ACCA APPROVED CONTENT PROVIDER A ACCA approved content provider C C A BPP Learning Media is dedicated to supporting aspiring business professionals P with top-quality learning material as they study for demanding professional 5 exams, often whilst working full time. BPP Learning Media’s commitment to student success is shown by our record of quality, innovation and market leadership in paper-based and e-learning materials. BPP Learning Media’s study A d v materials are written by professionally qualified specialists who know from a n c personal experience the importance of top-quality materials for exam success. e d P e r f o r m Paper P5 a n Advanced Performance Management ce M This ACCA Study Text for Paper P5 Advanced In addition to ACCA examining team reviewed a Performance Management has been material you get: n a g comprehensively reviewed by the ACCA examining e • A user-friendly format for easy navigation m team. This review guarantees appropriate depth • Exam focus points describing what the examining e and breadth of content and comprehensive syllabus n coverage. • Rtkeeeaygm upl oawirn iFltlas w sitna Fneota rycwohau cr dtho as pdutomermaries emphasising the tS t • Questions and quick quizzes to test your u d understanding y T • A practice question bank containing exam- e x t standard questions with answers • A full index • All you need in one book ACCA Approved 2F 0o 16, Mr exa Study Text Free access m ars to our Exam ch in 2 S Paper P5 Success site 0e 1p Contact us 7 antem Advanced Performance Look inside BPP House db 1L4o2n-d1o4n4 W Ux12b r8idAgAe Road Juneer 20 Management United Kingdom 216 TT 0+4844 5( 00)7250 1 810704 0( U2K2)11 (Overseas) 017, De For exams in September 2016, December c E [email protected] e m 2016, March 2017 and June 2017 bpp.com/learningmedia b e r February 2016 £32.00 ACP5ST16 (RICOH).indd 1-3 04/02/2016 15:48 ACCA APPROVED CONTENT PROVIDER As the first accredited publisher of ACCA materials, BPP Learning Media has set the benchmark for producing exceptional study materials for students and tutors alike. 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In this Study Text, which has been reviewed by ACCA’s examination team, we:  Highlight the most important elements in the syllabus and the key skills you need  Signpost how each chapter links to the syllabus and the study guide  Provide lots of exam focus points demonstrating what is expected of you in the exam  Emphasise key points in regular fast forward summaries  Test your knowledge in quick quizzes  Examine your understanding in our practice question bank  Reference all the important topics in our full index BPP's Practice & Revision Kit also supports this paper. FOR EXAMS IN SEPTEMBER 2016, DECEMBER 2016, MARCH 2017 AND JUNE 2017 First edition 2007 A note about copyright Ninth edition February 2016 ISBN 9781 4727 4431 9 Dear Customer (Previous ISBN 9781 4727 2683 4) What does the little © mean and why does it matter? e-ISBN 97 81 4727 4673 3 Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. 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The suggested solutions in the practice answer bank have been prepared by BPP Learning Media Ltd, unless otherwise stated. © BPP Learning Media Ltd 2016 ii Contents Page Introduction Helping you to pass v Studying P5 vii The exam paper xii Syllabus and study guide xiii Part A Strategic planning and control 1 Strategic management accounting...........................................................................................................................3 2 Performance hierarchy...........................................................................................................................................45 3 Performance management and control of the organisation....................................................................................69 4 Changes in business structure and management accounting................................................................................97 5 Environmental and ethical issues........................................................................................................................137 Part B External influences on organisational performance 6 External influences on organisational performance..............................................................................................173 Part C Performance measurement systems and design 7 Performance management information systems..................................................................................................195 8 Management information, recording and processing and management reports...................................................219 Part D Strategic performance measurement 9 Strategic performance measures in the private sector..........................................................................................273 10 Divisional performance and transfer pricing issues.............................................................................................319 11 Strategic performance measures in not-for-profit organisations..........................................................................347 12 Non-financial performance indicators..................................................................................................................369 13 The role of quality in management information and performance measurement systems...............................................................................................................................................................385 14 Performance measurement and strategic HRM issues.........................................................................................427 Part E Performance evaluation and corporate failure 15 Alternative views of performance measurement and management.......................................................................469 16 Strategic performance issues in complex business structures.............................................................................503 17 Predicting and preventing corporate failure.........................................................................................................521 Mathematical tables 553 Practice question bank 557 Practice answer bank 579 Index 629 Review form Contents i ii iv Helping you to pass BPP Learning Media – ACCA Approved Content Provider As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examination team. By incorporating the examination team's comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies. The PER alert Before you can qualify as an ACCA member, you have to not only pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the 'PER alert' feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the Study Text, the purposes of which are explained fully on the Chapter features page, will help you while studying and improve your chances of exam success. Developing exam awareness Our Study Texts are completely focused on helping you pass your exam. Our advice on Studying P5 outlines the content of the paper, the necessary skills you are expected to be able to demonstrate and any brought forward knowledge you are expected to have. Exam focus points are included within the chapters to highlight when and how specific topics were examined, how they might be examined in the future, and how different topics within the syllabus fit together. Using the syllabus and study guide You can find the syllabus and study guide on pages xiii-xxiii of this Study Text. Testing what you can do Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt. We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. Introduction v Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list Topic list Syllabus reference What you will be studying in this chapter and the relevant section numbers, together with ACCA syllabus references. Puts the chapter content in the context of the syllabus as Introduction a whole. Study Guide Links the chapter content with ACCA guidance. Highlights how examinable the chapter content is likely to Exam Guide be and the ways in which it could be examined. What you are assumed to know from previous Knowledge brought forward from earlier studies studies/exams. Summarises the content of main chapter headings, FAST FORWARD allowing you to preview and review each section easily. Demonstrate how to apply key knowledge and Examples techniques. Definitions of important concepts that can often earn you Key terms easy marks in exams. When and how specific topics were examined, or how Exam focus points they may be examined in the future. Formulae that are not given in the exam but which have to Formula to learn be learnt. Gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER). Gives you essential practice of techniques covered in the Question chapter. Case Study Real world examples of theories and techniques. Chapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review. A quick test of your knowledge of the main topics in the Quick Quiz chapter. Found at the back of the Study Text with more Practice Question Bank comprehensive chapter questions. Cross referenced for easy navigation. vi Introduction Studying P5 As the name suggests, this paper examines advanced performance management topics and is particularly suited to those who are thinking about a career in management accountancy or are likely to be involved in strategic management decisions. ACCA expects you to demonstrate a professional approach to all questions – not just presenting information in a professional manner, but also integrating knowledge and understanding of topics from across the syllabus. The examination team has stressed that candidates should not expect topics in P5 exams to be examined in isolation. One of the major skills you will be expected to demonstrate in the P5 exam is being able to draw on knowledge gained across your studies to date, in order to present complete solutions to relatively broad business issues or problems. 1 What P5 is about The syllabus for Paper P5 further develops key aspects and skills introduced in Paper F5, and it draws on aspects of the material about strategic and operational planning and performance covered in Paper P3, Business Analysis. However, whereas Paper P3 assesses principles of management accounting as part of the wider analysis of a business situation, Paper P5 could examine aspects of management accounting – such as budgeting or costing techniques – in their own right. The stated aim of the P5 syllabus is: 'To apply relevant knowledge, skills and exercise professional judgement in selecting and applying strategic management accounting techniques in different business contexts and to contribute to the evaluation of the performance of an organisation and its strategic development.' Read this aim carefully. You are no longer just a 'number cruncher' drawing up budgets and producing calculations to include management reports. You are expected to understand the wider issues that affect organisations. These issues are often written about in newspapers and journals such as the Financial Times and The Economist, so it is important you read the financial press to help you identify how the issues you are studying in P5 relate to the real world context. At this level in your studies, you also need to recognise how the subjects you previously studied begin to fit together. You need to begin to take a holistic view of an organisation, and to see how the various parts of it and various processes affect overall performance – rather than looking at individual issues in isolation. Importantly, the P5 exam is likely to also test your ability to assess different approaches to performance management, from a variety of perspectives. As well as knowing what the approaches are, you will also need to be able to compare them with one another in the context of a scenario; for example, comparing the long-term and short-term issues affecting an organisation's performance. Snapshot of the syllabus The syllabus expects you to understand how organisations set their strategy and the external influences that affect strategic plans and operational outcomes. You will be expected to evaluate different systems of performance management and apply strategic performance measurement techniques in evaluating and improving performance. You may also be expected to advise on strategic performance evaluation and the possibility of corporate failure. Finally, you need to be aware of the current developments in management accounting and performance management, as these affect organisations. Introduction v ii There are five parts to the syllabus, as summarised below. (a) Use strategic planning and control models to plan and monitor organisational performance (b) Assess and identify relevant macroeconomic, fiscal and market factors and key external influences on organisational performance (c) Identify and evaluate the design features of effective performance management information and monitoring systems (d) Apply appropriate strategic performance measurement techniques in evaluating and improving organisational performance (e) Advise clients and senior management on strategic business performance evaluation and on recognising vulnerability to corporate failure We expect most of these capabilities (if not all) to be tested to some extent in every P5 exam. 2 What skills are required? Look back at the action verbs in the six parts of the syllabus outlined above. You are expected to be able to assess, advise and evaluate, as well as to identify and monitor. The need for these skills of assessing, advising and evaluating highlights that, at P5 level, you are expected to have moved beyond merely demonstrating your knowledge of a model or technique, and instead you have to apply that knowledge to practical situations. For example, the examination team will expect that, by the time you reach P5, you can already calculate basic financial ratios. In P5, though, the examination team will expect you to be able to interpret the information provided by those ratios to understand how an organisation is performing, and to make sensible suggestions (where appropriate) about how its performance could be improved. The questions set in P5 exams will be based around case study scenarios which describe an organisation, its objectives and its business environment. You will need to relate your answers specifically to the scenario given in the question. There will be very few marks available for simply describing models or theories. Evidence from past exam sittings suggests that candidates who simply learn models and theories, but then do not apply their knowledge to the question scenarios, typically score between 20-30% in their P5 exams. The P5 paper has a large written element, with well over half the marks being earned for written answers (discussion, analysis, evaluation) rather than calculations. Again, this is designed to reflect the position of a qualified accountant working in a business. The accountant can expect a number of the routine calculations and figures to be produced by their more junior colleagues, but the accountant should then expect to identify the issues or implications being identified by those figures. We have summarised here the skills you are expected to demonstrate in P5. (a) Core knowledge. The contents of Paper F5 Performance Management – assumed knowledge brought forward for Paper P5. (b) Numerical skills. Those skills demonstrated in Paper F5. You only learn a small number of new mathematical techniques in this paper but, alongside these, you are also expected to remember those you learnt previously. (c) Written skills. These are key skills on this paper. You will be expected to write reports and notes explaining issues you encounter. (d) Analysis and interpretation of question data or calculations. The examination team has stressed that candidates will be expected to analyse (not merely calculate) numerical data given in a scenario. (e) Wider business awareness or application of skills in a practical context. viii Introduction