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F5 Performance Management ( Notes)
Association of Chartered Certified Accountants - ACCA (PAC150)
INTEC Education College
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Got it Pass eLearning Co Supplementary Notes
Content
A3 Chapter 1 Information systems (Newly added in 2019/20)
A3 Chapter 2 Big Data (Newly added in 2020/21)
B1 Chapter 3 Activity based costing
B2 Chapter 4 Target costing and lifecycle costing
B4 Chapter 5 Throughput accounting and the theory of constraints – Part 1
B4 Chapter 6 Throughput accounting and the theory of constraints – Part 2
B5 Chapter 7 Environmental management accounting
C1 Chapter 8 Relevant costs (Newly added in 2019/20)
C2 Chapter 9 Cost volume profit analysis
C3 Chapter 10 Linear programming
C6 Chapter 11 Decision trees
C6 Chapter 12 The risks of uncertainty
D1 Chapter 13 All about budgeting – Part 1
D1 Chapter 14 All about budgeting – Part 2
D1 Chapter 15 All about budgeting – Part 3
D1 Chapter 16 All about budgeting – Part 4
D1 Chapter 17 All about budgeting – Part 5
D1 Chapter 18 Comparing budgeting techniques
D2 Chapter 19 The learning rate and learning effect
D4 Chapter 20 Materials mix and yield variances
E4 Chapter 21 Decentralisation and the need for performance measurement
E4 Chapter 22 Tackling performance evaluation questions
E4 Chapter 23 Building blocks of performance management
E5 Chapter 24 Transfer pricing
E6 Chapter 25 Not-for-profit organisations – Part 1
E6 Chapter 26 Not-for-profit organisations – Part 2
Got it Pass eLearning Co Supplementary Notes
Introduction
There are different study materials and modes for you to prepare for ACCA professional exams.
You can prepare the exam through self-study mode by reading textbooks and practicing revision tests from Approved Content Providers
Or you can go directly to the classes offered by ACCA Approved Learning Partners and stick into their notes.
However, no matter you are choosing which modes of study or which textbook, you need to know the technical articles published by ACCA for each paper is one of the best materials to prepare for your exams that you cannot miss.
In general, the articles are published by ACCA exam team and the contents are updated on a regular basis.
They highlight the core concepts or important areas that a lot of students cannot do well in the past exams.
The most important part is technical articles are generally the guidance to which question to be seen in upcoming exam.
Here are June 2018 examiners comments on ACCA Paper P7 (Advanced Audit & Assurance):
Since it help thousands of students to prepare exam, I organized the articles published by ACCA and summarized them according to their topics and syllabus with relevant questions as Supplementary Notes for those who are interested to focus on the key or challenging areas.
Remember these articles are helping you to enhance your knowledge on particular subjects, and not a substitute of approved textbook.
Got it Pass eLearning Co Supplementary Notes Information systems (IS) are critical for Performance Management: IS greatly aids in defining, measuring and monitoring performance metrics and comparing them against targets and benchmarks. It is a topic you need to be ready for in all sections of your exam. The examiner reports state that students regularly overlook this area of the syllabus, so make sure you cover it during your studies.
Role of IS
Information Systems are the backbone of a modern company. IS enables communication, sales and marketing, supply chain management, decision-making, employee management, process improvement and much more. Once considered a tool to improve efficiency, IS is now considered an important source of competitive advantage.
Think of a successful company you’ve recently read about or interacted with, and chances are you can also think of an example of how that company uses IS to distinguish itself from the competition. You can probably think of ways IS has changed the way you prepare for your ACCA exams—you might watch videos, take online courses, and participate in online forums. Moreover, you might have learned of these solutions through targeted advertising in your social media.
First, make sure you are familiar with some of the basic terminology of Information Systems for your PM exam:
Internet vs intranet The term ‘internet’ describes the global network of computers and devices that are all connected with an Internet Protocol (‘IP’) address. I’m sure you are familiar with this and use it regularly to browse content the web (for example, reading this article), access social media, and use many of the apps in your smartphone.
‘Intranet’ refers to a subset of the internet that is blocked off from the public and only available to a certain organisation. For example, a university might have a ‘private’ web portal where students can log in with a username and password and then see their schedules, access student message boards, or upload their assignments.
Networks A ‘network’ is a group of computer systems that communicate by physical and/or wireless connections. The wifi router you might have in your home is connected to the internet with a physical cable, and it then allows computers in your home to connect through the wireless network that it broadcasts.
Wireless technology Wireless technology is a fast-growing area of technology; as its name implies, it refers to communication without cables. Moreover, you are probably interacting with wireless technology regularly. You might connect headphones or other devices to your smartphone with Bluetooth, the car you drive might use Radio Frequency ID (RFID) tags embedded on individual components to monitor maintenance and repair history, and the shipping
Got it Pass eLearning Co Supplementary Notes company that delivers parcels to your home is probably using a variety of these technologies to track packages and monitor performance.
Categories of IS
Ensure that you understand and can distinguish between different types of information systems. While the latest developments in cloud computing, performance dashboards, and big data bring in new terminology and concepts, the following classic IS ideas form a starting place and are required knowledge for your Performance Management exam.
Transaction processing systems (TPS) These are systems used by operational staff to capture data and make processes more efficient, improving the accuracy and timeliness of information. Data will primarily be high- frequency and short term.
At your local supermarket, you end your shopping trips at the cashier when your groceries are probably scanned, and your total bill is then automatically calculated. This is a classic example of a TPS. The data collected helps the supermarket produce an accurate sales receipt and is also used to track inventory and understand shopping patterns.
Large retailers are now using ‘geo-analytic’ software which tracks your movements through a large store by monitoring your smartphone’s wifi signal from various routers. This is another example of a TPS.
Starbucks is beginning to use high-tech coffee machines in their stores that communicate information via the cloud on machine usage, maintenance, and even customer preferences—1examples of the transaction process, big data, and wireless technology.
Management information systems (MIS) These are systems used for structured decision-making that help managers analyse performance and control the business. They draw mainly on summarised, internal information from a company’s existing operations. For example, an MIS might help the manager of a supermarket to monitor inventory levels and determine reordering requirements, understand product profitability, and coordinate staff.
A modern MIS can access a variety of data types using big data and then present this information in real-time, with visualisations. An e-commerce company might build an MIS for a sales manager that monitors KPIs such as, ‘Site visit to purchase ratio,’ ‘regional sales status,’ or ‘sales by channel.’
Executive information system (EIS) These are systems that help senior managers analyse organisational performance, see trends, and make decisions with a highly summarised picture of the business. An EIS not only uses internal information but also brings in external information, like information related to the markets in which the company operates. A modern EIS is sometimes referred to as a
Got it Pass eLearning Co Supplementary Notes temperature?’ An effective performance management dashboard answers critical questions like for a business manager.
New tools are readily available, such as Microsoft Business Intelligence, that allows for the creation of highly customised dashboards for decision-makers at all levels of a company, drawing on many types of data (internal, external, financial, non-financial), to create customised performance metrics for any organisation.
Sources of information
A company has many sources of information to draw upon, which can be traditionally be categorised as internal vs. external. Internal information is easier to source, while external information can be more challenging to acquire. External information is particularly useful for strategic planning, when a company needs to consider market share, industry trends, and customer behaviors.
Internal sources can include, for example, the company’s accounting and production records, human resource records, website traffic, and call centre data. Information gained from these sources can enable a company to understand product profitability, production efficiency, and employee utilisation. A retailer analysing customer shopping behaviour with information from their CRMS would be using internal information.
External sources of information come from the environment in which a company operates and can include competitor’s websites, social media, credit rating agencies, and internet news, for example. A company that analyses feedback from social media sites and uses the internet research to identify new customer segments would be using external information.
Cost vs benefit Companies should ensure that the benefit received from management information exceeds the costs of gaining that information. For example, the implementation of an ERP system can bring many benefits, such as improved business intelligence, streamlined procedures, improved productivity, and lower cost per accounting transaction.
However, such a system also comes with costs. New software, hardware, testing, and other implementation costs will be incurred by the company, as well as potential disruption to people’s work routines, and the need to overcome resistance to change.
Controls over information systems Ensure that you have a working knowledge of the following controls over information systems for your Performance Management exam:
Physical controls These are controls that prevent unauthorised people from gaining physical access to
Got it Pass eLearning Co Supplementary Notes computer systems. Locked doors, picture IDs, and security cameras are examples of physical controls.
Logical controls Once someone has gained physical access to a computer system, the next level of security would be logical controls. Passwords and access rights are examples of logical controls.
Administrative controls Administrative controls are those that are designed to influence peoples’ behavior toward IS systems and practices. IT training and certifications, implementation of new procedures and discipline policies are examples of administrative controls.
Anti-virus Most computer users will be familiar with viruses: software intentionally created to harm your computer or data. While this is a complex topics which evolves quickly, the idea of anti-virus software is straight-forward: software designed to prevent, detect, and remove viruses. You most likely run both anti-virus and firewall (see below) software on your personal computer.
Firewall This term was first used to describe a physical wall in a building that keeps a fire contained; in IS, it describes a type of control that prevents access to a computer or computer network. Your company probably uses a firewall to keep hackers out of their computer networks, and if you are using a Windows operating system there is firewall functional included.
Validation Validation is a broad type of control used to ensure the accuracy, rather than security, or data. When you enter your birthday on a web form, you are usually asked to pick the date, month and year from pulldown menus or by clicking on a calendar tool. Moreover, you are probably not allowed to proceed to the next step of what you are doing if you left the birthday field blank. These are two examples of validation—the first control forces you to enter a valid date, and the second ensures you don’t leave the field blank.
Encryption This is a control whereby your data is encoded in a way that makes it extremely difficult for people to decode and then use your data if they were to gain access to it. Flash drives often come with encryption software included—this doesn’t prevent loss of the flash drive, but if it falls into the wrong hands it prevents unauthorise access.
Dial-back security This is an older type of control that comes from the era of dial-up networking when computer users often used a physical phone line to dial-in access the internet. This system works by calling the user back on a pre-determined phone line to ensure that access is being granted from an authorised location.
Got it Pass eLearning Co Supplementary Notes
Got it Pass eLearning Co Supplementary Notes
Chapter 2 Big Data
Executive Summary
Big data is part of the Performance Management syllabus. But what exactly is big data?
Got it Pass eLearning Co Supplementary Notes The volume of big data held by large companies such as Walmart (supermarkets), Apple and EBay is measured in multiple petabytes. A typical disc on a personal computer (PC) holds a gigabyte, so the big data depositories of these companies hold at least the data that could typically be held on 1 million PCs, perhaps even 10 to 20 million PCs.
The scale of this is difficult to comprehend. It is probably more useful to consider the types of data that large companies will typically store.
Retailers Via loyalty cards being swiped at checkouts: details of all purchases you make, when, where, how you pay, use of coupons.
Via websites: every product you have every looked at, every page you have visited, every product you have ever bought.
Social media (such as Facebook and Twitter) Friends and contacts, postings made, your location when postings are made, photographs (that can be scanned for identification), any other data you might choose to reveal to the universe.
Mobile phone companies Numbers you ring, texts you send (which can be automatically scanned for key words), every location your phone has ever been whilst switched on (to an accuracy of a few metres), your browsing habits. Voice mails.
Internet providers and browser providers Every site and every page you visit. Information about all downloads and all emails (again these are routinely scanned to provide insights into your interests). Search terms which you enter.
Banking systems Every receipt, payment, credit card information (amount, date, retailer, location), location of ATM machines used.
Variety
Some of the variety of information can be seen from the examples listed above. In particular, the following types of information are held:
Browsing activities: sites, pages visited, membership of sites, downloads, searches
Financial transactions
Interests
Buying habits
Got it Pass eLearning Co Supplementary Notes Reaction to advertisements on the internet or to advertising emails
Geographical information
Information about social and business contacts
Text
Numerical information
Graphical information (such as photographs)
Oral information (such as voice mails)
Technical information, such as jet engine vibration and temperature analysis
This data can be both structured and unstructured:
Structured data: this data is stored within defined fields (numerical, text, date etc) often with defined lengths, within a defined record, in a file of similar records. Structured data requires a model of the types and format of business data that will be recorded and how the data will be stored, processed and accessed. This is called a data model. Designing the model defines and limits the data which can be collected and stored, and the processing that can be performed on it.
An example of structured data is found in banking systems, which record the receipts and payments from your current account: date, amount, receipt/payment, short explanations such as payee or source of the money.
Structured data is easily accessible by well-established database structured query languages.
Unstructured data: refers to information that does not have a pre-defined data-model. It comes in all shapes and sizes and it is this variety and irregularity which makes it difficult to store in a way that will allow it to be analysed, searched or otherwise used. An often quoted statistic is that 80% of business data is unstructured, residing in word processor documents, spreadsheets, PowerPoint files, audio, video, social media interactions and map data.
Here is an example of unstructured data and an example of its use in a retail environment:
You enter a large store and have your mobile phone with you. That allows your movement round the store to be tracked. The store might or might not know who you are (depending on whether it knows your mobile phone number). The store can record what departments you visit, and how long you spend in each. Security cameras in the ceiling match up your image with the phone, so now they know what you look like and would be able to recognise you on future visits. You pass near a particular product and previous records show that you had looked at that product before, so a text message can be sent perhaps reminding you about it, or advertising a 10% price reduction. Perhaps the store has a marketing campaign
Got it Pass eLearning Co Supplementary Notes Increased customer loyalty
Increased competitive strength
Increased operational efficiency
Improved cost models
The discovery of new sources of revenue.
Examples of the uses of big data
Netflix: this company began as a DVD mailing service and developed algorithms to help it to predict viewers’ preferences and habits. Now it delivers films over the internet and can easily collect information about when movies are watched, how often films might be stopped and restarted, where they might be abandoned, and how users rate films. This allows Netflix to predict which films will be popular with which customers. It is also being used by Netflix to produce its own TV series, with much greater assurance that these will be hits.
Amazon: the world’s leading e-retailer collects huge amounts of information about customers’ preferences and habits which allow it to market very accurately to each customer. For example, it routinely makes recommendations to customers based on books or DVDs previously purchased.
Airlines: they know where you’ve flown, preferred seats, cabin class, when you fly, how often you search for a flight before booking, how susceptible you are to price reductions, probably which airline you might book with instead, whether you are returning with them but didn’t fly out with them, whether car hire was purchased last time, what class of hotel you might book through their site, which routes are growing in popularity, seasonality of routes. They also know the profitability of each customer so that, for example, if a flight is cancelled they can help the most valuable customers first.
This information allows airlines to design new routes and timings, match routes to planes and also to make individualised offers to each potential passenger.
Target: Target is the second largest discount retailer in the USA. There is an often quoted story about their ability to predict when a customer is pregnant – frequently before the customer has informed her family. By looking at about 25 products it is claimed that they can create a pregnancy predictor. For example, early pregnancy often causes morning sickness so consumers would perhaps change to blander food and less perfumed shower gel. Why would Target be interested in knowing whether a consumer is pregnant? Well that person will require different products during the pregnancy then in a few months the baby will have its own product needs: nappies, baby shampoo and clothes. Early identification of pregnancy can allow Target to establish the shopping habits of the mother and perhaps even the preferences of the child.
Got it Pass eLearning Co Supplementary Notes Tesco: British supermarket group Tesco has operations in several countries around the world. In Ireland, the company developed a system to analyse the temperature of its in- store refrigerators. Sensors were placed in the fridges that measured the temperature every three seconds and sent the information over the internet to a central data warehouse. Analysis of this data allowed the company to identify units that were operating at incorrect temperatures. The company discovered that a number of fridges were operating at temperatures below the -21◦C to -23◦C recommended. This was clearly costing the company in terms of wasted energy. Having this information allowed the company to correct the temperature of the fridges. Given that the company was spending €10 million per year on fridge cooling costs in Ireland, an expected 20% reduction in these costs was a significant saving.
The system also allowed the engineers to monitor the performance of the fridges remotely. When they identified that a particular unit was malfunctioning, they could analyse the problem then visit the store with the right parts and replace them. Previously the fridges would only be fixed when a problem had been discovered by the store manager, which would usually be when the problem had developed into something more major. The engineers would have to visit the store, identify the problem, and then make a second visit to the store with the required parts.
Dangers/risks of big data
Despite the examples of the use of big data in commerce, particularly for marketing and customer relationship management, there are some potential dangers and drawbacks.
Cost: It is expensive to establish the hardware and analytical software needed, though these costs are continually falling.
Regulation: Some countries and cultures worry about the amount of information that is being collected and have passed laws governing its collection, storage and use. Breaking a law can have serious reputational and punitive consequences.
Loss and theft of data: Apart from the consequences arising from regulatory breaches as mentioned above, companies might find themselves open to civil legal action if data were stolen and individuals suffered as a consequence.
Incorrect data (veracity): If the data held is incorrect or out of date incorrect conclusions are likely. Even if the data is correct, some correlations might be spurious leading to false positive results.
Extracted from articles by Ken Garrett, a freelance lecturer and writer, and Nick Ryan, a subject matter expert for BPP
Got it Pass eLearning Co Supplementary Notes
Ken Garrett demystifies activity-based costing and provides some tips leading up to the all-important exams
Conventional costing distinguishes between variable and fixed costs. Typically, it is assumed that variable costs vary with the number of units of output (and that these costs are proportional to the output level) whereas fixed costs do not vary with output. This is often an over-simplification of how costs actually behave. For example, variable costs per unit often increase at high levels of production where overtime premiums might have to be paid or when material becomes scarce. Fixed costs are usually fixed only over certain ranges of activity, often stepping up as additional manufacturing resources are employed to allow high volumes to be produced.
Variable costs per unit can at least be measured, and the sum of the variable costs per unit is the marginal cost per unit. The marginal cost is the additional costs caused when one more unit is produced. However, there has always been a problem dealing with fixed production costs such as factory rent, heating, supervision and so on. Making a unit does not cause more fixed costs, yet production cannot take place without these costs being incurred. To say that the cost of producing a unit consists of marginal costs only will understate the true cost of production and this can lead to problems. For example, if the selling price is based on a mark-up on cost, then the company needs to make sure that all production costs are covered by the selling price. Additionally, focusing exclusively on marginal costs may cause companies to overlook important savings that might result from better controlled fixed costs.
Absorption costing
The conventional approach to dealing with fixed overhead production costs is to assume that the various cost types can be lumped together and a single overhead absorption rate derived. The absorption rate is usually presented in terms of overhead cost per labour hour, or overhead cost per machine hour. This approach is likely to be an over-simplification, but it has the merit of being relatively quick and easy.
Example 1
Got it Pass eLearning Co Supplementary Notes
In Table 1 in the spreadsheet above, we are given the budgeted marginal cost for two products. Labour is paid at $12 per hour and total fixed overheads are $224,000. Fixed overheads are absorbed on a labour hour basis.
Based on Table 1 the budgeted labour hours must be 112,000 hours. This is derived from the budgeted outputs of 20,000 Ordinary units which each take five hours (100,000 hours) to produce, and 2,000 Deluxe units which each take six hours (12,000 hours).
Therefore, the fixed overhead absorption rate per labour hour is $224,000/112,000 = $2/hour.
The costing of the two products can be continued by adding in fixed overhead costs to obtain the total absorption cost for each of the products.
F5 Performance Management ( Notes)
Course: Association of Chartered Certified Accountants - ACCA (PAC150)
University: INTEC Education College
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