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FOR THIS MOCK

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ACCA MOCK
Advanced Performance Management

Advanced Audit and Assurance

Time allowed: 3 hours 15 minutes

Attempt all three questions

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Section A – This question is compulsory and MUST be attempted

Q 1 Upkeep is an international not-for-profit, humanitarian organisation that is

operating in more than 80 countries worldwide. Upkeep is engaged in both
development and emergency response activities in the countries, mostly the
organisation focus on economic empowerment, infrastructure development and
education of the countries it has a representation in.
Upkeep keeps a very close watch on the budgets that are approved by the donors
to ensure that the expenses are kept in control. Upkeep gives most weightage to
the variance analysis in the performance appraisal of the management. The second
most important performance indicator is the net surplus or deficit of income over
expense margin calculated by dividing the net surplus/deficit for the period with
total donations or receipts during the period. The third most important
performance indicator is the return on investment (ROI) of the organisation,
calculated by dividing the net surplus/deficit for the period with the total general
funds available for the period. The executive management is very concerned about
the performance of the company as all the three key performance indicators (KPIs)
have significantly deteriorated.
The operational management responded to the concerns of the executive
management by explaining that; mostly, the money received from donors is in a
different currency, the conversion of the funds into the functional currency is
usually the cause of over expenditure, which the management believes is not in
their control. They also challenged the key performance indicators stating that
these are not effective to evaluate the performance of not-for-profit agencies. The
net surplus/deficit margin should not be the main concern of Upkeep and the
executive management should try to include the non-financial performance
indicators in the appraisal process, which would better suit Upkeep.
Executive management is aware that the set indicators are not ideal but is
concerned about using non-financial performance indicators that cannot be
properly quantified to allow objective judgment. The executive management has
hired a consultancy and advisory firm called ‘AB consultants and advisors’, to help
them evaluate the performance of the company. The financial data, presented in
appendix A, on which the three main KPIs were calculated was shared with the
consultants. You are a manager working in the firm hired by the management for
the task mentioned and have been selected to head this assignment.

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Required:
Write a report to the executive management of Upkeep to:
(a) Evaluate the usefulness of the current KPIs of the organisation.
(8 marks)
(b) Explain the importance and need of non-financial KPIs for Upkeep.
(4 marks)
(c) Recommend some KPIs that can better evaluate the performance of Upkeep.
(10 marks)
(d) Show how the performance evaluation of Upkeep will change if the new
proposed KIPs are used for performance appraisal.
(20 marks)
(e) Recommend changes in the existing 3 KIPs, if management is reluctant to
adopt the proposed new KIPs by the consultancy and advisory firm.
(4 marks)
Professional marks will be awarded for the format, style and structure of the
discussion of your answer. (4 marks)

(50 marks)

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Appendix A
2014 2015
Description Budget Statement of Budget Statement of
surplus/deficit surplus/deficit

Grants received $800,000 $801,000 $1,000,000 $1,002,500

Direct program ($600,000) ($750,000) ($800,000) ($982,500)

activities
Shared/admin ($100,000) ($150,000) ($100,000) ($170,000)
costs
Net $100,000 ($99,000) $100,000 ($150,000)
surplus/deficit

General funds $500,000 $401,000

Beneficiaries targeted 160,000 180,000 200,000 300,000

individuals individuals individuals individuals
Phases of the project 5 5 7 8
completed
Post implementation 80% 95% 80% 98%
satisfaction survey

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Section B – TWO questions to be attempted

2 The new CEO of MLK Ltd. is a great supporter of standard costing. He believes
that the key for effective standard costing is perfect budgeting. The CEO has
freshly joined the company and feels that the current costing system is not
optimal for the company. The company makes 3 different products, product A,
product B and product C. Each product is manufactured and assembled at a
different factory and targeted at different markets.
The existing practice of the management is to make annual budgets and compare
the actual performance monthly. The performance of the management is
evaluated based on the joint results of the three products monthly. New CEO
believes that the current practice is unfair for the product managers, as they are
completely autonomous in the decision making in all aspects (including capital
investments, marketing and distribution) of their product manufacturing and sales.
Though the CEO thinks of standard costing as a very reliable technique for
monitoring and control, however, he believes that the target costing could prove a
better technique for this company.
The CEO is not at all satisfied by current performance evaluation performed by the
company. Appendix A lists the extracts of the financial information that were used
in the performance evaluation.

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Notes:
1- Total fixed costs are apportioned among the products based on their
production.
2- During the period, manager A invested $200,000 in new machinery that would
improve the production process.
3- Half of the total profit made by MLK Ltd. is distributed among the managers of
each department if the variance of net profit is favourable, to ensure that the
goals of the managers are in-line with the goals of the company. The company
believes that the apportionment based on the size of the division is a fair measure,
therefore the bonus is distributed based on the capital structure of the division
(capital employed).
4- New CEO believes that the change in the actual production and sales should be
depicted properly in the budgets when computing variances.
5- CEO also believes that the current scheme for bonus distribution is not just, the
bonus should be apportioned based on the performance of each product in
generating net profit (instead of capital employed). The remainder policy of profit
distribution remains unchanged.
6- CEO is also of the opinion that each product depicts a division of the company,
the managers of the division are independent and autonomous, therefore, the
performance appraisal for the company should be performed based on the
divisions instead of the company as a whole.
7- It has also been agreed that based on the market of each product, product A
should earn a mark-up of 20%, product B should earn a markup of 25% and
product C should earn a mark-up of 40%. Based on CEO’s assessment and market
survey, CEO believes that the current sale price of each product is sufficient, the
company should try to target a reduction in cost.

Required:
(a) Using the data in the appendix and accompanying notes, re-compute the
variances and bonus. Comment on the impact, the new computations have on
the performance evaluation of the managers. (11 marks)
(b) Comment on the drawbacks of the standard costing system and how can
target costing fill these gaps for MLK Ltd. (4 marks)
(c) Show how target costing can be used by MLK Ltd. as the basis of performance
management system. Compare the results of target costing and standard costing
from part ‘a’. (10 marks)

(25 marks)

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3 Floor Co. is a multinational manufacturer and distributor of toys. Recently,

the management has been very concerned about the efficiency of the company
and believes that modern business practices and management techniques can
help improve the efficiency of the company. The management is interested in
adopting six sigma approach to achieve this object, however, the management
does not properly comprehend the mechanics of this method. They have hired
you, an expert, to present and give a detailed report on what six sigma technique
is and how can it help manufacturing and distribution companies.
Floor Co. has seven manufacturing sites around the globe and distributes their
products to 80 counties. They also have retail outlets in 5 of these countries, apart
from this they also offer licensing. The management is also thinking about
changing their performance measurement technique to balanced scorecard.
Required:
(a) Explain what balanced scorecard is and how it functions.
(10 marks)
(b) Prepare notes that you would use (as an expert) when presenting the six
sigma approach to the management of Floor Co. The focus of the presentation
should be on the suitability of six sigma for Floor Co.
(15 marks)

(25 marks)

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