised the additional budget.
Objective 3 - Ensure pupils are prepared for adult life and have the
skills and character necessary to contribute to society and the
economy.
The inspector has highlighted Tonford School's strong sense of
community values and citizenship'. This suggests the school is
performing well in relation to the objective of preparing students for
adult life, and developing their social skills.
Exam results and the 'pupil progress' scores in compulsory subjects
indicate that the school is for adulthood.
making a significant contribution in providing pupils with core
knowledge and skills necessary
location or background.
Objective 4 - Provide all children with access to high quality
education, regardless of their The inspector's report has highlighted
that pupils at Tonford School come from diverse backgrounds' and
awarded the school an improved grading over the last five years.
Coupled with 'pupil progress' scores, this indicates that the school is
fulfilling the objective to provide children which access to high
quality education, regardless of their background.

Explain difficulties of qualitative objectives

(c) In order to assess any organisation's performance against its
objectives, performance information needs to be available, and, in
many cases, this information is obtained by measuring aspects of
performance relevant to the objectives.
Difficulties of measurement
However, one of the inherent difficulties with qualitative objectives
compared to quantifiable objectives is how to measure them.
For example, exam success rate (% of pupils achieving 5 grades A-
C) is quantifiable, and relatively easy to measure, using exam
results data. However, trying to measure the overall quality of
education in a school or whether a school provides a 'supportive
learning environment' is potentially much more difficult, because
there aren't any specific outputs (eg results) which can be
measured.
So, while exam results and pupil progress metrics are indicators of
pupil achievement in schools - which can be measured - assessing
them only provides a partial assessment of whether schools are
providing children with 'access to high quality education' or whether
they are providing 'supportive learning environment which
encourages a high standard of pupil achievement'.
A related problem is that the aspects of performance which are
monitored end up being the ones where performance can most
easily be measured, rather than those which are most important in
ensuring that the objectives are achieved.
The DoE has recognised these issues though and acknowledged the
need for inspectors to visit schools on a regular basis, to gain an
insight into the aspects of performance which cannot be reflected in
statistical measures.
Subjectivity
Another major problem with assessing qualitative aspects of
performance is that they tend to be subjective. For example, people
are likely to have different expectations of what constitutes a high
quality of education, a supportive learning environment, or the
extent to which students are prepared for adult life.
In this respect, one of the key things the DoE has to ensure is that
its inspectors are consistent in their grading of schools. For example,
if one inspector rates a school as 'Good', but another inspector
would have rated the same school as 'Excellent', this inconsistency
would significantly reduce the validity of the performance data
which is produced.

Building block model in service business

Fitzgerald and Moon's building block model provides a framework for
service companies to design performance measurement systems
which are linked to management rewards. It provides a system of
targets (standards) which will motivate managers to improve
business performance.
There are three building blocks in the model. The first block gives six
dimensions, meaning the aspects of performance which must be
measured in a service business. These are:
• Financial performance, for example, profitability and growth.
• Competitiveness which measures an organisation's standing
against its competition.
• Quality of the service offered.
• Flexibility of the organisation in providing the service.
• Innovation which addresses the ability to introduce new
processes and services.
• Resource utilisation which measures productivity and
efficiency.
These six dimensions should be split into results (financial
performance and competitiveness) which are the outcomes of past
decisions and determinants (quality, flexibility, innovation and
resource utilisation) which drive future performance and results.
The second block relates to setting standards. To motivate
managers, it is important that they take ownership of standards
(that is accept or internalise them) and the standards appear
achievable and equitable (fair).
The third block relates to the rewards managers are offered for
achieving the standards.
These must have clarity (the performance measurement scheme
must be understood by managers), they must be motivating
(rewards must be attractive) and controllable (not subject to
influences outside the manager's control).
Performance review of Best night co

Gross room revenue - Best Night's 'gross' room revenue based on

standard room rates has increased by 6-6% in 20X7, which reflects
the higher occupancy rates (74% v 72%) and the increase in
standard room rates ($140 v $135 per night) •
However, this gives a rather misleading impression of how well the
hotels have performed in the year to 20X7.
Revenue after discounts - Revenue from room sales, adjusted for
discounts or rate reductions offered, has actually only increased 1-
8%, and that reflects the significant 45% increase in discounts or
reductions offered:

Faced with the declining number of business customers, and

consequently the prospect of lower occupancy rates, managers may
have decided to offer lower room rates to try to retain as many of
their existing business customers as possible, or to try to attract
additional leisure customers.
Although occupancy rates increased by 2•8% (from 72% to 74%
which now exceeds the budgeted level), revenue, net of discounts,
only increased by 1-8%. This means that revenue per room per night
after discounts in 20X7 was lower than in 20X6, despite the
standard rate being higher ($140 v $135).
In the context of tough market conditions, the decision to increase
the standard room rate for 20X7 appears rather optimistic. Although
the hotel managers have managed to achieve occupancy rates
higher than budget, they have only managed to do so by reducing
room rates.
Additional revenue - One of the potential benefits of increased
occupancy rates, even if guests are paying less per room per night,
is that they will generate additional revenue from food and drink
sales. This appears to be the case because additional revenues have
increased by approximately 5%.
Total revenue - In total, revenue (net of discounts) has increased
2•4% in 20X7 v 20X6. Given the tough competitive environment,
Best Night Co could view any increase in revenues as positive.
Moreover, provided the revenue achieved from selling the room is
greater than the variable cost of providing it, then increasing
occupancy levels should increase the hotels' contribution to profit.
Operating profit - However, despite the increase in revenue,
operating profits have fallen by SO-3m (1-3% between 20X7 and
20X6, due to a sizeable increase in operating costs.
There is no detail about Best Night Co's operating costs, for
example, the split between fixed and variable costs. However, in an
increasingly competitive market, cost control is likely to be very
important. As such, the $3 million (3-3%) increase in operating costs
between 20X6 and 20X7 is potentially a cause for concern, and the
reasons for the increase should be investigated further.
However, when looking to reduce costs, it will be very important to
do so in a way which does not compromise customer satisfaction.
More generally, Best Night Co needs to avoid cutting expenditure in
areas which will have a detrimental impact on customer satisfaction
ratings, for example, not replacing mattresses even though they are
becoming uncomfortable to sleep on. Operating profit margin - The
increase in costs has also led to a fall in operating profit margin from
20-8% to 20•0%.
It is perhaps more instructive to look at the margin based on
standard room rates per night, thereby reflecting the impact of the
discounts offered as well as the increase in costs. On this basis, the
margin falls slightly more: from 18-9% to 17•6%.

ROCE - This reduced profitability is also reflected in the company's

return on capital employed which has fallen slightly from 62%
($24•2m/S39•1m) to 60-5% ($23•9m/S39-5m). This suggests that
the value which Best Night Co is generating from its assets is falling.
The decline in ROCE could be a particular concern given the relative
lack of capital investment in the hotels recently.
Capital investment will increase the cost of Best Night Co's non-
current assets, thereby reducing ROCE for any given level of profit.
Customer satisfaction scores
Although the reduction in profitability should be a concern for Best
Night Co, the reduction in customer satisfaction scores should
potentially be seen as a greater cause for concern. The scores
suggest that, in the space of one year, Best Night Co hotels have
gone from being in the top 10% of hotels to only just being in the
top 25%. This is a significant decline in one year, and one which
Best Night Co cannot afford to continue.
Best Night Co prides itself on the comfort of its rooms and the level
of service it offers its guests.
Both of these factors are likely to be important considerations for
people when considering whether or not to stay in a Best Night Co
hotel. Therefore, falling customer satisfactions levels could be seen
as an indication that fewer existing customers will stay at a Best
Night Co hotel in future - thereby threatening occupancy rates, and
prices, in future.
Moreover, the scores suggest that the decision to defer the
refurbishment programme is likely to have a detrimental impact on
future performance.
Jump
• It is essential that the targets set are based on elements of
the job that the local managers are able to control. Targets that are
based on elements that local managers are unable to influence will
be seen as pointless and unrealistic and could demotivate staff at
the local manager level.Staff on timeIndividual members of staff
may be late for work as a result of external factors, including home
pressures or delayed public transport. Such factors cannot be
controlled by the local manager. However if such problems occur on
a regular basis to certain members of staff, the local manager does
have the power to amend their contract of employment.The way in
which the local manager manages staff will impact upon how
motivated they are to work and to arrive on time. The local manager
has the power to devise shift patterns that best suit their team and
can reward them accordingly, through their ability to amend
employment contracts.In summary, lateness to work can be
controlled by the local manager.Personal training sessionsThe local
manager has control over prices charged to customers. If demand
for personal training sessions falls they can reduce prices or make
special offers in a bid to increase customer numbers.A number of
potential customers may view personal training sessions as a luxury,
particularly in the current economic climate. Also, the personal
training market is particularly competitive, which may make it
difficult for the local managers to increase sales. Local managers
can take steps to improve the service offered by the sports club but
any significant expenditure requires approval at Board level.In
summary, the local manager can only partly control the number of
personal training sessions that are booked.Member use of facilities
The local manager controls the staff and hence the level of customer
service. It is likely that a high level of customer service could
encourage some members to use the facilities more often.The local
manager also has the ability to influence member numbers by
adjusting membership prices.However, external factors such as work
pressures and level of health may prevent some members from
visiting the club as often as they would like.In summary, the local
manager can only partly control the number of member visits.
• Reduce pricesThe targets are largely volume-driven and
local managers have the power to adjust membership fees and
prices for personal training sessions. Local managers could therefore
reduce prices to ensure that they meet the targets and therefore
obtain their bonus. Such a scenario would harm Jump's overall
profitability.Recording of transactionsA local manager with access to
the accounting records could deliberately record visits to the club in
the incorrect period in order to ensure that they achieve a bonus.
For example, in Q2 the target for personal training sessions was not
met by five sessions. The manager could record the first five
transactions of Q3 in Q2 to ensure that they obtain an extra $400
bonus.
Building block model
Competitiveness
This ratio indicates whether MSC's services are attractive compared
to its competitors, which is important if it is going to survive in such
a competitive market.
It has performed substantially better than other OSC service centres
on average, having converted 67.9% of website hits into jobs,
compared to the 65% converted by other service centres. This is a
good result.
Financial performance
Gross profit margin is the preferred measure for financial
performance from the data presented. It shows the percentage of
revenue which exceeds the cost of goods sold.
MSC's gross profit margin is almost three percentage points higher
than the average, which is a good result. This could be partly
because they did relatively well on their new service pack sales
(note 4) but it is also likely to be because their ratio of senior
mechanics to junior mechanics is lower than the average, and junior
mechanics will invariably be paid less than
Quality of service
Quality is a key element of MSC's service to customers and if it is
poor, customers will not return.
Again, MSC has outperformed the other service centres on average
by 1-8 percentage points.
This could be because it has a higher ratio of senior mechanics to
junior mechanics than other service centres, so the quality of work is
probably better, hence the higher level of repeat customers.
Flexibility

The time taken to complete each job is important as many

customers will use MSC because they can sit and wait for the work
to be done, rather than having to hire a rental car for the day, for
example.
The comparison shows that MSC takes longer to complete a job than
the OSC average. This Is not really a good thing and is probably
because they have slightly less experienced staff on the whole, but
it could also be that they do a more thorough job than other service
centres. Given the fact that they have a higher level of return
customers than the average and they are graded 9 or 10 by their
customers (10 percentage points higher than the average), this is
presumably not viewed negatively by customers.
Resource utilisation
The key resource in a service company is its staff and so these
indicators measure how this resource is being utilised.
MSC's utilisation of its staff is lower than that of the other service
centres by $5,115 per mechanic. This clearly ties in with the fact
that the average time to complete a job is longer at MSC than other
service centres. However, given that they use a slightly less
experienced staff on average than other centres and the fact that
their gross margin is higher than average, this should not be viewed
too negatively.
Innovation
MSC wants to offer a wide variety of service packs to its customers
and needs to be innovative in packaging services up.
The 23.4% indicates that MSC is indeed innovative in their approach
to their customers' needs, offering an innovative mix of services.
MSC has really outperformed other service centres on this front,
generating a far larger part of its revenue by the introduction of new
service packs, which must have attracted customers. This is a really
strong performance.
(b) The standards block sets the target for the performance
indicators chosen for each of the dimensions. The targets must meet
three criteria - they must be achievable, fair and encourage
employees to take ownership. If the targets set do not meet these
criteria, then the performance of the organisation could suffer.
The rewards block ensures that employees are motivated to achieve
the standards. It also considers the properties of good reward
schemes which are that they should be clear, motivating and based
on controllable factors.
If standards and rewards are set appropriately, the staff will be
engaged and motivated and it is then more likely that the goals, ie
dimensions, of the organisation will be achieved.
Performance review of web co

Total sales revenue

Web Co's total sales revenue has increased 25% (W1) on Quarter 1
(Q1), from $2.2 million to $2.75 million. This is impressive given the
decision to give a $10 discount to all customers who spend over
$100. It is not possible to attribute the increase to any particular
change or incentive without analysing the performance indicators
below.
Net profit margin
The net profit margin has decreased from 25% to 16.7%. Net profit
was $550,000 in Q1 and $459,250 in Q2 (W2). If the profit margin
remained at 25%, net profit for Q2 would have been $687,500. Net
profit for Q2 is therefore $228,250 lower than it would have been.
This significant decrease is largely due to the fee of $200,000 paid
for an advert on the webpage of a well known fashion magazine. A
further $20,000 is attributable to the fee paid to the website
consultant.
The remaining $8,250 could be the costs of providing the free 'Fast
Track' delivery service.
Alternatively it could be the cost of offering a $10 discount to all
customers who spent more than $100. More information would be
required on how the discounts are accounted for (whether they are
included in cost of sales or netted off against sales revenue). Further
detail of the costs of providing the 'Fast Track' servicewould also be
useful.
Number of orders from customers/customers spending over $100
The number of orders received from customers has increased by
22%, from 40,636 in Q1 to 49,600 in Q2 (W3). This 22% increase is
in line with the 25% increase in sales revenue.
The number of customers spending more than $100 per visit has
increased by 37%, from 4,650 in Q1 to 6,390 in Q2. This increase is
likely to explain the 3% increase in sales revenue that is not due to
increased order numbers, depending on how the discounts are
accounted for.
Number of visits to website
The number of visits to the website has also increased significantly,
from 101,589 to 141,714 (39.5% (W4)). Of this increase, 28,201
(W5) can be attributed to visitors coming through the fashion
magazine's website. The remainder of the increase is likely to be
due to the work of the website consultant.
It is clear that both changes have been effective in increasing the
number of visitors to Web Co's online store. At a cost of $20,000, the
work of the web consultant represents excellent value for money.
However Web Co's sales are not really high enough to justify an
outlay of $200,000 for the web magazine advert, hence the
significant fall in net profit margin (detailed above).
Conversion rate - visitor to purchaser

The conversion rate has decreased by five percentage points, from

40% to 35%. This is to be expected, given the substantial increase in
visitors to the website as a result of the web magazine advert and
search engine optimisation.
Readers of the fashion magazine may have clicked on the advert
link out of curiosity and may return to the site and purchase
products at a later date.
Further information is required to confirm the above. For example,
the total number of visitors to purchasers' split into (i) visitors who
visited the site through the link on the online magazine, and (ii)
visitors who did not.
Website availability
Website availability has remained at 95%. This indicates that the
changes made by the IT department have not corrected the
problem(s).
Lack of availability may have lost Web Co a significant number of
sales. Further information is required to quantify the impact. For
example, the number of aborted purchases due to the website
becoming unavailable.
Subscribers to online newsletter
The number of subscribers has increased by 159%, from 4,600 to
11,900 (W6). This huge increase is most likely due to the free 'Fast
Track' delivery service offered to all subscribers.
As the fall in net profit has already been accounted for above, it
appears that Web Co has managed to offer this service without
incurring any extra cost.
Further information is required to establish whether the company's
view of subscribers is correct (that subscribers become customers
who place further orders). For example, has the number of repeat
customers increased?
Conclusion
In summary, Web Co performed well in Q2. With the exception of the
work performed by the IT department to make the website more
available, all other changes have increased sales and/or increased
subscribers to the online newsletter.
Though further information is required in a number of areas, it is
clear that the business has responded well to the changes and
incentives introduced.
The cost of the web advert ($200,000) was so high that profits have
decreased substantially despite the incentives and changes detailed
above.
Performance review of PAF co

Commentary
General overview
Overall, Division S has performed well in 20X3, although it has not
managed to meet its objective of becoming market leader despite
its $2m advertising campaign. Since it has 30% of the market in
20X3 and there are only two competitors holding 70% of the market
between them, at least one of those competitors must hold 35% or
more of the market.
Revenue and market share
This has increased by a huge 44% in the last year. This compares to
an increase of only 9% in Division C. However, part of the reason
that this has been achieved is because the changes in fire safety
laws introduced by the government at the end of 20X2 have caused
the market for fire products and services to increase from $107.75m
to $129.48m. Part of Division S's success is therefore down to
increased opportunity. However, Division S has also increased its
market share by a further five percentage points compared to 20X2.
Division C has only managed a 3 percentage point increase in its
market share, so this is a good result by Division S. One can assume
that this is at least partly as a result of the advertising campaign
carried out by Division
S. However, this did cost a large amount, $2m, and it did not quite
enable the Division to achieve its aim of becoming market leader.
Materials costs
The increase in materials costs is 36%, compared to an increase in
revenue of 44%. It is difficult to say whether this is good or bad
since the increase in revenue includes revenue from services, for
which no materials costs would be expected to arise. Further
information is needed on the split of revenue between products and
services.
Payroll costs, revenue per employee and cost per employee
Payroll costs have increased by a massive 70% and far more than
Division C's 15% increase. This is largely due to the fact that
Division S's employee numbers increased from 241 in 20X2 to 380 in
20X3. This is a really big increase in employee numbers and has
been accompanied by a fall in revenue per employee from $111,772
in 20X2 to $102,224 in 20X3. It is possible that Division S over-
recruited, as it hoped to secure a greater level of business than it
did through its advertising campaign. Division S's payroll cost per
employee also increased from $25,020 in 20X2 to $27,000 in 20X3.
Presumably, this is because of the fact that there is high demand for
staff skilled in this area and DivisionS has probably had to increase
pay in order to attract the calibre of staff which it needs.
Increase in property costs
In percentage terms, the biggest increase in costs which Division S
has suffered is in relation to its property costs. They have increased
by 78%, compared to Division C's 6% increase. It would appear that
this increase is due to the increased rent charged by Division S's
landlords on its business premises, which in turn has risen because
of the increased tax charges. However, it is not possible to quantify
this precisely without further information on rent increases.
Gross profit margin
This has actually fallen from 61% to 56%. Division C has also seen a
fall in its GPM, but only a two percentage point fall as opposed to
Division S's five percentage point fall. The reasons for Division S's
lower GPM are the higher material, payroll and property costs. Also,
Division S did not try to pass on any of its increased costs to its
customers in the form of higher prices.
Distribution and marketing costs
These have increased by 38% compared to Division C's 18%.
However, when you take out the advertising costs in both years'
figures and work out the cost increase without them ($8.522m -
S7.102m/$7.102m), it leaves an increase of only 20%. This increase
would be expected given the 20% increase in world fuel prices which
occurred. Division S has to deliver to a wider geographical spread of
customers than Division C, so it would be expected to feel the full
brunt of fuel price increases.
Administrative costs
These have increased by 6% compared to Division C's less than 1%
increase (0% when rounded down to the nearest percent).
Further information is needed about the items included in these cost
figures to explain why this increase has arisen.
Net profit margin
Despite challenging cost increases in all categories, Division S has
still managed to increase its NPM from 9% to 11%. However, this is
substantially lower than the NPM in Division C, which has fallen
slightly but is still 21%, almost twice that in Division S. As we have
seen, Division S's GPM is lower than Division C's anyway and, on top
of that, Division C has not suffered a big increase in advertising
costs like Division S; nor have administrative costs risen
inexplicably.
Head Office
There is no information given about Head Office. If the Calana
Division is also the Head Office, there could be Head Office costs
included in Calana's figures, which would affect the comparisons
being made. Further information is required here.
Performance review of clean feet

ROl and margins

When looking purely at the ROl for each division, it appears that PC
has performed better than HG, since its ROl is almost eight
percentage points higher. Similarly, whilst HG's gross profit margin
(GPM) is higher than PC's, its net profit margin (NPM) is over two
percentage points lower.
However, these figures must be viewed with a degree of scepticism
because, first, the net profit margin is after the deduction of head
office (HO) costs and second, HO made a decision to invest in a
computer system which cost a lot of money and was not very good.
As regards the HO costs, each division apparently bears an equal
share. However, the divisions have no control over these costs and
also, given that PC is a significantly larger division, it would be
expected that it would bear more of the costs.
Therefore, when looking at the profit margins, it would seem wise to
assess performance by looking at the GPM rather than the NPM, and
in this regard, HG has performed better.
New computer system and complaints
As regards the ROl, HG's assets have increased by at least $2m this
year because of the new IT system. This means that its ROl looks
lower than it otherwise would, as does its asset turnover. Given the
problems which have arisen from the system's introduction, it is
likely to have affected HG's costs and sales figures too, yet it was
introduced against the advice of HG. It is clear from the year-on-year
increase in HG's customer complaints and the reduction in the
number of orders completed in seven days that the IT system has
affected its results.
Whilst PC's comparative data for 20X9 for the seven days and the
customer complaints look better than HG's, these measures actually
show a deterioration in its performance here from one year to the
next, with no explanation being given for this.
Working capital management

From the working capital ratios it is clear that, despite all the
problems, HG has actually managed to collect cash from customers
within the 30-day limit, although it is late in paying its suppliers. PC,
on the other hand, has performed worse here, taking almost 60 days
to collect its debts and 73 days to pay its liabilities.
PC seems to have better control of its inventory, but this may be
because of the delays caused by the IT system at HG.
Both divisions have apparently healthy current and quick ratios,
although no industry norm is given against which they could be
compared. However, it is noticeable that HG has a healthy cash
balance compared to PC's overdraft, so it would appear to be
managing its cash better.
Staff turnover
HG has a low staff turnover rate which has stayed the same year on
year, unlike that of PC, which has increased from 8% to 18%. It is
impressive that HG has such an apparently loyal workforce
compared to PC, particularly given the problems which have arisen
during the year.
To conclude, although at a glance it would appear that PC is
performing better than HG, when the introduction of the new
computer system is taken into account, a different picture emerges.
Tutorial note. This solution contains more points than would be
required to score full marks.
(c) Given the fact that the two divisions can only control capital
expenditure of up to $50,000, it is inappropriate to use ROl to assess
their performance. ROl measures the effectiveness of assets in
generating profit, but the managers of the divisions do not have
total control over asset purchases, so this goes against the
controllability principle. Furthermore, ROl is currently calculated
based on net profit rather than controllable profit, so the HO costs
recharged have been deducted before the ROl is calculated. This
means that the managers are both being held accountable for
further costs which they cannot control.
Using ROl as a basis for the bonus means that, for the year ending
31 August 20X9, the manager of HG is earning a bonus of only
$5,400 because the ROl is only one whole percentage point above
15%. The manager of PC, on the other hand, is earning the
maximum bonus of $18,000. This is not fair and will demotivate the
manager of HG. This may lead the manager to minimise the capital
expenditure which they control in future, maybe cut costs
inappropriately or simply cause them to lose interest in generating
sales for the business.
Performance measure
Return on capital employed
ROCE shows how much profit has been made in relation to the
amount of resources invested.
C Co and both divisions of W Co are profitable. The Design division
of W Co has the highest ROCE, at over 25%, while the Gearbox
division and C Co are significantly lower at 11.99% and 8.45%
respectively. This is primarily due to the nature of the design
business which derives its profits from personnel rather than
physical assets. Employees generate profits by designing products,
rather than by using expensive machinery. Therefore the Design
division's capital employed (asset) figure is significantly lower.
C Co has the largest asset base, and this is reflected in a relatively
low ROCE. The Gearbox division is closer to this than to the Design
division, but this is as a result of similarities in the nature of the
business rather than division performance alone.
Asset turnover
Asset turnover is a measure of how well the assets of a business are
being used to generate sales. The Gearbox division has the highest
level at 79%, while C Co has the lowest at 19%.
This is probably due in part to the fact that the Gearbox division
buys from C Co, therefore C Co must hold a large asset base to
produce the relevant components. Both divisions of W Co do not
have the same requirement and this is reflected in the higher asset
turnover figures.
Operating profit margin
C Co comes out on top in the final profitability measure, which is the
operating profit margin at just over 45%, while the Gearbox division
is the lowest at 15.18%. The Design division performs well at
41.96%, as it did in asset turnover. This was to be expected from the
ROCE of 25%, which is a combination of the other two ratios. The
Design division has both high unit profitability and generates sales
at a high level compared to its asset base.
There are limitations to these types of comparisons due to the
differing nature of the businesses. It would be more useful to
compare each business unit to an industry average for similar
businesses, as well as comparing year-on-year figures to monitor the
units on an ongoing basis.
Transfer prices
From C Co's perspective
C Co transfers components to the Gearbox division at the same
price as it sells components to the external market. However, if C Co
were not making internal sales then, given that it already satisfies
60% of external demand, it would not be able to sell all of its current
production to the external market. External sales are $8,010,000,
therefore unsatisfied external demand is ([$8,010,000/0.6] -
$8,010,000) = $5,340,000.
From C Co's perspective, of the current internal sales of $7,550,000,
$5,340,000 could be sold externally if they were not sold to the
Gearbox division. Therefore, in order for C Co not to be any worse off
from selling internally, these sales should be made at the current
price of $5,340,000, less any reduction in costs which C Co saves
from not having to sell outside the group (perhaps lower
administrative and distribution costs).
As regards the remaining internal sales of $2,210,000 ($7,550,000 -
$5,340,000), C Co effectively has spare capacity to meet these
sales. Therefore, the minimum transfer price should be the marginal
cost of producing these goods. Given that variable costs represent
40% of revenue, this means that the marginal cost for these sales is
$884,000. This is therefore the minimum price which C Co should
charge for these sales.
In total, therefore, C Co will want to charge at least $6,224,000 for
its sales to the Gearbox division.
From the Gearbox division's perspective
The Gearbox division will not want to pay more for the components
than it could purchase them for externally. Given that it can
purchase them all for 95% of the current price, this means a
maximum purchase price of $7,172,500.
Overall
Taking into account all of the above, the transfer price for the sales
should be somewhere between $6,224,000 and $7,172,500.
Balance scorecard people bank
Financial perspective
The People's Bank has had a year of mixed success when looking at
the extent to which it has met its financial targets. Its return on
capital employed (ROCE) shows how efficiently it has used its assets
to generate profit for the business. The target for the year was 12%
but it has only achieved an 11% return. The People's Bank's interest
income, however, was in fact S0.5m higher than its target, which is
good. This may have been achieved by offering slightly better
interest rates to customers than competing banks, as the interest
margin The People's Bank achieved is slightly lower than target. The
most likely reason for the under target ROCE is therefore probably
the investment which The People's Bank has made in IT security and
facilities for the disabled and visually impaired. Whilst this may have
reduced ROCE, this investment is essentially a good idea as it helps
The People's Bank pursue its vision and will keep customers happy.
It will also, in the case of the IT security investment, prevent the
bank and its customers from losing money from fraud in the future.
The other performance measure, the amount of new lending to
SMEs, is a little bit disappointing, given The People's Bank's stated
value of making a difference to communities.
The failure to meet this target may well be linked to the fact that an
insufficient number of staff were trained to provide advice to SMEs
and consequently, fewer of them may have been successful in
securing additional finance.
Customer perspective
With regard to its customers, The People's Bank has performed well
in the year. It has exceeded its target to provide mortgages to new
homeowners by 6,000. This is helping The People's Bank pursue its
vision of helping new homeowners. It has also managed to beat the
target for customer complaints such that there are only 1.5
complaints for every 1,000 customers, well below the target of 2.
This may be as a result of improved processes at the bank or
improved security. It is not clear what the precise reason is but it is
definitely good for The People's Bank's reputation.
The bank has also exceeded both of its targets to help the disabled
and visually impaired, which is good for its reputation and its stated
value of making services more accessible.
Internal processes
The number of processes simplified within the bank has exceeded
the target, which is good, and the success of which may well be
reflected in the lower customer complaints levels.
Similarly, the investment to improve IT systems has been a success,
with only three incidences of fraud per 1,000 customers compared
to the target of 10. However, perhaps because of the focus on this
part of the business, only two new services have been made
available via mobile banking, instead of the target of five, which is
disappointing. Similarly, it is possible that some of the new systems
have prevented the business from keeping its CO, emissions to their
target level.
Innovation and learning
The People's Bank has succeeded in helping the community,
exceeding both of its targets relating to hours of paid volunteer work
and number of community organisations supported by volunteers or
funding. These additional costs could have contributed to the fact
that the bank did not quite meet its target for ROCE.
However, the bank has not quite met its targets for helping small
businesses and helping the disadvantaged. As mentioned earlier,
the shortfall in training of employees to give advice to SMEs may
have had an impact on The People's Bank's failure to meet its target
lending to SMES. As regards the percentage of trainee positions, the
target was only just missed and this may well have been because
the number of candidates applying from these areas was not as high
as planned and the bank has no control over this.
Overall, the bank has had a fairly successful year, meeting many of
its targets. However, it still has some work to do in order to meet its
stated values and continue to pursue its vision.
5 strategic aims to asses performance Robinholt
university

1) To provide education which promotes intellectual initiative and

produces confident and ambitious graduates who have reached the
highest academic standards to prepare them for success in life and
the workplace.
There are various performance indicators which can be looked at to
ascertain whether RU is meeting this strategic aim. First, question 1
of the survey shows that 83% of students think that the course is
intellectually stimulating and the quality of teaching is high. This has
gone down by three percentage points since 20X5, which is not
good.
In the NOS survey, the percentage of graduates agreeing that the
course has developed them as a person has increased from 80% in
20X5 to 82% in 20X6. This would indicate that RU is indeed
developing confident and ambitious graduates.
However, the number of graduates achieving first class degrees in
20X6 has fallen vastly from 28% to 20%. Given that the entry
requirements were only relaxed in 20X6, this should not have had
any impact on results. This infers that the quality of teaching may
have declined and the ratio of students to academic staff has
increased from 35:1 to 40:1. It appears that, although many new
students were recruited in 20X6, there were not enough new
academic staff recruited to deal with the influx of students. This is
shown by the fact that student numbers increased by 13% but
academic staff costs only increased by 6%.
As there was presumably a pay rise in the year too, it is clear that a
proportionate amount of new staff were not recruited. This failing is
also reflected by the fall in the answer to question 2 from 86% to
82%, with students being less satisfied in 20X6 with the advice and
support they have received. Also, the staff retention rate has gone
down in 20X6, meaning that staff are less familiar with RU and
therefore more likely to provide a fragmented service.
However, in 20X5 74% of employers were happy with the graduates
they recruited, in 20X6 this dropped to 72%. In addition, in 20X5
only 65% of students have managed to obtain graduate jobs within
a year compared to previous years. Given that RU has relaxed the
entry requirements for students in 20X6, this may mean that its
20X6 recruits are not as well qualified as its 20X5. This could mean
that in the future the number of graduates obtaining graduate jobs
within a year and the satisfaction percentages of employers could
fall further. This decision has meant that there has been a 23%
increase in fee income, but it compromises RU's ability to meet its
first strategic aim.
(2) To provide an organised, efficient learning environment with
access to cutting edge technology and facilities.
As regards premises, the money spent on maintaining these has
decreased by 10% in 20X6, despite the increased student numbers.
In the NOS survey, the percentage of students satisfied with these
facilities has gone down nine percentage points from 92% to 83%.
This suggests that this particular strategic aim has been neglected.
Students seem far less satisfied with the way that the courses are
run and administered now, with a fall of nine percentage points in
answers to question 4. Administration staff costs have only
increased by 5% despite a 13% increase in student numbers and,
presumably, a pay rise during the year. It can be inferred that staff
are under increasing pressure and unable to cope with the increased
numbers. This is again reflected by the fall in the staff retention rate
from 90% in 20X5 to 75% in 20X6.
(3) To be a leader in sustainable business practices which protect
the environment and support local people.
As with the above strategic aim, this one also seems to have been a
little forgotten in 20X6. In 20X5, RU won an environmental award for
its campuses. It also took part in a food sharing initiative which
helped the local community. It has now got rid of its recycling bins
and ceased to be involved in the food share project. RU's spending
on sustainability and community assistance has actually halved in
20X6. This decline in activity is partly attributable to staff shortages.
All in all, this is not very good as RU is now failing to meet one of its
main strategic aims.
(4) To provide attractive, innovative conference and event facilities,
attracting clients both nationally and internationally.
Conference and event income has gone up by 13% in 20X6, which is
a good increase for RU. It has managed to control its costs relating
to these events well too, since these have only increased by 4%. RU
has also won an award for its conference facility and attracted a
number of new clients.
RU therefore appears to be focusing well on this strategic aim.
(5) To be recognised both nationally and internationally for the
scope and relevance of their research.
Income from research at RU has actually gone down by 13% this
year, as have the associated costs. Whilst a local university has won
an award for their contribution to research, RU has not been
successful in this regard. The suggestion is that this aim has not
been focused on in 20X6.
Overall satisfaction
In addition to the above, it should be considered that the overall
satisfaction percentage for students has decreased from 83% to
81%. This could have serious implications for RU as it is the main
performance indicator used both internally and externally to assess
how RU is performing.
As well as meaning that RU may well now attract fewer students, it
will also have an impact on the fees which can be charged to
students in future years. The university needs to consider how it can
improve the service it is providing in order to improve overall
satisfaction.

Advantage disadvantage of balance score cards

A balanced scorecard approach to performance management is

important to Hammocks
Co because it will provide management with a set of information
which covers all relevant areas of business performance. At present
Hammocks Co considers performance from a financial and customer
perspective. These perspectives are important but they do not allow
a wide enough consideration of all of the factors that should be
considered in this business.
Introducing the balanced scorecard will:
Ensure that all internal systems and processes support the customer
and financial objectives. For example, in decision-making there is
little point in buying a new IT system that does not either improve
customer experience or reduce processing costs.
Encourage full integration between all departments. Errors in
invoicing or sending specific requirements are system or internal
process errors. While a customer might not choose a holiday resort
for its excellent administration, they may refuse to use a company
again if they receive poor service. Thus neglecting one aspect of the
scorecard can impact on customer satisfaction and longer term
financial performance.
Make sure important elements are assessed and expected
performance levels quantified and/or qualified. This means that
performance can be measured, explained, compared and where
necessary, control action can be taken. The errors that occur at
Hammocks Co are spoiling the company's reputation, but there is no
evidence that any action is being taken.
Note. Only TWO were required.
Goal of performance measurement
(ii) Internal business process
Goal: To have an effective and efficient administration
The feedback on TripEvent indicates that the only guest complaints
relate to administrative issues prior to the guest arrival and not
operational issues at the resort. In fact the actions of the resort staff
with the speedy resolution of bedding issues and the organising of a
complimentary transfer seems to have diverted trouble. Therefore
measures need to be focused on the weaker area which is the
administration.
Measures:
(1) Number of times that a guest request is not received at resort
prior to their arrival/number of requests made.
This will measure the number of times the guest experience is not
seamless from booking
to arrival.

(2) Average number of corrections to booking due to an

administrative error.
This measures inefficient use of staff time and potentially increased
customer frustration.
Innovation and Learning
Goal: To match leading competitor's facilities
The comment on TripEvent shows that even loyal customers are
noticing that rivals are including more innovative facilities at their
resorts. Although the true strength of Hammocks Co lies in the
quality of the service it is important that the facilities' appliances
and service offerings are updated to compare favourably with that of
its rivals.
Measures:
(1) Number of in-room appliances offered by rivals but not by
Hammocks Co.
The measure will ensure that Hammocks Co consider what is
included within the guest rooms by comparing to external factors.
(2) Number of new items offered on the menu each month.
This should ensure that the chefs consider the latest trends in fine
dining and do not ever appear stagnant from the point of view of the
customer.
Balance scorecard Medcomp

Financial
The critical success factor identified for this perspective is most
likely to
be positive cash flow.
The most appropriate performance indicator is total donations less
operating costs.
Performance analysis:
Total donations in 20X8, 20X7 and 20X6 are 51,710,000, S1,605,000
and $1,475,000 respectively and when the operating costs are ~
deducted, the net cash flows are S(20,000), $55,000 and $45,000
respectively. This shows that for the current year Medcomp is not
achieving a positive cash flow. However, this is a relatively small
cash deficit for the year and does not suggest that the charity has
any real problems. The size of the donations has risen considerably
over the years and the number of businesses donating has fallen.
This could indicate that the fundraisers have focused their efforts on
a smaller number of more affluent businesses.
Customer
CSF:
The critical success factor identified for this perspective is most
likely to be medical effectiveness.
KPI:
The best performance indicator for this perspective is the
percentage of successful treatments.
Performance analysis:
For the years 20X8, 20X7 and 20X6 these are 77%, 86% and 87%
respectively. As treatment for cataracts is a relatively simple
procedure, a high success rate would be expected but the results in
20X8 show a significant deterioration. The reasons for the recent fall
in effectiveness could be the result of factors outside the control of
Medcomp, such as variations in the disease or the advanced
condition of the disease when presented. However, it could be also
linked to the lack of efficiency of the new treatments.
Internal business process
CSF:
The critical success factor identified for this perspective is most
likely to be functional efficiency.
KPI:
The performance indicator for this perspective could be: 'average
number of days to deliver drugs and equipment to treatment
centres
Performance analysis:
This has remained at seven days since 20X6 and in some ways this
can be expected as the 12 treatment centres have been at the same
location for many years and the logistics of the delivery well
established. It should be noted that this measure is an average lead
time and will also vary on location. However, as Medcomp rarely
experiences shortages at the treatment centres, it can be surmised
that transport costs are managed as efficiently as possible and this
means an average seven-day lead time.
Innovation and learning
CSF:
The critical success factor identified for this perspective is most
likely to be innovation.
KPI:
The performance indicator for this perspective is the new
procedures as a percentage of total procedures from the table.
Performance analysis:
It is clear that Medcomp has made several changes to the existing
protocol in 20X8. One in five procedures administered are new and
have been introduced within the past 12 months. This is a clear
improvement on 20X7 and 20X6 as the CSF is for new treatments.
However, the new treatments have not improved the efficiency of
the treatment, as evidenced by the percentage of successful
treatments, and this will need to be monitored.
Benefit of balance scorecard
The benefits to an organisation of using the balanced scorecard to
assess performance instead of relying solely on financial measures
are as follows:
Not all organisations have profit or financial return as the main
objective. In an altruistic not-for-profit charity such as Medcomp, the
objectives are based on delivering a service which can be measured
in benefit to people who are unable to pay for the service. Therefore,
it is necessary to have measures which are not purely financial to
reflect the different emphasis of the mission and supporting
objectives.
Financial performance indicators are 'lagging' indicators. This means
that the events and decisions which caused these indicators
occurred long ago. The balanced scorecard includes
"leading' indicators. For example, the innovation and learning
perspective may encourage spending on training or techniques
which will depress profits or increase costs in the short term, but will
have much greater benefits in the future.
The balanced scorecard helps to align key performance measures
with strategy at all levels.
This means that all employees will be able to link their individual
goals to those of the organisation as a whole. The benefit of this is
that it ensures that what gets measured is important to the
organisation.
Financial measures used in isolation are relatively easy to
manipulate in the short term. For example, a high return on
investment figure may be considered an indicator of good
performance whereas it may have been caused by a manager
delaying the purchase of a necessary asset. The balanced scorecard
provided a range of indicators which makes this type of
manipulation more difficult to conceal.