A BIG THANKS TO

FOR THIS MOCK

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ACCA MOCK
Advance Performance Management
APM

Advanced Audit and Assurance

Time allowed: 3 hours 15 minutes

Attempt all three questions

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1 To: Executive management - Upkeep

From: Manager – AB Consultants and Advisors
Date: DD-MM-YYYY
Subject: Performance indicators for Upkeep

Introduction
We have been hired as consultants to help management of Upkeep in improving
the performance of the organisation by evaluating the current appraisal process
and providing recommendation where possible to improve the appraisal process
to ensure that the objectives of Upkeep are achieved with as minimum
resources as possible.
The report is divided into five sections and appendixes, the first section
evaluates the current KPIs of Upkeep, the second section explains the
importance of the non-financial indicators that might suit Upkeep, the third
section lists some of the KPIs that we believe will help improve the performance
of the organisation, the fourth section compares the current performance taking
account of old and new (proposed) KPIs and, finally, in the last section we list
some of the changes in the current KPIs that Upkeep is using to better function
in the environment in which Upkeep operates, as we acknowledge that fact that
a change at such a strategic level is not easy and takes time. After all these
sections of the main body, the report ends with a summarised conclusions
paragraph.

Usefulness of the current KPIs

The current KPIs that Upkeep has are not very suitable for the company, as they
are fit for profit oriented business. Upkeep does not aim to make profit,
therefore indicator like net surplus or deficit of income over expense margin and
return on investment are not suitable for Upkeep. These indicators are relatively
less useful for companies like Upkeep, even if this ratio is high, how can this ratio
help Upkeep become better. Maximisation of net surplus is not an objective of a
humanitarian company. Management should not waste time in evaluating such
indicators, which will lead the company nowhere. The last indicator of Upkeep
that is used by the management uses variance analysis to keep a close eye on
the expenses. This indicator can help management to evaluate the economy of
the resources it is using to achieve the objectives. It is a good KPI to evaluate the
performance of Upkeep, as controlling cost will help Upkeep achieve objectives
economically.

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Non-financial KPIs for Upkeep (importance and need)

The objectives of not-for-profit organisations (NPOs) are usually non-financial
ones, the objectives cannot be easily quantified, therefore, the indicators of such
companies should include non-financial KPIs. The performance of such companies
should not be evaluated only taking account of financial indicators, aspects like
quality, relations, satisfaction and effectiveness are very important NOPs. The
current mechanism for performance evaluation in Upkeep only take account of
financial KPIs and ignore the qualitative aspects of the company. Humanitarian
companies like Upkeep strive for a concept what we call ‘value for money’ (VFM),
the VFM can is achieved by the economy (cost of inputs), efficiency (inputs in
relation to outputs) and effectiveness (quality of outputs). The aspects of VFM are
too complicated to just be covered by financial indicators, hence, including a mix
of financial and non-financial KPIs is necessary for companies like Upkeep to
evaluate their performance appropriately.

Recommendation of KPIs for Upkeep

Looking at the working environment of Upkeep, we recommend the following KPIs
for Upkeep:

1- Beneficiaries reached per grant received – calculated by dividing total

beneficiaries by grants received.
2- Cost incurred per beneficiaries reached – calculated by dividing total cost
incurred for the period by beneficiaries reached.
3- Growth rate of grants received – calculated by dividing the increase (or
decrease) in grant received by base figure of grants received (i.e. previous year’s
figure).
4- Direct program costs in relation to total costs of Upkeep – calculated by dividing
the direct program activity costs by total costs incurred during the period.
5- Total cost incurred per phase completed – calculated by dividing the total costs
incurred for the period by total phases completed.
6- Total grants received per satisfied beneficiary – calculated by dividing total
grants received for the period by total satisfied beneficiaries.
7- Cost incurred per satisfied beneficiaries – calculated by dividing total cost
incurred for a period by satisfied beneficiaries.

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Performance evaluation of Upkeep based on new KPIs

Please refer to appendix A and B for the details of calculations. Appendix A details
the KPIs that we have recommended in the previous section of this report and
appendix B details the KPIs that Upkeep already uses.
Looking at the calculations, we can see how drastically the performance evaluation
differs in both mechanisms. Let’s first have a look at how the current framework
would show performance of Upkeep. Apart from grants received all the variances
are adverse, the net deficit in both years have increased significantly, depicting an
increase in the inefficiency of the organisation. Moving forward to the next KPI, net
surplus or deficit of income over expense margin also shows a worsening of the
position from 12% deficit to 15%. However, this KPI as discussed above is not very
ideal to judge the performance of a humanitarian organisation. To increase this
margin should not be an objective of this company, as all the funds that are
received are for welfare and humanitarian activities, any savings cannot be retained
by the company, all expenses as depicted in the budget should be carried out,
however, if the company does perform all the activities economically, the surplus
can be used by Upkeep to invest in extended activities as approved by the donors.
However, this can be ensured by proper a budgetary system. The last indicator is
even more inappropriate for companies like Upkeep, ROI is purely a profit oriented
indicator, there is no objective, or rather a concept, of financial return in
humanitarian organisations. Still, the ROIs for both years, calculated for Upkeep,
show an increase in the deficit from 20% to 37%. Now let’s shift out focus to the
indicators in appendix A, the beneficiaries per grant have increased, this indicator
shows that more beneficiaries can be entertained with each $ of grant received.
This can be considered good for Upkeep as it can invest more on each beneficiary
now, however, a stable ratio can be considered more optimal depicting as the
grants are increasing so are the targeted beneficiaries. An increase shows that the
target beneficiaries are not increasing at the same pace. The next indicator is the
cost per beneficiary, the cost per beneficiary has been reduced, this is a good sign.
This shows that the total admin costs are reducing and Upkeep is reaching
beneficiaries more economically, this ratio is indicating an increase in both economy
and efficiency of Upkeep. The next indicator is the growth in the in the grants
received, this is one of the most fundamental indicators that Upkeep should adopt,
the data shows that there is a growth of 25% in the receipts, the organisation
should focus great efforts on the maintenance or increase of this indicator.

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The next indicator is the portion of direct cost as compared to the total cost incurred
by Upkeep. It shows an increase, this is a good sign, depicting that admin costs are
reducing and direct program costs are increasing, indicating effectiveness of Upkeep.
The net indicator on our list is total cost incurred per completed phase, the indicator
depicts a lowering of cost incurred to complete each phase, again an indicator of
economy and efficiency of Upkeep. The next indicator is total receipts per satisfied
beneficiaries, this indicator is showing a decrease, this should be an area of concern
for Upkeep, indicating that the satisfied beneficiaries’ number is relatively lowered in
2015. Moving ahead to the last indicator, we can see the cost per satisfied beneficiary
has also decreased, again this either depicts lowered satisfied beneficiary number or
increase in efficiency and economy of Upkeep.
As we can see correct indicators allow a company to focus their efforts in areas that
really matter for a company.

Changes in the existing 3 KPIs

We recommend the following changes in the current indicators for the time being
until Upkeep is ready to change the entire performance evaluation system:
1- Add more detailed variance analysis, detailing breakup of the direct and shared
costs, to have a better picture of the cost structure.
2- Change the net surplus or deficit of income over expense margin to simple direct
program expense margin calculated by dividing the direct expenses with the total
grants received, it is a better indicator of efficiency.
3- Change the ROI to a tailored fundraising ROI, tracking the efficiency by changing
the denominator of the ratio from general funds to capital employed (fixed assets).
4- Change the ROI to depict costs incurred instead of net surplus made, as controlling
cost can be considered a better objective of NPO rather than increasing the net
surplus.

Conclusion
As stated in the report, Upkeep should change the current appraisal structure of the
company, current KPIs are not optimal for Upkeep. New proposed KPIs can help
Upkeep to better evaluate its VFM, but as it is a strategic change, we recommend
some temporary changes in the current scheme of indicators to evaluate the
performance for the time being.
Sincerely
Manager – AB Consultancy and Advisory

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Capital Employed ($) 500,000 500,000 500,000 Nil

Re-commutation of bonus
Eligibility for division A: not eligible as the net profit variance is adverse $10,000.
Eligibility for division B: not eligible as the net profit variance is adverse $6,000.
Eligibility for division C: eligible as the net profit variance is favourable $5,800.
Bonus distribution:
Manager of division A: Nil
Manager of division B: Nil
Manager of division C: $42,523 (Working 1)

Impact the new computations of performance evaluation

As evident from the new calculations, each of the division if seen in isolation (taking
account of the flexed budgets), shows a better picture of the performance of the
company. Both divisions A and B have an adverse variance while only division C
shows favourable picture. Hence, according to the policy of the company, only
division C is eligible for the bonus. Additionally, the size of division should not be
used as the basis of bonus division, as it can be seen, product C has the lightest
capital investment but is most profitable among all the three products, switching to
net profit generated as the basis of allocation of bonus seems a batter variable. We
can see how the profit attributable to the division has significantly increased after
using net profit as the basis of apportionment.

(b) Drawbacks of standard costing

1. Expensive and time consuming process.
2. 2. Ignores qualitative aspects of the business like the quality of raw materials.
3. Ignores concepts like lead time and customer satisfaction.
4. Can only work in companies that manufacture or deal in standard products.
Cannot be applied on non-standardised production processes.
5. Standard costing has a reactive nature, cannot ensure prevention from
inefficiencies.
Advantages of using target costing
1. Target costing takes company towards cost optimisation, this company has set its
standards around net profit, which makes it very clear that the company is cost
oriented. Target costing can help a company reach its desired cost structure.

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2. Predictability of profit can be achieved, as the company will set the cost markups,
it would know how much profit will be achieved from the operations.
3. Target costing has a more proactive approach, focusing on both price and cost
control.
4. Analysis from target costing can be used to help improve processes and remove
duplications or inefficiencies.
5. Can be used by companies that do not deal in standardised products, although
MLK Ltd. has three standard products, devising standards for all three products is a
time consuming process, principles of target costing can be uniformly applied on an
entire organisation.

According to target costing, only product B has a cost gap, meaning, it is not as per the
management’s expectations in generating mark-up on the cost. Remaining both
products (A and C) are performing better in terms of target costing, therefore, we can
say that these products are efficiently produced. However, the results of standard
costing are very different, according to standard costing only product C shows
favouable variance.

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We have seen the drawbacks of standard costing and advantages of target costing,
the comments of CEO appear accurate, the company should adopt target costing to
monitor its performance.

Working 1:
Total profit generated: $120,200
Amount of profit attributable to bonus: $120,400 / 2 = $60,200
Amount of bonus attributable to division C: $85,045 / $120,400 x $60,200 =
$42,523

Working 2:
Target cost for product A = $10 / 1.2 = $8.33
Target cost for product B = $12 / 1.25 = $9.6
Target cost for product C = $20 / 1.4 = $14.29

3 (a) Balanced scorecard

The balanced scorecard is a performance management process that uses
automation tools to help managers control and monitor business activities.
Balanced score’s popularity is due to the fact that it focuses on the strategy of the
organisation and mixes the financial and non-financial factors when evaluating the
performance. The name ‘balanced’ is given to this tool as it evaluates the
performance of a business from 4 perspectives:
1. Financial indicators – focus on inputs and costs, e.g. ROI, ROCE, ROE, etc.
2. Customer indicators – focus on soft issues like quality, perception and
satisfaction, e.g. delivery time, customer complaints, new customer, customer
retention, etc.
3. Internal business processes indicators – focus on economy and efficiency, e.g.
unit costs, yields, setup costs, etc.
4. Learning and growth indicators – focus on innovation and improvements, e.g. life
cycle costing, R&D ratio, time to market, etc.

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(b) Notes on six sigma

Introduction slide
Six sigma is an approach that aims at improving the quality and eliminating
defects. The philosophy of six sigma is to improve the quality of outputs by
identifying the flaws in the business processes and removing them. The process
of six sigma uses the concepts of statistics in identifying the standard deviations
in the process.
This approach is very popular among the businesses, no matter which sector
they relate to. The focus of six sigma is not on cost but rather on the elimination
of defects and customer satisfaction. Multinational companies are adopting
these modern techniques for managing business activities because the focus of
such techniques is considered superior to traditional business tools and
techniques that were more cost driven.

Process of six sigma

Six sigma can be achieved by a DMAIC methodology that helps in the
implementation of the philosophies of six sigma in business operations. The
DMAIC stands for define, measure, analyse, improve and control.

Define
The customer specifications and requirements are used to define the processes
and systems of the company. The goals of the company are altered to become in
line with what customers want.
Floor Co. needs to hold a survey to ensure that it knows what the customers
expect from the company. The business should be directed by the expectations
of the customers because we all know that ‘customer is always right’.

Measure
Next step would be to collect data on the existing processes in place, to see how
they are achieving the objectives. This step relates to how the processes are
functioning now. The processes should be structured in such a way as to achieve
the objectives that are aimed at customer satisfaction. This should be relatively
easy for Floor Co., the management needs to gather all the data they have on
the existing processes, the monitoring reports, quality control reports, internal
audit reports or management letters issued by the external auditors. The
management can also start a more focused data gathering process, especially
aimed at the implementation of the six sigma.

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Analyse
The next stage of the process is to analyse the data collected from the current
processes. The analysis is performed to identify the root causes of the issues that
the current processes have embedded in them. The focus of the analysis is to
evaluate cause and effect relationship. The data that is gathered by Floor Co. will
have to be analysed in detail by the management. This is a key process, so
management needs to invest sufficient efforts to ensure that correct causes of the
issues in the current processes are identified.

Improve
This next step is aimed at improving the current processes, this can have two
alternates, either the current processes are improved by inserting patches where
needed, or the management could devise new processes for the updated
objectives. Management of Floor Co. needs to evaluate the results of the analysis,
to see if they can amend the current processes to new objectives or would they
need to devise new processes.

Control
The final stage of the six sigma implementation methodology is to control and
monitor the progress, management of Floor Co. would need to have a close watch
on the progress of the change that they approved. The continuous monitoring
enables the management to identify issues in the implementation at an early stage,
and therefore, corrective actions can be taken to ensure that the desired results are
obtained.

Conclusion
So, in order to now conclude the discussion we have done on six sigma, I believe
switching to six sigma is a wise move for a business like Floor Co. However, to
ensure that the desired results are obtained, we would need to follow some kind of
a methodology, one such methodology is DMAIC. If management follows this
approach it would be easy to implement the philosophy of six sigma. Thank you!

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