Overview
This study text covers the ACCA Performance Management (PM) syllabus, focusing on advanced management accounting techniques, decision-making, budgeting, cost control, performance evaluation, and both financial and non-financial performance measurement.
Management Accounting Revision
- Standard costing involves setting predetermined unit costs for control, planning, and performance measurement.
- Four types of standards: attainable, basic, current, and ideal.
- Absorption costing allocates all production costs (including fixed overheads) to products; marginal costing only allocates variable costs.
- Contribution is sales minus variable costs and is key for decision-making.
- Under/over-absorption happens when absorbed overheads differ from actuals.
- Marginal costing is simpler and better for decision-making but not for inventory valuation (which needs full absorption costing).
Management Information Systems & Big Data
- Information systems support planning, control, and decision-making at operational, management, and strategic levels.
- Good information is ACCURATE (Accurate, Complete, Cost-effective, Understandable, Relevant, Accessible, Timely, Easy to use).
- Types: Transaction Processing Systems (TPS), Management Information Systems (MIS), Executive Information Systems (EIS), ERP, and CRM.
- Big Data is defined by 5 Vs: Volume, Velocity, Variety, Veracity, Value.
- Data analytics and data visualisation are increasingly essential for informed decision-making and performance management.
Specialist Cost & Management Accounting Techniques
- Activity Based Costing (ABC) improves overhead allocation by linking costs to activities and cost drivers.
- Target costing sets allowable cost by subtracting required profit from the market price; closing cost gaps involves design and process changes.
- Life-cycle costing tracks all costs and revenues over a product’s life.
- Throughput accounting focuses on maximizing throughput (sales minus material costs) and managing constraints (bottlenecks).
Cost Volume Profit (CVP) Analysis
- Breakeven point: level where total contribution covers fixed costs, resulting in zero profit.
- Margin of safety measures how much output or sales can drop before losses occur.
- Weighted average C/S ratio is used for multi-product CVP analysis.
- CVP analysis supports planning but assumes linear cost/revenue behavior and constant sales mix.
Planning with Limiting Factors
- Identify scarce resources and maximize total contribution via key factor analysis or linear programming for multiple constraints.
- Shadow price shows how much extra profit is generated by one additional unit of a scarce resource.
- Slack occurs when a resource is underutilized.
Pricing Decisions
- Pricing strategies include cost-plus, market (demand-based), penetration, skimming, complementary, product-line, discounting, and discrimination.
- Price elasticity of demand measures how sensitive demand is to price changes.
- Optimum price/max profit is where marginal revenue equals marginal cost.
Relevant Costing & Short-term Decision Making
- Relevant costs are future, incremental cash flows influenced by the decision; sunk and committed costs are not relevant.
- Opportunity cost is the value of the best alternative forgone.
- Apply relevant costing in make-or-buy, shutdown, one-off contracts, and further processing decisions.
Budgeting & Control
- Budgets serve for planning, control, communication, co-ordination, evaluation, motivation, authorization, and delegation.
- Budget types: imposed (top-down), participative (bottom-up), incremental, zero-based, rolling, activity-based.
- Use flexed budgets for performance evaluation at actual output levels.
- Effective budgeting considers behavioral impact, goal congruence, motivation, and potential for budgetary slack.
Quantitative Techniques
- High/low method separates fixed and variable cost elements.
- Learning curve effect: labor hours per unit fall as cumulative production doubles (learning rate %).
- Regression and correlation quantify relationships; time series forecasts trends and seasonality.
Advanced Variances
- Material, labor, and overhead variances analyze differences between actual and standard costs/prices/rates.
- Mix and yield variances analyze efficiency when input proportions or outputs change.
- Planning and operational variances separate effects of uncontrollable planning errors vs. operational performance.
Performance Measurement & Control
- Financial KPIs: profitability (ROCE), liquidity (current ratio), efficiency (asset turnover), gearing (debt/equity), etc.
- Non-financial KPIs: customer satisfaction, quality, innovation, resource utilization, etc.
- Balanced Scorecard covers financial, customer, internal process, and innovation/learning perspectives.
- Building Block Model applies especially in service sector.
Divisional Performance & Transfer Pricing
- Divisions measured as cost centers, profit centers, revenue centers, or investment centers.
- ROI and Residual Income (RI) are key divisional performance measures, but have limitations.
- Transfer prices can be market-based, cost-plus, or opportunity cost-based; optimal transfer price depends on market conditions and division capacities.
Not-for-Profit & Public Sector Performance
- Objectives often non-financial; multiple stakeholders may have conflicting goals.
- Value for Money (VFM) assessed using Economy, Efficiency, and Effectiveness (the 3Es).
- KPIs and performance measures need to be tailored to non-quantifiable outputs and social value.
Employability & Technology Skills
- Computer-based exams require proficiency in word processing, spreadsheets, and presentation software.
- Practice using ACCA’s Exam Practice Platform to build exam technology skills.
Key Terms & Definitions
- Relevant Cost — Future, incremental cash flow affected by a decision.
- Contribution — Sales minus variable costs.
- Throughput — Sales revenue minus direct material cost.
- Shadow Price — Value of an extra unit of scarce resource.
- Transfer Price — Internal price for goods/services moved between divisions.
- Balanced Scorecard — Framework for using financial and non-financial metrics across four areas.
- Zero-based Budgeting (ZBB) — Budgeting from scratch, justifying all costs.
- Learning Curve — Predictable decrease in labor time per unit as cumulative output doubles.
Action Items / Next Steps
- Review all “test your understanding” questions and model answers for exam practice.
- Practice calculations for variances, CVP, break-even, transfer pricing, and learning curves.
- Use ACCA Exam Practice Platform for hands-on experience with CBE software.
- Read technical articles on Big Data, Throughput Accounting, and Beyond Budgeting on the ACCA website.