Professional Documents
Culture Documents
STRATEGIC MANAGEMENT
ACCOUNTING
STUDENT SUPPORT NOTES
FOR 2015
CONTENTS
Module 1
INTRODUCTION TO STRATEGIC MANAGEMENT
ACCOUNTING
page 1
Module 2
CREATING ORGANISATIONAL VALUE,
PART A: VALUE CREATION
page 37
Module 2
CREATING ORGANISATIONAL VALUE,
PART B: STRATEGIC MANAGEMENT
page 57
Module 5
PROJECT MANAGEMENT, PARTS A AND B
page 167
Module 5
PROJECT MANAGEMENT, PART C
page 181
Module 5
PROJECT MANAGEMENT, PARTS D, E AND F
page 197
Answers to Module Learning Examples
Module 3
PERFORMANCE MEASUREMENT
page 87
Module 4
TECHNIQUES FOR CREATING AND MANAGING
VALUE
page 133
Introduction
iii
iv
Module 1
PART A: THE ROLE OF MANAGEMENT
ACCOUNTING
STRATEGIC MANAGEMENT
RISK MANAGEMENT
ENVIRONMENTAL MANAGEMENT
ACCOUNTING SYSTEMS
INTRODUCTION
TO STRATEGIC
MANAGEMENT
ACCOUNTING
1
Context
In contrast to financial reporting to external users of information, strategic management accounting
is about internal reporting so that managers and operational staff can make both day-to-day and
strategic decisions.
Solution 1.1
Context
From straightforward management accounting pre-1965, when the focus was on determining
costs and controlling financial resources, the discipline has developed into strategic management
accounting.
Context
The contemporary business world has changed rapidly in recent times and this has had a profound
effect on the evolution of SMA and on the roles of management accountants.
Solution 1.2
Context
As traditional management accounting has evolved into strategic management accounting, the skills
required from management accountants have increased.
A matrix of required skills was provided (2004) by the International Accounting Education Standard
Board (IAESB).
These required skills are linked to the ways in which management accountants help to create
sustainable success for their organisation.
10
Context
Strategic management is concerned with the creation and protection of value, in both commercial
and non-commercial organisations. Strategic management accounting provides a supportive role for
strategic managers, and is concerned with the provision and use of information that can be used to
enhance value.
Solution 1.3
11
12
STRATEGIC MANAGEMENT
Context
It is important to emphasise that management and strategy are not procedures or techniques that
can be rote learned. Candidates need to understand a wide range of strategic ideas and use them to
produce practical solutions to practical problems.
Candidates should gain an understanding of the role of strategic management accounting as they
progress through the segment. This introduction gives a basic outline.
Solution 1.4
13
14
Context
This overview of the strategic management process illustrates the way that various elements
involved in business strategy link together. However, it is important to note that there are
alternative approaches to strategy, so the rational model should not be seen as a checklist for
doing strategy.
Solution 1.5
15
16
Context
In order for an organisation to achieve its goals and objectives, it will need to ensure that what is
meant to happen actually happens. Management at the top and bottom levels of the organisation
need to be strongly linked to ensure that an intended strategy is actually implemented.
17
18
Context
The management accounting system provides information for both strategic and operational use.
This covers a wide variety of areas.
Solution 1.6
19
20
RISK MANAGEMENT
Context
Good corporate governance requires that the organisation be aware of the nature of the different
types of risk it faces, and to manage them as effectively as possible.
21
22
RISK MANAGEMENT
Context
This section illustrates the principle that the control environment and procedures, especially
accounting controls, should be sufficient to deal with the issues and risks in the business
environment in which they operate.
Solution 1.7
23
24
Context
Major problems with many MASs are their failure to provide information that addresses or solves
problems. If they do, there are often issues around timeliness. Note that there is a greater level of
detail seen here than in the study materials.
25
26
Context
Commitment to sustainability means organisations need to know physical information about, for
example, waste products as well as monetary information. This is the role of EMAS, so that an
organisation's analysis of issues and decisions about them can be properly informed about
sustainability matters.
27
28
Context
Although management accounting has developed a great deal at the strategic management level,
we should not ignore or underestimate its importance at the operational level.
29
30
Context
Product costing depends on the classification of costs and is at the heart of day-to-day and strategic
decisions.
A budget is the detailed expression of the organisation's strategy in the form of a monetary plan.
Operational managers require budgets to plan activities and to take control action over time.
31
32
Context
Especially in manufacturing environments, variance analysis can be a key way in which the
management accountant provides information to support operational managers.
Note that fixed and flexible budgets and variance analysis are not covered in the study materials.
33
34
Context
Note that interdependence of variances is not covered in the study materials.
Working capital comprises inventory, accounts receivable and cash, less accounts payable.
Operational managers require timely and accurate information on levels of working capital and how
efficiently they are being maintained.
35
Reinforcement
Study Guide Module 1
36
Make sure that you attempt all the questions and activities within the Module
to test your knowledge.
Module 2
PART A: VALUE CREATION
ORGANISATIONS: THE TRANSACTION COST
APPROACH
CORPORATE GOVERNANCE:
SUSTAINABILITY
CREATING VALUE
CREATING
ORGANISATIONAL VALUE,
PART A: VALUE CREATION
37
38
Context
The transaction cost approach gets to the heart of why a business exists. Note that hierarchy basis
and problems are not specifically covered in the study materials.
Solution 2A.1
39
40
Context
Corporate governance affects the way an organisation is run and how its strategy is implemented.
Good corporate governance enables investors to feel confident that their investment is wellmanaged and will not be lost as a result of bad decisions, poor management control or greed of the
directors.
Corporate governance develops to keep pace with changes in organisations behaviour and the
economic contexts that they operate in. This leads some countries to prefer the certainty of a
system based on strict rules. Others prefer the adaptability and flexibility of codes based on
principles.
41
42
Context
The other key aspect of corporate governance that is important to Management Accountants is
performance.
This is forward-looking and involves reporting information to make decisions that achieve strategic
planning, risk management and sound performance measurement. It also includes consideration of
the 'triple bottom line' of sustainability.
43
44
Context
Management Accountants need to develop CSR systems which identify stakeholder groups
and the social and environmental requirements of these stakeholders.
Solution 2A.2
45
46
Context
Sustainability is the focus of enterprise governance.
Solution 2A.3
47
48
CREATING VALUE
Context
Understanding, measuring and managing the value creation process are critical strategic
management accounting activities.
Solution 2A.4
49
50
Context
The organisation value chain is an essential model. It focuses on the need to create value (for the
consumer) and is vital for any analysis of strategic capability. It also provides a model of the way
that organisations work, and introduces the idea of processes in business strategy (covered in more
detail under strategic management).
Note that the 'value system' is not specifically covered in the study materials.
Solution 2A.5
51
52
Context
The value chain approach extends outside the individual organisation to encompass others in their
supply chain. Exploiting the linkages in this chain by means of collaboration can yield very good
results.
53
54
Context
The strategic importance of value chain management means Management Accountants must be
familiar with the concept, and provide an organisation with information to understand and manage
its value chain.
55
Reinforcement
Study Guide Module 2 Part A
56
Make sure that you attempt all the questions and activities within the Module
to test your knowledge.
Module 2
PART B: STRATEGIC MANAGEMENT
WHAT IS STRATEGIC MANAGEMENT?
STRATEGY CHOICE
STRATEGY IMPLEMENTATION
CREATING
ORGANISATIONAL VALUE,
PART B: STRATEGIC
MANAGEMENT
57
58
Context
It is important to emphasise that although tools and frameworks are used to help formulate
strategy, it is inherently a creative process involving uncertainty and judgement about the future.
Strategic management concerns practical processes to compare the original strategic plan to the
organisations position as it evolves, and taking corrective action where necessary; even if this
action involves changing the original strategy to adapt to the dynamic environment.
59
60
Context
Organisations need to make plans and carry these out successfully to survive and do well. The left
hand page outlines the rational strategic management process, which guides the setting and
execution of an organisation's strategy. We saw this figure in Module 1 too, as an overview of the
strategic management process as a whole.
Solution 2B.1
61
62
Context
Value for the organisation is achieved through creating competitive advantage. Value analysis is
concerned with identifying how value can be created within the value chain of an organisation,
adding to customer value and competitive advantage.
63
64
Context
SWOT is an approach to summarising strategic position. It offers some basic guidance on how
strategy may then be developed in a sound fashion.
Solution 2B.2
65
66
Context
Understanding the nature of reproducible capabilities and distinctive capabilities or core
competences is fundamental to any assessment of strategic capability and competitive advantage.
Solution 2B.3
67
68
Context
Product life cycles and product portfolios have significant implications for business strategy and
performance. To be successful, an organisation needs to continue to offer products that the
customer wants to buy, even as their tastes and demands change over time.
The capacity to innovate cost effectively may be an important capability to have.
Solution 2B.4
69
70
Context
The five forces model is acknowledged as a valuable tool for assessing the competitive
environment. It is used to help answer the core questions required for industry analysis.
71
72
Context
The PEST framework is a useful model for identifying the major aspects of the macro-environment.
73
74
Context
The impact business activity has on the physical environment has become a major concern.
Environmental protection is a key aspect of both sustainability and corporate social responsibility
(CSR).
Note: Social/environmental factors, technological factors and environmental protection are not
covered in this level of depth in the study materials.
75
76
Context
After the organisation has analysed its internal and external environment, it should start strategic
planning in order to come up with a good strategy that 'ticks all the boxes'.
77
78
Context
An organisation which wants to enter new, almost unheard-of industries or to carve out an
uncontested share of an existing industry needs to both improve value and reduce costs a big
challenge.
79
80
Context
Porter (1980) believes there are three generic strategies which deliver competitive advantages for
an organisation cost leadership; differentiation; and focus.
Solution 2B.5
81
82
STRATEGY CHOICE
Context
So far, this module has been concerned with the nature and characteristics of potential strategies.
This section summarises the process by which organisations choose the strategy they are actually
going to follow.
83
84
STRATEGY IMPLEMENTATION
Context
The best strategic plans are no good unless they are properly implemented. It is impossible to plan
for every eventuality, and plans may need to be changed.
Implementation turns the rather abstract and conceptual nature of planning into a reality, involving
hands-on work by individuals at all levels.
Solution 2B.6
85
Reinforcement
Study Guide Module 2 Part B
86
Make sure that you attempt all the questions and activities within the Module
to test your knowledge.
Module 3
PART A: PERFORMANCE/PERFORMANCE
MEASUREMENT
FINANCIAL PERFORMANCE
NON-FINANCIAL PERFORMANCE
FUNCTIONS OF PERFORMANCE
MEASUREMENT
SUSTAINABILITY REPORTING
LIMITATIONS OF TRADITIONAL
CONTROLS
BALANCED SCORECARD
IMPROVING PERFORMANCE
REWARDS
PERFORMANCE
MEASUREMENT
87
88
PERFORMANCE/PERFORMANCE
MEASUREMENT
Context
Performance measurement is a fundamental role of strategic management accounting (SMA) which
aims to support managers making decisions that lead to achievement of objectives.
3: Performance measurement
89
90
FINANCIAL PERFORMANCE
Context
This section sets out various ways that are used to report financial performance.
Traditional financial reporting and ratio analysis have given way to more flexible and varied ways of
reporting financial performance.
3: Performance measurement
91
92
NON-FINANCIAL PERFORMANCE
Context
Performance measurement systems should include non-financial performance measures. Unless key
non-financial targets are achieved, the organisation is unlikely to achieve its financial targets.
(2)
A hotel?
Solution 3.1
3: Performance measurement
93
94
Context
There are two aspects to performance measurement. One is measuring how much value has been
created by the organisation. The other is measuring success in maintaining or achieving a
sustainable business.
2012
2011
Sales revenue
192,676
159,337
24,652
13,125
-122,450
-104,648
-13,135
-10,346
-22,077
-9,759
Value added
59,666
47,709
Other income
Cost of materials
2012
to shareholders (dividend)
1,639
2.8
1,406
2.9
29,503
49.5
23,854
50.0
4,322
7.2
4,525
9.5
3,957
6.6
3,530
7.4
2011
20,246
33.9
14,393
30.2
59,666
100.0
47,709
100.0
Solution 3.2
3: Performance measurement
95
96
SUSTAINABILITY REPORTING
Context
Traditional financial reporting is reporting on historical performance, with a focus primarily on shortterm financial performance.
There has been growing recognition that historical financial reporting on its own is insufficient for
measuring and monitoring performance of companies.
CSR reporting, or sustainability reporting, provides information about other aspects of performance.
Many ASX-listed companies publish voluntary sustainability reports annually.
3: Performance measurement
97
98
Context
There have been several problems with sustainability reports, reducing their value as meaningful
measures of corporate performance. This has led to initiatives for standardisation in reporting,
particularly between similar types of company.
The separation of traditional financial reporting from sustainability reporting has also been
challenged, with guidelines for the combination of all aspects of performance (financial and
sustainability performance) included within a single integrated report. This initiative for integrated
reporting is at an early stage of development.
Solution 3.3
3: Performance measurement
99
100
Context
There is a governance aspect to performance measurement ensuring that the company operates
in line with the risk appetite (risk/return trade-off) decided by the board of directors, and ensuring
that risk management and control systems are effective.
There is also an ethical aspect to reporting performance. The board of directors uses external
reporting to send signals to shareholders and other stakeholders, and there may be some
motivation to send misleading signals through incorrect reporting.
3: Performance measurement
101
102
Context
Within a performance measurement system, the choice of key performance indicators will depend
partly on the business strategy of the company (cost leadership or differentiation the focus being
either cost leadership or differentiation within a market niche).
Performance measurement systems should also have several elements, from an overriding vision or
mission to a system of rewards for successful achievements.
3: Performance measurement
103
104
Context
Traditional management accounting is often criticised because of its emphasis on fixed targets and
budgetary control.
Alternative approaches to measuring performance include the ideas of the Beyond Budgeting
movement.
3: Performance measurement
105
106
Context
A performance measurement system should include reports on both operational performance and
also progress towards strategic objectives. Both aspects of reporting are needed.
Solution 3.4
3: Performance measurement
107
108
Context
Performance measurement systems require some form of contextual framework. The most
appropriate framework varies with the circumstances of the organisation. This section introduces
candidates to the concepts of cause-and-effect reporting frameworks and cascading reporting
frameworks.
3: Performance measurement
109
110
3: Performance measurement
111
112
3: Performance measurement
113
114
BALANCED SCORECARD
Context
The balanced scorecard is the best known multidimensional model, and it looks at financial and
non-financial measures under four headings: customer perspective; financial perspective; internal
process perspective; and learning and growth perspective.
Solution 3.5
3: Performance measurement
115
116
BALANCED SCORECARD
Context
Kaplan and Norton (2001) developed the concept of strategy mapping from the balanced scorecard.
3: Performance measurement
117
118
BALANCED SCORECARD
Context
Although the balanced scorecard provides a useful framework for developing multidimensional
performance measures, organisations may still face some potential problems when applying it.
Note that the topic Words of warning is not covered in such depth in the study materials.
What measures might be appropriate for each perspective of the balanced scorecard?
Solution 3.6
3: Performance measurement
119
120
Context
Performance management should include measures for measuring and monitoring performance
against strategic objectives. In practice, this can be difficult.
3: Performance measurement
121
122
Context
A decision has to be made about what performance measures should be used within a
measurement and reporting system. The performance measures that are used should be linked to
the critical success factors for achieving the organisations goals and objectives.
3: Performance measurement
123
124
Context
Performance targets should be selected carefully, and should possess certain characteristics or
qualities.
3: Performance measurement
125
126
IMPROVING PERFORMANCE
Context
Benchmarking uses data from comparators inside and outside the organisation to identify best
practice and thereby improve performance.
Solution 3.7
3: Performance measurement
127
128
IMPROVING PERFORMANCE
Context
Measures of performance are usually (1) targets for achievement, (2) measures of trends over time
or (3) comparisons of achievements against a benchmark.
However, any performance measurement system risks encouraging dysfunctional behaviour by
managers.
3: Performance measurement
129
130
REWARDS
Context
In this section we look at one of the key behavioural aspects of performance measurement the
link to rewards.
Solution 3.8
3: Performance measurement
131
Reinforcement
Study Guide Module 3
132
Make sure that you attempt all the questions and activities within the Module
to test your knowledge.
Candidates should review Appendix 3.1 of the study materials which outlines
the case study of Western Water (WW) including examples of how WW
develops its performance measures using a balanced scorecard linked to
strategy through the strategy mapping process. This process is cascaded
down through the organisation to enable strategy to be implemented. WW
reports its performance in financial and non-financial terms and emphasises
long-term sustainability.
Module 4
TECHNIQUES
FOR CREATING AND
MANAGING VALUE
133
134
Context
Activity-based costing (ABC) recognises that many important categories of overheads are not
simply driven by volume and therefore using one absorption rate does not give a realistic allocation
of costs.
Increasingly in a modern environment overheads tend to be large and overhead activities are
complex and unrelated to production activity (direct labour hours or machine hours). There is a
variety of different cost drivers for overheads. In such circumstances ABC provides a more
rigorous allocation of overheads to give a more realistic unit cost estimate.
135
136
Context
Implementing ABC can be broken down into a number of distinct steps.
Output (units)
Sales price
Direct material cost
Labour hours/unit
Wages paid at $5/hr
B
25,000
$/unit
20
10
1
C
2,000
$/unit
20
10
1
55,000
90,000
30,000
15 000
190 000
A
2
2
10
10
20
B
1
2
13
10
20
C
1
2
2
2
20
Required
Using ABC, show the cost and gross profit per unit for each product during the period.
137
138
Solution 4.1
139
140
Context
The cost and complexity, and therefore the lack of take up, of traditional ABC by organisations has
led to a revision of the model, called time-driven activity based costing (TDABC).
Solution 4.2
141
142
Context
Strategic revenue management is concerned with developing strategies to optimise revenue.
143
144
Context
Strategic cost management techniques such as life cycle costing, target costing and Kaizen
costing provide opportunities for achieving cost reduction in a modern manufacturing environment.
Solution 4.3
Solution 4.4
145
146
Context
One of the traditional responsibilities of the management accountant is to provide cost information.
Indeed, in many organisations the management accountant was called the cost accountant.
Activity-based management is concerned with using information on the costs of activities
to improve efficiency and eliminate certain activities that do not add value to customers,
as well as improving design and developing better relationships with customers.
Solution 4.5
Solution 4.6
147
148
Context
Business processes may be changed to improve the way an organisation functions, in order to help
it achieve its business objectives.
Solution 4.7
Solution 4.8
149
150
Context
As controversy over global warming continues, and big business adopts green targets, the issues
raised here are likely to become increasingly important.
T
Solution 4.9
151
152
Context
Viewing suppliers as business partners instead of being a cost to be minimised affords opportunities
for cost reduction and value enhancement through collaboration.
Solution 4.10
153
154
Context
Supply chain management is an externally-focused technique, whereby members of the supply
chain collaborate to provide value to the customer. Savings are shared between the partners in the
chain.
Solution 4.11
Solution 4.12
155
156
Context
Total Quality Management (TQM) focuses on the entire organisation rather than just one part of it.
It is a process of continually improving quality of products, services and processes with the
emphasis on preventing defects or failures rather than trying to do something about them after
they have occurred.
Note that total quality management is not covered in this level of depth in the study materials.
Solution 4.13
Cost of prevention
(b)
Cost of appraisal
(c)
(d)
(e)
Solution 4.14
157
158
Context
Outsourcing and offshoring are additional examples of externally-orientated strategic management
accounting techniques.
159
160
Context
Customer profitability analysis (CPA) is linked with ABC, which can be used to build up customer
specific costs in a similar manner to cost pools. It is used to identify the most profitable customer
groups.
161
162
Context
ABC can assist in customer profitability analysis (CPA) by focusing attention on customer groups
which are not profitable and areas where cost reduction measures should be undertaken.
Note that the customer life cycle is not explicitly covered in the study materials.
Solution 4.15
D
1 000
I
3 000
N
850
G
1 200
DING employs ten full-time IT specialists who each deliver 1 500 chargeable hours per year and
who are paid $60 000 per year.
Costs
DING has estimated its other costs as follows:
$'000
Telephone support
1 000
After-sales service
1 500
Client meetings
280
2 780
U
163
164
DING has reviewed its existing client database and determined the following four average profiles of
typical clients:
D
I
N
G
Total
000's
000's
000's
000's
000's
Number of telephone queries
20
480
50
250
800
Number of visits
3
21
4
8
36
Number of meetings
70
90
20
100
280
Chargeable hours
4
6
2
3
15
Previously DING used a single cost rate of $200 per hour for both in-house profit reporting and
quotations for new contracts.
Required
(a)
Prepare calculations to show the profit attributed to each customer group using the current
system of attributing costs.
(b)
Prepare calculations to show the profit attributed to each customer group using an activitybased system of attributing costs.
(c)
Discuss the differences between the costs attributed using ABC and those attributed by the
current system, and advise whether the change to the ABC system should be adopted.
Solution 4.16
165
Reinforcement
Study Guide Module 4
166
Make sure that you attempt all the questions and activities within the Module
to test your knowledge.
Module 5
PART A: PROJECT MANAGEMENT DEFINED
PROJECTS AND PROJECT MANAGEMENT
ORGANISATIONAL STRUCTURES
PROJECT TEAM
PROJECT
MANAGEMENT,
PARTS A AND B
167
168
Context
Project management is an important aspect of strategic implementation (strategy into action).
This section sets the scene for more detailed consideration of techniques and applications.
Solution 5A.1
169
170
Context
The concept of the project life cycle (steps) is particularly useful when it comes to larger projects,
because it breaks the project into manageable parts. This makes it easier to allocate resources, and
to manage them.
Solution 5A.2
171
172
A: ORGANISATIONAL STRUCTURES
Context
Structure of project will depend on its requirements or purpose.
Solution 5A.3
173
174
Context
Increased globalisation means that many organisations undertake international projects.
175
176
Context
A project manager has to understand how to balance the factors of scope, resources, time and risk
to ensure the project's desired result is achieved.
Solution 5B.4
Solution 5B.5
177
178
B: PROJECT TEAM
Context
Selecting the right team is critical to the success of a project.
Note that the topic building a project team is not covered to this degree of depth in the study
materials.
Solution 5B.6
179
Reinforcement
Study Guide Module 5 Parts A and B
180
Make sure that you attempt all the questions and activities within the Module
to test your knowledge.
Module 5
PART C: MANAGEMENT ACCOUNTANTS ROLE
IN PROJECT SELECTION
THE BUSINESS CASE
STRATEGIC ANALYSIS/FIT
RISK ASSESSMENT
FINANCIAL ANALYSIS
PROJECT
MANAGEMENT,
PART C
181
182
Context
Preparing a business case for a project is essential otherwise organisations drift into ill-defined
projects based on vague hope and an even vaguer budget.
183
184
C: STRATEGIC ANALYSIS/FIT
Context
Project management in its widest sense is fundamental to much of strategy.
Note Breakthrough projects are not covered in the study materials.
185
186
Context
Keeping stakeholders informed and involved in a project and keeping them happy is one of the
project managers key tasks.
Solution 5C.1
187
188
C: RISK ASSESSMENT
Context
All projects carry an element of risk, and it is important that a clearer understanding of what the
project delivers against the business strategy is developed.
Solution 5C.2
189
190
C: FINANCIAL ANALYSIS
Context
A number of techniques exist to evaluate projects. In long-term projects, discounted cash flow
(DCF) methods (such as Net Present Value) are superior as they account for the time value of
money.
0
$000
8 125
1 750
1
$000
2
$000
3
$000
4
$000
4 500
1 875
425
312
6 250
2 750
625
312
7 000
3 750
500
312
7 500
4 000
500
312
Day Mode Inc is paying corporate tax at 30 per cent and is expected to do so for the foreseeable
future. Tax is paid one year in arrears.
The company will claim capital allowances on fittings and equipment at 25 per cent on a reducing
balance basis. Capital allowances are not available on land and buildings.
Estimated resale proceeds of $250 000 for the fittings and equipment have been included in the
total figure of $10 000 000 given above.
Day Mode Inc expects the working capital requirements to be 15 per cent of turnover during each of
the four years of the investment program.
Day Modes real cost of capital is 7.7 per cent per annum.
Inflation at 4 per cent per annum has been ignored in the above information. This inflation will not
apply to the resale value of the business which is given in nominal terms.
Required
Calculate the NPV for Day Modes proposed investment.
191
192
Solution 5C.3
193
194
C: FINANCIAL ANALYSIS
Context
A variety of other techniques can contribute to an initial financial analysis of a project.
Solution 5C.4
195
Reinforcement
Study Guide Module 5 Part C
196
Make sure that you attempt all the questions and activities within the Module
to test your knowledge.
Module 5
PART D: MANAGEMENT ACCOUNTANTS ROLE
IN PROJECT PLANNING
PROJECT SCHEDULING: GANTT CHARTS
PROJECT BUDGETING
PROJECT
MANAGEMENT
PARTS D, E AND F
197
198
Context
Gantt charts are a fairly basic project management tool, and they do not show the interrelationship
between the various activities in the project as clearly as a network diagram.
199
200
Context
In the context of project management tools, network analysis is more useful than some of the
others.
Solution 5D.1
201
202
Context
This continues our consideration of critical path analysis, showing an alternative presentation.
Preceding
activity
Optimistic
Most likely
Pessimistic
1
2
2
4
3
6
7
6
9
4
5
5
4
6
1
5
9
20
5
7
10
15
6
10
2
10
18
30
7
10
15
19
14
20
9
21
21
46
15
1
2
3
4
5
6
7
8
9
10
Remove kitchen
Remove toilet block
Excavate floor for new slab
Remove mezzanine
Repair mezzanine
Lay new slab
Build toilets
Fit out toilets
Build kitchen
Fit out kitchen
(a)
(b)
(c)
Construct the PERT network for the project using the AOA approach
Determine the expected completion times for all project activities.
Determine the projects critical path.
Solution 5D.2
203
204
Context
CPM plus crashing may help shorten the project and improve cash flows and returns.
205
206
D: PROJECT BUDGETING
Context
Larger, more complex projects will require a dedicated team to plan activities, monitor progress,
produce reports and record changes. Much of this activity is fairly routine and can be automated.
Note that the topics 'improving estimates' and 'influences on cost' are not covered in the study
materials.
Estimating
Troubleshooting
Monitoring
Reporting
Solution 5D.3
207
208
Context
As project activities take place, progress is monitored against set deliverable dates and cost
budgets.
Solution 5E.4
Learning example 5E.5
If the project progress report shows that actual progress is slower than planned, how could this
'slippage' be addressed?
Solution 5E.5
209
210
Context
The three critical aspects of project performance are cost, completion and quality.
The earned value method is a method for reporting progress on a project in terms of both cost and
time, comparing actual costs and progress with expected costs and progress.
211
212
Context
All projects must be carefully controlled if they are to achieve their objectives. Risk management
should be a continuing process, starting at the planning stage and continuing until project delivery
is complete, in order to take account of changing risk patterns.
213
214
Context
All projects come to an end, but they dont just stop. A project manager must examine often
formally whether the objectives have been met.
Note that post-completion audit is not specifically covered in the study materials.
Solution 5F.6
215
Reinforcement
Study Guide Module 5 Parts D, E and F
216
Make sure that you attempt all the questions and activities within the Module
to test your knowledge.
ANSWERS TO
MODULE
LEARNING
EXAMPLES
1
Module 1
Solution 1.1
Statutory financial reporting is regulated as to content. SMA reporting can contain whatever
information is considered appropriate.
Solution 1.2
Obviously the answer to this question will depend on the organisation chosen.
However, it is likely to have been affected by one or more of the causes listed. The key point is to
identify how that might have influenced how internal reporting is carried out in the organisation.
Solution 1.3
Customer value creation. Ability to enjoy the benefits from products or services of the
organisation, purchased at a price that is no higher than the value of the benefits enjoyed.
Employee value creation. Continuing security of employment. Fair pay and satisfactory
working conditions in return for the efforts provided and results achieved.
Solution 1.4
Obviously the answer to this question will depend on the organisation chosen.
However, the strategy and strategic plan should seek to address certain key issues:
Solution 1.5
Both of the examples have been carefully worded so that they describe a higher-level management
process that could be part of any of the elements.
Each could be an input into strategic planning and choice, which is a complex process
involving the consideration of a wide range of influences, possibilities, advantages and
disadvantages. Should we offer new products or look to serve new markets?
Solution 1.6
Focus on past
The challenge facing management accountants is one of providing more relevant information for
decision making, but traditional management accounting systems may not always do this.
Management accounting information is often biased towards the past rather than the future, and
management accounting systems do not always detect strategic issues.
Inward focus
Decision making is a forward and outward looking process, and management accounting
information has been too inward looking.
Internal provision
The majority of management accounting information is devised for internal consumption.
Strategic management involves looking at the external environment, however, and strategy is
pursued in relation to competitors. Competitor actions need to be understood and quantified to be
able to devise appropriate responses.
Simplistic techniques
Some management accounting techniques such as variance analysis are seen as too simplistic
and largely irrelevant for decision making in today's business. Modern business is embracing new
ways of working, including outsourcing, and there is constant pressure to improve quality and
service and reduce costs. Some techniques such as activity-based costing have been developed
which are designed to take specific business processes and cost drivers into account when
measuring profitability and performance. Techniques such as customer profitability analysis
attempt to replace general analysis with specific information.
Solution 1.7
Business environment
Regular reconciliations
Module 2
Solution 2A.1
Strategic alliances/joint ventures create collaboration which helps organisations reduce transaction
costs by sharing information and providing access to broader markets and resources than they
would normally get if they were operating independently.
Solution 2A.2
The impact has been profound. The oil spill and BP's reaction to it ultimately resulted in a fall in the
company's share price, the resignation of senior management and direct comment from the US
President on the company's behaviour.
Solution 2A.3
These are some of the points candidates could have considered:
Solution 2A.4
Value of benefits obtained revenue
Less: Direct costs
Less: Cost of capital used (10 000 7.5%)
Value created =
$'000
3 000
(1 980)
(750)
270
Solution 2A.5
Here are some examples. There are many more.
Inbound logistics: Storing inputs properly to avoid damage and deterioration.
Operations: Producing goods of consistent high quality.
Outbound logistics: Avoiding stockouts so that customer orders can be filled.
Marketing and sales: Obtaining feedback on what customers consider important.
After sales service: Providing prompt and effective installation of equipment.
Procurement: Obtaining quality supplies at best prices to keep costs down.
Technology development: Introducing more efficient production methods.
Human resource management: Hiring appropriately skilled staff.
Solution 2B.1
This Learning Example requires a personalised answer and therefore there is no formal solution.
Solution 2B.2
The solution will obviously depend on the organisation chosen. But make sure strengths and
weaknesses are internal factors, and opportunities and threats are external factors.
Solution 2B.3
De Beers: diamonds.
Petrobras (Brazil) and Brazilian motor vehicle manufacturers: ethanol fuel technology.
Microsoft: Windows operating system and applications suite (although this asset is fading
now, in the face of competition from open-source equivalents).
Solution 2B.4
Introduction: Virgin Galactic sub-orbital spaceflight (actually still in development but nearing
introduction);
Growth: the smartphone product class, formerly dominated by the BlackBerry, which has been
overtaken by Apples iPhone and a range of products from other manufacturers; High definition (HD
ready) televisions.
Maturity: the internal combustion-driven saloon car has been a mature product class for decades
it may be approaching the end of this phase as pressure to limit fuel consumption grows; Microsoft
Office product suite;
Decline: compact disc as a medium for music.; printed newspapers (as web versions grow); travel
agent services (with the growth of web-based booking).
Solution 2B.5
Major global examples include the following:
Cost leadership Walmart
Differentiation BMW
Differentiation focus Breitling watches
Cost focus Kwik-fit Tyres
Solution 2B.6
The following are possible issues to be checked:
(a)
(b)
(c)
(d)
Deadlines have we met them, and are we likely to meet future deadlines?
Targets have we missed any? Are we in danger of missing any?
Have we sufficient resources to complete the project?
Will the market plan be achieved; in other words, are we producing enough?
Module 3
Solution 3.1
Online retailer
Hotel
Delivery times
% of items returned
Solution 3.2
Candidates may make many comments, including:
Value added to shareholders (who also own company reserves) has increased.
Although employee appropriations have fallen in percentage terms, many of such costs are
fixed, and the higher volumes has benefitted the workforce in absolute terms.
Solution 3.3
Financial performance.
Strategic objectives and progress towards these.
Risks and risk management.
Sustainability performance (environmental, social).
Employment information; remuneration.
Corporate governance information.
Independent assurance/audit.
Solution 3.4
The customer and financial quadrants of the balanced scorecard are generally seen as containing
many 'lagging' indicators. These are performance measures that reflect short-term operational
activity, such as customer acquisition and net margin, which lags behind the bigger strategic
decisions that take a longer term view. Measures in the 'leading' quadrants of learning and
innovation, and business processes, look at investing in people and processes with a view to
generating benefits that may be some way down the line. In other words, positive leading
performance measures reflect the likely success of the organisations future strategy, while positive
lagging performance measures reflect the past success of the organisations short-term operations.
There is often a temptation to focus on reporting better short-term financial indicators, such as net
margin, by cutting immediate costs rather than on improving longer-term indicators, such as cycle
times of processes, by investing in training and proper maintenance of non-current assets. While
cutting training and development expenditure and 'economising' on repairs and maintenance of
machinery may generate reduced operational costs and increased profits in the short-term, the
effect will be felt in the longer term in that the organisations cycle times will not have been
improved and it may start to lose market as a result.
Solution 3.5
Here are some suggestions, although they are by no means the only possible answers:
Financial perspective: Stable income (or growth); growth in new products/markets; share price;
dividend growth
Customer perspective: Customer choice; value for money; convenience; repeat business
Internal process perspective: Marketing/customer loyalty; inventory management; speed
through checkouts
Learning and growth perspective (extending the brand): New products as a percentage of
turnover; new markets as a percentage of turnover; number of new brands launched; staff training
expenditure
Interestingly, some supermarkets do use versions of the balanced scorecard in real life, customised
to each particular business.
Solution 3.6
A huge range of measures may be appropriate here. Examples may include:
Financial perspective cash flow, profitability, liquidity.
Customer perspective repeat visitors, customer satisfaction surveys.
Business process perspective wastage in cafes, unit costs of plants.
Innovation and learning perspective number of new exhibits per year, new plants introduced.
Solution 3.7
1
Solution 3.8
This Learning Example requires a personalised answer and therefore there is no formal solution.
There is a strong body of opinion that believes that top executives receive excessive rewards
because they get the benefits of the efforts of the people who work for them.
Module 4
Solution 4.1
Workings: recovery rates
$55 000
$0.5851 per machine hour
40 000 50 000 4 000
(1)
Machine cost
(2)
QC & set-up
$90 000
$3 600 per production run
10 13 2
(3)
Receiving
$30 000
$1 363.64 per component receipt
10 10 2
(4)
Packing
$15 000
$250 per customer order
20 20 20
Machining costs
Quality control & set-up
Receiving
Packing
Total overhead costs
U
A
$
23 404
36 000
13 636
5 000
78 040
Units produced
Sales price
Gross profit/unit
C
$
2 341
7 200
2 728
5 000
17 269
20 000
25 000
2 000
$3.90
$3.79
$8.63
A
$/unit
5.00
10.00
3.90
18.90
20.00
1.10
B
$/unit
10.00
5.00
3.79
18.79
20.00
1.21
C
$/unit
10.00
5.00
8.63
23.63
20.00
(3.63)
Overhead cost/unit
B
$
29 255
46 800
13 636
5 000
94 691
Total
$
55 000
90 000
30 000
15 000
190 000
Solution 4.2
(a)
CCR =
(c)
$
500
1 500
2 000
U
$2 000
$0.10
20 000
Solution 4.3
Mobile phone
Solution 4.4
Options available to reduce costs:
(1)
Training staff in more efficient techniques. In the extreme a lecturer could have two classes
simultaneously and talk to one, while the other class watched video presentations or did
questions.
(2)
(3)
(4)
Cutting out non-value added activities. This might be hard to do for a lecturer but an
example may be social time with students.
Solution 4.5
Improved quality.
Increased customer satisfaction.
Lower costs.
Therefore increased profitability.
Solution 4.6
Solution 4.7
BPM seeks to give an organisation an improved understanding of how their processes operate, so
that they can be redesigned with a view to creating and delivering better customer value.
The idea of looking at how processes operate across an organisation to achieve value for the
customer draws directly on Porter's idea of an organisation as a set of value-creating activities.
Solution 4.8
10
(a)
BPM is an all or nothing proposition. It is therefore expensive and risky, requiring major
expenditure on consultancy, investment in IT systems and disruption. It is not worth doing
unless benefits are going to exceed costs.
(b)
Implementation is difficult, as organisations fail to think through what they are trying to
achieve, and the process becomes captured by departmental interest groups.
(c)
Managers take a departmental view rather than the view of the business as a whole.
(d)
BPM becomes associated only with across the board cost cutting rather than a
fundamental re-evaluation of the business. Managers will fight very hard to avoid any threats
to their position.
(e)
Management consultants responsible for the ideas often fail to come up with realistic
strategies for implementation. Managers are therefore left with a BPM formula that they may
not fully understand and have to implement it in a hostile work environment.
Solution 4.9
Potentially lower cost of capital because investors and lenders demand a lower risk premium.
Longer product life cycles as environmental legislation may force early replacement of nongreen products.
No risk of pressure group action that may damage the reputation of the organisation.
There may be a larger pool of employees willing to work for the organisation and possibly for
less money.
Solution 4.10
Candidates may mention a range of answers, possibly including:
Solution 4.11
Removal of inspection (a non-value adding activity) of both goods inwards and outwards if
quality can be assured and level of desired quality known.
Better knowledge of end customer's interest communicated down the chain. The Internet
makes this more feasible.
Solution 4.12
Improvements can be made to a poorly performing push model, but major improvement will
normally require some aspect of the pull model to be incorporated.
11
Solution 4.13
In theory, variance reporting should not be of any relevance at all, because variances will not occur.
In practice, an organisation will not get everything right first time and variance reporting may still
draw attention to areas for improvement but only if the standard and 'getting it right' are one and
the same.
Solution 4.14
(a)
Cost of prevention
(b)
Cost of appraisal
(c)
(d)
(e)
Decrease. Despite the rise in the cost of prevention the fall in the
other costs of quality will out-weigh this increase.
Solution 4.15
Cap Co needs to look at the variables which make the accounts unprofitable and then adjust them
accordingly.
Possible suggestions include:
Introduce (or modify) variable delivery charges depending on location of customer and size
of order
Solution 4.16
(a)
D
1 000
(800)
200
U
N
850
(400)
450
G
1 200
(600)
600
52.9%
50%
D
1 000
I
3 000
N
850.0
G
1 200.0
160
25
125
70
380
240
600
875
90
1 805
80.0
62.5
166.7
20.0
329.2
120.0
312.5
333.3
100.0
865.8
20%
60%
12
I
3 000
(1 200)
1 800
620
62%
1 195
39.8%
Total
3 000
520.8
334.2
61.2%
27.9%
Workings
(1)
(c)
= $40/hour
(2)
(3)
After sales service no. of visits OAR = 1 500/36 = 41.667 per visit
(4)
D & N are more profitable than believed. N costs less than previously thought because
N customers require little support.
(ii)
I & G are less profitable than believed, due to higher costs as they use a high
proportion of support services, especially expensive after-sales service visits.
Also the previous system has recovered only $3m of costs from a total of $3.38m.
Any under-recovery could lead to losses, especially if this cost is used to set prices and
quotations.
ABC systems provide better cost analysis, both for reporting of profitability and for decision-making.
The ABC system should be adopted.
13
Module 5
Solution 5A.1
There is no formal solution to this activity, as it will depend on candidates own location and
experience.
Solution 5A.2
Market research projects are fundamental to strategic analysis. The analysis of both the wider PEST
environment and the immediate industry/market environment could be divided into project
assignments for small project teams.
The project management emphasis on clear definition of scope and objectives would tend to enforce
effective use of limited resources by focusing work on the most important areas.
Solution 5A.3
Possible examples include:
Project organisation
Leighton Holdings
Joint venture
Collaborate
PPP
Virtual project
Software development
Solution 5B.4
Projects and project teams vary very widely, so a contingency approach is necessary. Different
circumstances will require different approaches. A very relaxed style would not be appropriate for a
project in a dangerous environment, for example, nor a very autocratic style for a design project
requiring extensive collaboration.
Solution 5B.5
Teams can often suffer from poor leadership, inadequate resources or ill-defined objectives. Teams
can also be ineffective because of lack of commitment, which can usually be traced to:
14
Reluctance on the part of the managers required to supply the staff needed.
Poor communication arising from part-time working.
Rivalry, both personal and departmental.
Solution 5B.6
Task-force project
team
Advantages
Disadvantages
Solution 5C.1
Internal
External
Management of charity
Trustees
Budget holders/fundraisers
Donors
Regulators
Project team
Volunteers
General public
Solution 5C.2
Project risk can be classified as follows:
(a)
Quantifiable risks. These are risks where the probability of an event occurring can be
established by statistical analysis of past occurrences.
(b)
Unquantifiable risks. These are risks which cannot be quantified, making them difficult to
manage.
15
OR
(a)
(b)
External risks eg due to changes in exchange rates or other macro economic factors.
Solution 5C.3
Net Present Value working (All figures $000s)
Year
Sales
Direct Costs
1
4 500
2
6 250
3
7 000
4
7 500
(1 875)
(2 750)
(3 750)
(4 000)
(425)
(625)
(500)
(500)
Marketing
Office Overheads (40%)
(125)
(125)
2 750
2 625
2 875
1.04
1.042
1.043
1.044
2 158
2 974
2 953
3 363
(647)
131
0
(675)
(675)
Present Values
(125)
2 075
Inflated at 4% (rounded)
(125)
(675)
(892)
(301)
146
10 000
(129)
2 298
(1 009)
74
(160)
1 857
(886)
98
1 265
2 030
13 816
(863)
0.567
0.893
0.797
0.712
0.636
1 658
1 832
1 445
8 787
(489)
12 558
Cumulative PV
Less Initial Investment
(8,125 200 + 1,750 + 675)
(9 675)
2 883
Workings
Reducing balance
(1)
Tax relief
Year
30%
131
30%
98
30%
74
30%
146
1 750
Claim in year 1
25%
Claim in year 2
25%
(438)
1 312
(328)
984
Claim in year 3
25%
(246)
738
(2)
Resale value
(250)
(488)
Working capital
Required at start of year ie
15% of Turnover
inflate current values
(increments)
(3)
16
938
1,050
1,125
675
976
1,136
1,265
(675)
(301)
(160)
(129)
0
1 265
675
Solution 5C.4
Annuity factor Project A: (1 1.08-4)/8% = 3.3121
Annuity factor Project B: (1 1.08-3)/8% = 2.5771
Equivalent annual cash flow (EAC) Project A: $300 000/3.3121 = $90 577
Equivalent annual cash flow (EAC) Project B: $250 000/2.5771 = $97 008
Project B has the higher EAC, which means that it delivers more value per year than Project A and
would be chosen.
Solution 5D.1
The critical path is those parts of the project which if delayed beyond the allotted time would delay
the completion of the project as a whole.
Solution 5D.2
(a)
Activity
6
3
Activity
7
11
Activity
3 14
Activity
1
Activity
2
10
Activity
31 9
17
Activity
8
Activity
10
Activity
4
Activity
5
11
e
Calculations of expected time (ET)*
(b)
Activity
*ET
1=7
2 = 10
3 = 14
4=7
5 = 11
6=3
7 = 11
8 = 17
9 = 31
10 = 8
=
(4 + 4 7 + 10)/6 = 7
(5 + 4 10 + 15)/6 = 10
(5 + 4 15 + 19)/6 = 14
(4 + 4 6 + 14)/6 = 7
(6 + 4 10 + 20)/6 = 11
(1 + 4 2 + 9)/6 = 3
(5 + 4 10 + 21)/6 = 11
(9 + 4 18 + 21)/6 = 17
(20 + 4 30 + 46)/6 = 31
(5 + 4 7 + 15)/6 = 8
(O + 4ML + P)/6
Where:
O
ML
P
(c)
=
=
=
Optimistic
Most likely
Pessimistic
Solution 5D.3
B
17
Solution 5E.4
The airline industry is an obvious example as safety is non-negotiable.
Solution 5E.5
Options to address slippage include:
Do nothing.
'Work smarter' to be more efficient.
Reschedule ie change the phasing.
Introduce incentives to enhance individual performance.
Change the specification.
Add resources to make up lost ground (crashing).
Replan.
Solution 5F.6
Consider what would happen if members of the project team left new members might not know
what went wrong before, and so could make the same mistakes. Also, keeping a record of what
happened can help if there is any comeback from the client.
18