Topic: Other Aspects of Performance Measurement

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  • 5 Marks

MA – Aug 2022 – L2 – Q4b – Other aspects of performance measurement

This question discusses the relationship between conformance and non-conformance costs using data from Mante Ltd.

Mante Ltd is reviewing its progress toward meeting its objective of having a reputation for producing high-quality products. Extracts from the company’s records for each of the years ended 31 October 2020 and 2021 are shown below.

Description 2021 2020
% of units rejected by customers 15% 21%
% of units rejected before delivery 15% 5%
Cost as % of revenue:
Raw material inspection 10% 3%
Training 7% 4%
Preventive machine maintenance 8% 2%
Machine breakdown maintenance 4% 11%
Finished goods inspection 8% 2%

Required:
Discuss, using the above data, the relationship between conformance costs and non-conformance costs and its importance to Mante Ltd.

Conformance costs are costs incurred to ensure that products meet quality standards before they are delivered to customers. These include prevention and appraisal costs, such as raw material inspection, training, and preventive maintenance.
Non-conformance costs, on the other hand, arise when products fail to meet quality standards. These include internal and external failure costs, such as machine breakdown maintenance and customer rejections.

In the case of Mante Ltd, an increase in conformance costs from 2020 to 2021 (e.g., raw material inspection rose from 3% to 10%, training from 4% to 7%, and preventive maintenance from 2% to 8%) correlates with a significant decrease in non-conformance costs, as evidenced by the drop in customer rejections from 21% to 15%.

The relationship between conformance and non-conformance costs is crucial: by increasing spending on conformance (prevention and appraisal), Mante Ltd has reduced external failures, as shown by the lower rejection rates from customers. Additionally, spending more on preventive measures (e.g., preventive machine maintenance) has reduced machine breakdown maintenance costs, which fell from 11% to 4%.

Importance to Mante Ltd:
By focusing on conformance costs, Mante Ltd is effectively reducing the costs associated with poor quality. This strategy not only enhances its reputation for high-quality products but also leads to better financial performance as the costs of dealing with failures (both internal and external) decline. Improving quality control processes internally helps prevent defective products from reaching customers, which in turn reduces the need for rework, refunds, or warranty claims, leading to overall cost savings and customer satisfaction.

  • 20 Marks

MA – Aug 2022 – L2 – Q1 – Other aspects of performance measurement

This question asks about the Balanced Scorecard concept, its differences from traditional measures, and benchmarking to improve company performance.

Ancient Ltd is a company engaged in the assembling and selling of computers, mobile phones, and their accessories. This company has been the market leader for the last 5 years in this field but is now incurring losses due to decreasing demand and escalating production costs. Currently, the company evaluates its performance using financial measures. The managing director of Ancient Ltd has learned at a recently attended workshop that the concepts of Balanced Scorecard and Benchmarking could be used to improve the performance of organizations. It was also noted that the Balanced Scorecard should be considered at the strategic planning stage in order to set smart objectives.

Required:
a) Explain the concept of the Balanced Scorecard approach to performance measurement.
(2 marks)

b) State TWO (2) differences between the Balanced Scorecard and Traditional Performance measures.
(3 marks)

c) Explain the role of each perspective of the Balanced Scorecard approach at the strategic planning stage. (You are required to give an example of performance measures for each perspective.)
(8 marks)

d) How can the concept of benchmarking be used to improve the performance of Ancient Ltd.?
(3 marks)

e) Explain with an example, how benchmarking could be used to improve performance measures in relation to the customer perspective of Ancient Ltd’s Balanced Scorecard.
(4 marks)

a) Balanced Scorecard (BSC)
Traditional methods of performance measurement focus only on financial measures such as profit, ROI, etc., which are derived from historical data without any future incorporation. The Balanced Scorecard breaks away from these traditional concepts and proposes, in addition to financial measures, three non-financial performance measurement areas for organizations, namely:

  • Customer perspective
  • Internal business perspective
  • Innovation and learning perspective.
    (2 marks)

b) Differences between Balanced Scorecard and Traditional Approach

  • The Scope: BSC covers financial and non-financial performance measures, whereas the traditional approach focuses solely on financial measures.
  • Decision-making: BSC leads to optimal decision-making by considering all performance measurements, unlike the traditional approach, which concentrates only on profit.
    (2 points @ 1.5 marks = 3 marks)

c) BSC at Strategic Planning Stage
BSC helps set strategic objectives in all four perspectives:

  • Customer Perspective:
    The organization should ask, “To achieve our vision, how should we appear to our customers?” Objectives could include:

    • New customer acquisitions (e.g., 40% increase)
    • Customer retention (e.g., 95% retention ratio)
    • On-time delivery (e.g., 98% delivery rate)
    • Customer complaints reduction to 1%.
  • Internal Perspective:
    The organization must ask, “What must we excel at to achieve our financial and customer objectives?” Objectives could include:

    • New product introduction (e.g., introduce 4 new products next year)
    • Percentage of sales from new products (e.g., 20% of sales)
    • Reduction in production losses (e.g., 2% reduction)
  • Learning and Growth Perspective:
    Organizations must continue to improve and create value by investing in infrastructure, people, systems, and organizational procedures. Objectives could include:

    • Employee skill level
    • Training availability
    • Employee satisfaction (e.g., reduce turnover to 0.5%)
  • Financial Perspective:
    Organizations must address how to create value for shareholders. Objectives could include:

    • Sales growth (e.g., 40%)
    • Gross profit ratio (e.g., 30%)
    • Return on Investment (e.g., 25%)
    • Unit cost reduction by 20%.
      (2 marks for 4 perspectives = 8 marks)

d) Benchmarking
Benchmarking is the continuous search for and adaptation of significantly better practices that lead to superior performance. This is done by investigating the performance and practices of other organizations, such as industry leaders or similar industries. By adopting these best practices, Ancient Ltd. can elevate its performance to industry-standard levels.
(3 marks)

e) Benchmarking and Customer Perspective
Benchmarking can improve customer perspective performance by adopting best customer-oriented practices from other organizations. For example:

  • Adopting the market leader’s customer complaints handling procedures.
  • Improving after-sales procedures by using best practices.
  • Enhancing invoicing and product delivery systems according to industry best practices.
    By adopting such practices, Ancient Ltd. can improve performance related to customer satisfaction.
    (4 marks)
  • 4 Marks

MA – May 2018 – L2 – Q2c – Other aspects of performance measurement

Explain two limitations of management information in providing guidance for managerial decision-making.

Explain TWO limitations of management information in providing guidance for
managerial decision-making.

  1. Failure to Meet the Requirements of Good Information
    If the information supplied to managers is deficient or inaccurate, it may lead to poor decision-making. Inadequate or irrelevant data can result in decisions that are not based on a comprehensive understanding of the situation, potentially causing adverse outcomes.
  2. The Problem of Relevant Costs and Revenues
    Not all information from accounting systems is relevant for decision-making. Effective decisions depend on considering only future costs and benefits that will be affected by the decision. Factors such as sunk costs (previously incurred costs) and non-incremental costs (unchanged fixed costs) should be excluded from decision-making processes.
  • 5 Marks

MA – July 2023 – L2 – Q2b – Other aspects of performance measurement

This question requires an explanation of three key features of Total Quality Management (TQM).

Total Quality Management (TQM) ensures that all components of an industry work together to improve the quality of its services and products.

Required:
Explain THREE (3) features of Total Quality Management.
(5 marks)

Features of Total Quality Management (TQM):

  1. Continuous Improvement:
    TQM emphasizes the need for ongoing improvement in all processes, products, and services. This involves consistently seeking ways to reduce waste, increase efficiency, and enhance the quality of outputs. Continuous improvement is often implemented through methodologies like PDCA (Plan-Do-Check-Act) and Six Sigma.
  2. Customer Focus:
    TQM places a strong emphasis on understanding and meeting customer needs and expectations. The primary goal is to achieve customer satisfaction by delivering high-quality products and services. This involves actively listening to customer feedback, understanding their requirements, and ensuring that these needs are met or exceeded.
  3. Employee Involvement:
    TQM encourages the involvement of all employees at every level of the organization in the quality improvement process. It recognizes that quality is everyone’s responsibility and that empowering employees to contribute ideas and take ownership of their work can lead to significant improvements in quality. This feature promotes teamwork, open communication, and a sense of ownership among employees.

(Any 3 points @ 1.667 marks each = 5 marks)

  • 10 Marks

MA – Nov 2020 – L2 – Q3a – Performance Analysis, Other Aspects of Performance Measurement

Identify and explain the four perspectives of the Balanced Scorecard.

a) The aim of a balanced scorecard is to provide a comprehensive framework for translating a company’s strategic objectives into a coherent set of performance measures. It allows managers to look at the business from four different perspectives.

Required: Identify and explain these FOUR (4) perspectives.

  • Customer Perspective:
    • Explanation: In the customer perspective of the Balanced Scorecard, managers identify the customer and market segments in which the business unit will compete and the measures of the business unit’s performance in these targeted segments. This perspective typically includes core measures such as customer satisfaction, customer retention, new customer acquisition, customer profitability, and market share in targeted segments.
    • Key Question: What do existing and new customers value from us?
    • Importance: This perspective emphasizes delivering value propositions that attract and retain customers in targeted market segments.
  • Internal Business Process Perspective:
    • Explanation: This perspective focuses on the critical internal processes in which the organization must excel to deliver value propositions to customers and satisfy shareholder expectations of excellent financial returns. It aims to improve internal processes and decision-making, ensuring consistent levels of product and service quality.
    • Key Question: What processes must we excel at to achieve our financial and customer objectives?
    • Importance: It emphasizes the importance of efficient and effective internal processes to achieve strategic goals.
  • Innovation and Learning Perspective:
    • Explanation: The learning and innovation perspective focuses on the organization’s capacity to continue improving and creating future value. It involves developing employee capabilities, encouraging innovation, and ensuring the business can maintain its competitive position through the acquisition of new skills and development of new products.
    • Key Question: Can we continue to improve and create future value?
    • Importance: This perspective is crucial for long-term growth and sustainability, as it addresses the organization’s ability to adapt and innovate.
  • Financial Perspective:
    • Explanation: The financial perspective involves the traditional financial performance measures that indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement. These measures include profitability, growth, and shareholder value.
    • Key Question: How do we create value for our shareholders?
    • Importance: It ensures that the company’s strategy is aligned with financial objectives and that financial performance is monitored to meet shareholder expectations.
  • 10 Marks

MA – May 2020 – L2 – Q2a – Other Aspects of Performance Measurement

Discuss four management concepts that can be used by a management accountant to achieve customer satisfaction.

a) Given the dynamic environment within which organisations operate, the Management Accountant’s role has evolved to include providing information that would assist the firm to design strategies geared towards achieving competitive advantage through sustained customer satisfaction. These strategies target key success factors which include cost efficiency, quality, time, and innovation because of the value placed on them by customers.

Required:

i) Discuss FOUR (4) management concepts that the Management Accountant can use to achieve customer satisfaction. (8 marks)

ii) State FOUR (4) questions that a good decision maker might pose in order to make an assessment of the value of information. (2 marks)

i) Total Quality Management (TQM):
Total Quality Management is a term used to describe a situation where all business functions are involved in a process of continuous quality improvement that focuses on delivering products or services of consistently high quality in a timely fashion. Through TQM, organizations seek to increase customer satisfaction not only by emphasizing quality products and services but also by providing speedier responses to customer requests.

Benchmarking:
Benchmarking is a technique that is increasingly being adopted as a mechanism for achieving continuous improvement. It is a continuous process of measuring a firm’s products, services, or activities against other best-performing organizations, either internal or external to the firm. It enables organizations to achieve high competitive standards desired by customers.

Employee Empowerment:
Employee empowerment relates to providing employees with relevant information to enable them to make continuous improvements to the output of processes. This empowerment allows employees to respond faster to customers, increase price flexibility, reduce cycle time, and improve morale.

Value Chain Analysis:
Value chain analysis is the linked set of value-creating activities from basic raw material sources or component suppliers through to the ultimate end-use product or service delivered to the customer. Value is created through research and development, design, production, marketing, distribution, and customer service. Coordinating the individual parts of the value chain together to work as a team creates the conditions to improve customer satisfaction.

(Any 4 well-explained points @ 2 marks each = 8 marks)

ii) Questions for assessing the value of information: These include:

  • What information is provided?
  • What is it used for?
  • Who uses it?
  • How often is it used?
  • Does the frequency with which it is used coincide with the frequency with which it is provided?
  • What is achieved by using it?
  • What other relevant information is available which could be used instead?

(Any 4 points for ½ a mark = 2 marks)

  • 10 Marks

MA – May 2021 – L2 – Q3b – Other aspects of performance measurement

b) The Estate Manager of Swift International Company was charged to coordinate the procurement process for the award of a contract to construct a warehouse for the company. In the process, the Chief Executive Officer (CEO) called on the manager to ensure the contract is awarded to Gyidi Construction Works, whose owner is the CEO's friend. When the bids were evaluated, Gyidi placed fourth in terms of responsiveness but being guided by the CEO’s directive, the project was awarded to Gyidi Construction Works. Being guilty of not acting professionally, the estate manager admitted that he had acted unethically. Required: Identify and explain FOUR (4) threats to ethical behaviour as a Management Accountant. (10 marks)

b) The Estate Manager of Swift International Company was charged to coordinate the procurement process for the award of a contract to construct a warehouse for the company. In the process, the Chief Executive Officer (CEO) called on the manager to ensure the contract is awarded to Gyidi Construction Works, whose owner is the CEO’s friend. When the bids were evaluated, Gyidi placed fourth in terms of responsiveness but being guided by the CEO’s directive, the project was awarded to Gyidi Construction Works. Being guilty of not acting professionally, the estate manager admitted that he had acted unethically.

Required:
Identify and explain FOUR (4) threats to ethical behaviour as a Management Accountant. (10 marks)

 

Threats to Ethical Behaviour as a Management Accountant:

  1. Self-interest threat:
    The threat that a financial or other interest will inappropriately influence the management accountant’s judgment or behaviour. For example, the potential for personal gain could lead to biased decision-making.
  2. Self-review threat:
    The threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the management accountant, or by another individual within the management accountant’s firm or employing organisation, on which the accountant will rely when forming a judgment as part of providing a current service.
  3. Advocacy threat:
    This occurs when a professional accountant promotes a client’s or employer’s position to the point that the management accountant’s objectivity is compromised. For instance, pushing for the CEO’s friend to win the contract could bias the accountant’s professional judgment.
  4. Familiarity threat:
    The threat that due to a long or close relationship with a client or employer, a management accountant will be too sympathetic to their interests or too accepting of their work. The estate manager’s familiarity with the CEO may have influenced the decision to act unethically.
  5. Intimidation threat:
    The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the management accountant. For example, pressure from the CEO could lead to decisions that go against professional ethics.
  • 5 Marks

MA – May 2021 – L2 – Q2a – Other aspects of performance measurement

Identify and explain consequences of environmentally unfriendly corporate practices on profits.

a) The Climate Adaptation Summit (CAS 2021) sought to tackle head on, the imminent catastrophe, which, the unattended climate change can unleash on the world. This is perceived to be more disastrous than the COVID-19 pandemic. So far, accountants have not agreed on how to quantify damages caused to the environment by a company’s operations in the accounts unless they come in the form of a fine.

Required:
Identify and explain FOUR (4) consequences of environmentally unfriendly practices of corporate entities that may negatively influence their profits. (5 marks)

Consequences of environmentally unfriendly practices:

  1. Fines imposed when pollution levels are exceeded: Companies may face significant financial penalties for exceeding legally established pollution limits.
  2. Lawsuits for breaching emission levels: Breaching environmental regulations can lead to costly legal actions, which may result in heavy compensation payments or settlements.
  3. Environmental taxes: Governments may impose additional taxes on companies that engage in practices harmful to the environment, increasing operating costs.
  4. Loss of customers: Consumers are increasingly favoring environmentally conscious companies, leading to potential loss of market share and reduced sales for companies with poor environmental records.
  5. Damaged corporate reputation: Negative publicity related to environmental harm can damage a company’s reputation, affecting brand value and long-term profitability.
  6. Reduced land value: Environmental degradation caused by a company can lead to reduced property values, impacting the company’s assets and overall financial standing.
  7. Inability to attract expertise: Companies known for poor environmental practices may struggle to attract top talent, particularly those who prioritize working for socially responsible organizations.
  8. Inability to attract funding from potential investors: Investors are increasingly considering environmental, social, and governance (ESG) factors in their investment decisions. Companies with environmentally unfriendly practices may find it difficult to secure funding.
  • 6 Marks

MA – May 2017 – L2 – Q1c – Performance analysis, Other aspects of performance measurement

Explain cost center, revenue/profit center, and investment center in terms of their managerial objectives and performance measurement indexes.

Explain in brief the following terminologies as used in performance evaluation, highlighting their managerial objectives and the performance measurement indexes:

i) Cost centre
ii) Revenue/profit centre
iii) Investment centre

(6 marks)

i) Cost Centre:

Cost centres are responsibility centres where the managers have authority only to incur costs. These centres only incur costs but do not directly generate revenues. Managers of such cost centres are therefore evaluated based on their ability to control costs. The manager’s ability to meet the goals of budgeted controllable costs becomes the main focus. The evaluation reports for the centre compare the actual controllable costs with flexed controllable costs budget data.

(2 marks)

ii) Revenue/Profit Centre:

Managers of profit centres have responsibility to incur costs as well as generate revenues. Managers of these centres are therefore evaluated based on the profitability of their centres. To evaluate the performance of managers of profit centres, information on controllable costs and revenues are gathered. Fixed costs must be distinguished between direct and indirect costs. The profitability of these centres is measured by the controllable margin (contribution less controllable fixed costs).

(2 marks)

iii) Investment Centre:

Investment centres, in addition to incurring costs and expenses and generating revenues, have control over investment decisions (acquisition and disposal of long-term assets). Managers of investment centres are evaluated both on the profitability of the centres they manage and the rate of return on the funds invested. Since investment centre managers have control or significant influence over investment funds, the primary basis for evaluating the performance of the managers is the return on investment (ROI).

(2 marks)

  • 3 Marks

MA – May 2017 – L2 – Q1b – Other aspects of performance measurement

Explain three qualities of management accounting information in terms of their importance for decision making.

While managers can use different leadership styles, they all share the task of utilizing information to make decisions that achieve organizational goals. Accounting information for decision making will differ in terms of its details depending on the user.

Required:

Explain THREE qualities of Management Accounting information. (3 marks)

Answer:

The qualities of Management Accounting information include:

  1. Relevance:
    Information should be timely and bear on the decision-making process by possessing predictive or confirmatory (feedback) value.
  2. Faithful Representation:
    Information must be truthful, complete, neutral, and free from error.
  3. Comparability:
    Even though different companies may use different accounting methods, there is still sufficient basis for valid comparison.

Additional points from the original answer but not required since only three qualities were asked:

  • Consistency:
    Deviations in measured outcomes from period to period should be the result of deviations in underlying performance (not accounting quirks).
  • Verifiability:
    Different knowledgeable and independent observers reach similar conclusions.
  • Timeliness:
    Information should be available in sufficient time to be capable of influencing decisions.
  • Understandability:
    Information should be clear and concise to those with reasonable business knowledge.

While managers can use different leadership styles, they all share the task of utilizing information to make decisions that achieve organizational goals. Accounting information for decision making will differ in terms of its details depending on the user.

Required:

Explain THREE qualities of Management Accounting information. (3 marks)

Answer:

The qualities of Management Accounting information include:

  1. Relevance:
    Information should be timely and bear on the decision-making process by possessing predictive or confirmatory (feedback) value.
  2. Faithful Representation:
    Information must be truthful, complete, neutral, and free from error.
  3. Comparability:
    Even though different companies may use different accounting methods, there is still sufficient basis for valid comparison.

Additional points from the original answer but not required since only three qualities were asked:

  • Consistency:
    Deviations in measured outcomes from period to period should be the result of deviations in underlying performance (not accounting quirks).
  • Verifiability:
    Different knowledgeable and independent observers reach similar conclusions.
  • Timeliness:
    Information should be available in sufficient time to be capable of influencing decisions.
  • Understandability:
    Information should be clear and concise to those with reasonable business knowledge.

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