Performance Management · November 2020

ADECO NIGERIA PLC. (a) Relevant savings and revenue 25,000 units 35,000 units Shut down ₦ ₦ ₦ Sales revenue 337,500 393,750 – Material B 9,375 – 56,250 Sale of machinery 33,750 32,250 37,500 Total revenue/savings 380,625 426,000 93,750 Relevant costs Material A disposal 3,750 2,250 7,500 Purchase material B – 11,250 – Labour 93,750 150,000 – Variable overhead (excl. depreciation) 60,000 84,000 – Advertising campaign 37,500 52,500 – Manager’s salary 30,000 30,000 – Redundancy pay – – 37,500 Total relevant costs 225,000 330,000 45,000 Net savings 155,625 96,000 48,750

Workings 25,000 units 35,000 units Shut down 1. Sales revenue No. of units 25,000 35,000 Selling price ₦13.50 ₦11.25 Sales revenue ₦337,500 ₦393,750 2. Savings made on material B Surplus available 5,000 _ 30,000 Saving per litre ₦1.875 ₦1.875 ₦1.875 Total saving ₦9,375 – ₦56,250 3. Sale of machinery Current market price ₦37,500 ₦37,500 ₦37,500 Reduction in value ₦3,750 ₦5,250 _ Sale proceeds ₦33,750 ₦32,250 ₦37,500 4. Disposal cost of material A Quantity to be disposed of 25,000 15,000 50,000 Cost of disposal ₦3,750 ₦2,250 ₦7,500 5. Purchase cost of material B Production requirement 25,000 35,000 No. of litres to be _ 5,000 Purchased 66 Purchase cost ₦11,250 6. Labour costs Normal labour costs ₦93,750 ₦93,750 Contract labour – ₦56,250 ₦93,750 ₦150,000 7. Variable overhead @ ₦2.40 per unit* ₦60,000 ₦84,000 *Variable overhead/unit ₦ Total variable overhead 150,000 less depreciation 30,000 120,000 Variable overhead/unit = ₦120,000 50,000 = ₦2.40 per unit 8. Manager’s salary – relevant 9. Redundancy pay – relevant 10. General fixed overheads and non-production overheads – not relevant

(b) Special order From the calculations in (a), the decision will be to produce 25,000 units at a price of ₦13.50. This means that the special order of 25,000 units could be produced, with the following relevant revenues and costs: ₦ Revenue: Sales (25,000 × ₦12.0) 300,000 Savings made on material A disposal {250,000 𝑋 ₦750 5000 } 3,750 303,750 Costs: Material B (20,000 x ₦1.875) 37,500 Labour (25,000 × ₦ 5.625) 140,625 Variable overhead (25,000 × ₦2.40) 60,000 238,125 Additional contribution 65,625 Decision: Adeco is advised to accept the special order as it will produce additional contribution of ₦65,625. 67

(c) The cost accounting technique normally used by the management accountant to Assist management in decision making is the marginal costing technique, while the cost accounting principle is the relevant costs and relevant revenue principle. Marginal costing might be used for decision-making. For example, marginal costing is used for limiting factor analysis, linear programming and contribution techniques. It is appropriate to use marginal costing for decision-making when it can be assumed that future fixed costs will be the same, no matter what decision is taken, and that all variable costs represent future cash flows that will be incurred as a consequence of any decision that is taken. These assumptions about fixed and variable costs are not always valid. When they are not valid, relevant costs should be used to evaluate the economic/financial consequences of a decision. Relevant costs should be used for assessing the economic or financial consequences of any decision by management. Only relevant costs and benefits should be taken into consideration when evaluating the financial consequences of a decision. A relevant cost is a future cash flow that will occur as a direct consequence of making a particular decision. The key concepts in this definition of relevant costs are as follows:

• Relevant costs are costs that will occur in the future. They cannot include any costs that have already occurred in the past.

• Relevant costs of a decision are costs that will occur as a direct consequence of making the decision. Costs that will occur anyway, no matter what decision is taken, cannot be relevant to the decision.

• Relevant costs are cash flows. Notional costs, such as depreciation charges, notional interest costs and absorbed fixed costs, cannot be relevant to a decision.

Marking Guide Marks Marks Marks

a. (i) Production of 25000 units (½ x 13) 6.5 (ii) Production of 35000 units (½ mark x 13 ticks) 6.5 (iii) Shutdown of factory (½ mark x 13ticks) 6.5 Headline 0.5 20.0 b. Management Accounting Technique (Any 4 points @ 2½marks) 10.0 c. Accept or reject decision on special order (10ticks @ 1 mark) 10.0 40.0 68

Examiner’s Report The question tests candidates’ understanding of marginal costing as well as relevant costing techniques. Being a compulsory question, all candidates attempted the question. The performance of student was just above average. The major pitfall was candidate lack of understanding of the subject area especially in situation that has to do with savings, replacement costs and cost incurred in situation of shutdowns. Candidates are advised to read the ICAN study text when preparing for future examination of the Institute.

IDEAL NIGERIA LIMITED

(a) Marginal costing approach Profit will be maximised by producing output to maximise the contribution per machine hour (contribution per unit of limiting factor). Light Medium Contribution per unit ₦30 ₦35 Machine hours per unit 1.5 hours 2 hours Contribution per machine hour ₦20 ₦17.50 Ranking for manufacture 1st 2nd Profit will be maximised by making and selling 10,000 units of Light in each period (maximum sales demand). This will require 15,000 machine hours. The remaining 25,000 machine hours should be used to make and sell 12,500 units of Medium. ₦ Contribution from Light: 10,000 ×₦30 300,000 Contribution from Medium: 12,500 ×₦35 437,500 Total contribution 737,500 Fixed costs 450,000 Profit 287,500 (b) Throughput Accounting recognises material costs and its components as the only variable costs while the variable costs under marginal costing consist of direct materials costs, direct labour costs and variable overhead costs. 69 Under throughput accounting, direct labour costs are treated as fixed costs under other operational costs while marginal costing treats direct labour costs as relevant or variable costs relevant for decision making. The Net profit of throughput accounting differs from that of the marginal costing because the components of their costs of sales vary. The main difference between throughput accounting and marginal costing is in the treatment of direct labour and variable overhead costs as a ’fixed cost’ in the short-term. In throughput accounting, fixed costs are referred to as ’factory cost’.

(c) Throughput accounting ratio = Return per bottleneck unit / Factory cost per bottleneck unit Here, the bottleneck resource is machine time. Light Medium ₦ ₦ Sales price 110 135 Materials cost 50 45 Throughput 60 90 Machine hours per unit 1.5 hours 2 hours Throughput/return per machine hour ₦40 ₦45 To calculate the cost per factory hour, we need to make an assumption about direct labour cost and variable overhead costs. It is assumed that the direct labour cost and variable overhead cost in the answer to part (a) is fixed in the short-term. ₦ Direct labour and variable overhead costs: Light: 10,000 ×₦30 300,000 Medium: 15,000 ×₦55 825,000 Total Direct labour/Variable Overhead 1,125,000 Fixed costs 450,000 Factory cost in each period 1,575,000 70 Factory cost per machine hour = ₦1,575,000/40,000 hours = ₦39.375. Light Medium Return per machine hour ₦40 ₦45 Factory cost per machine hour ₦39.375 ₦39.375 Machine hours per unit 1.5 hours 2 hours Throughput accounting ratio 1.02 (102%) 1.14 (114%) Ranking for manufacture 2nd 1st

Note: The aim should be to maximise the throughput accounting ratio, and to ensure that the ratio is higher than 1.0.

(d) Profit will be maximised by making and selling 15,000 units of Medium (maximum sales demand). This will use up 30,000 machine hours. The remaining 10,000 machine hours should be used to make 6,666.67 units of Light. ₦ Return from Medium: 15,000 ×₦90 1,350,000 Return from Light: 6,666.67×₦60 400,000 Total return/throughput 1,750,000 Fixed costs 1,575,000 Profit ₦175,500

Marking Guide Marks Marks Marks

a. - Profit maximizing output using Marginal Costing principles (8 ticks @ 1 tick = ¼ mark) 2.0 - Maximising output (2 ticks @ ½mark) 1.0 - Maximum profit ( 4ticks @ ¼mark) 1.0 4.0 b. Throughput accounting Vs Marginal Costing (2 points @ 2 marks per tick) 4.0 c. Calculation of Throughput Accounting ratio

- Throughput returns/per Machine hour (8 ticks @ ¼ mark) 2.0 - Computation of Factory Cost/Machine hour (8 ticks @ ¼ mark) 2.0 - Computation of Throughput Accounting ratio (4ticks @ 1 mark) 4.0 8.0 d. Profit Maximisation/output using Throughput Accounting:

- Computation of output (2 ticks @ 1 tick) 2.0 - Computation of Profit (4 ticks @ ½ mark) 2.0 4.0 20.0 71

Examiner’s Report The question tests candidates’ understanding of application of marginal costing and throughput accounting principles. The performance of candidates was just average. The major pitfall was candidates’ poor understanding of marginal costing and throughput accounting techniques. Candidates are encouraged to read the Institute’s study text when preparing for future examinations of the Institute.

(a) Reconciliation Statement between Budgeted and Actual Profit N’000 Budgeted contribution 1170.0 Sales volume variance 180.0 (A) Sales price variance 220.0 (F) Standard Contribution 1,210.0 Cost variances F A N. N. Materials price 330.0 Materials usage 320.0 Labour rate 18.0 Labour efficiency 120.0 Variable overhead rate 90.7 Variable overhead efficiency 90.0 Total 18.0 950.7 Total cost variances 932.7 (A) Actual contribution 277.3 Less Fixed cost 400.0 Actual loss (122.7) 72

Workings TOMA PASTE NIGERIA LIMITED Materials price variance: based on quantities purchased since inventories are valued at standard cost. N’000 66,000 kg of materials should cost (×N40) 2,640 They did cost 2,970 Material price variance 330 (A) kg 11,000 units produced should use (× 5kg) 55,000 They did use 63,000 Usage variance in kg 8,000 (A) Standard price per kg N40 Usage variance in ₦ N320,000 (A) Labour rate variance N’000 36,000 hours of labour should cost (×N40) 1,440 They did cost 1,422 Labour rate variance 18 (F) Labour efficiency variance hours 11,000 units produced should take (× 3 hours) 33,000 They did take 36,000 Efficiency variance in hours 3,000 (A) Standard rate per hour N40 Efficiency variance (in ₦) N120,000(A) Variable Overhead Variances: N’000 36,000 hours should cost (×N30) 1,080.0 They did cost 1,170.7 Variable overhead expenditure variance 90.7 (A) Variable overhead efficiency variance (36,000hrs – 33,000hrs) =3,000 hours (A) ×N30 per hour = N90,000 (A) 73 Sales price variance N’000 11,000 units should sell for (x N500) 5,500 They did sell for 5,720 Sales price variance 220 (F) Sales volume (contribution margin) variance Budgeted sales volume in units 13,000 Actual sales volume in units 11,000 Sales volume variance in units 2,000 (A) × Standard contribution per unit N90 Sales volume variance in N.contribution N180,000 (A) N/B = Standard Contribution = (N500 – N410) ALTERNATIVE TO COMPUTING VARIANCES

- Material price Variance = Actual Cost less Standard Cost = Actual Quantity Purchased x Actual Cost Per kg less = Actual Quantity Purchased x Standard Cost per kg = (AQ x AC) – (AQ x SC) = 66,000 x 2,970,000 66,000 – (66,000 x N40) = N2,970,000 – N2,640,000 = N330,000 Adverse

- Material Usage Variance = Standard Cost less Standard Cost of Actual Production = Actual Quantity Used x Standard Cost Per kg less = Standard Cost of material per unit x Actual Production = (AQ x SC) – (SC x AP) = (63,000 x 40) – (N200 x 11,000) 74 = N2,520,000 – N2,200,000 = N320,000 Adverse

- Labour Rate Variance = Actual Cost less Standard Cost = (Actual hours used x Actual hour rate less = (Actual hours used x Standard labour rate per hour) = (36,000 x N1,422,000 36,000 ) – (36,000 x N40) = N1,422,000 – N1,440,000 = N18,000 Favourable

- Labour Efficiency Variance= Standard Cost - Standard Cost of Actual Production = (Actual hours x Standard labour rate per hour) - (Standard labour rate per unit x Actual Production) = (36,000 x N40) – (N120 x 11,000) = N1,440,000 – N1,320,000 = N120,000 Adverse

- Variable Overhead Efficiency Variance = Standard Cost – Standard Cost of Actual Production = (Actual Hours x Standard variable overhead per hour)-(Standard variable overhead per unit x Actual Production) = (36,000 x N30) – (N90 x 11,000) = N1,080,000 – N990,000 = N90,000 Adverse 75

- Variable Overhead Expenditure Variance = (Actual Cost – Standard Cost) = (Actual Hours x Actual Variable Overhead per hour) – (Actual Hours x Standard Variable overhead per hour) = (AH x AVOH) – (AH – SVOH) = (36,000 x ( N1,170,700 36,000 ) – (36,000 x N30) = N1,170,700 – N1,080,000 = N90,700 Adverse = (SSP – ASP) AQS = N500 – ( N5,720,000 11,000 ) x 11,000

- Sales Volume Variance = (Standard Sales – Budgeted Sales) = (Actual Sales Volume x Standard Sales Price) - (Budgeted Quantity x Standard Sales Price ) = (AQS x SSP) – (BQS – SSP) = (11,000 x N500) – (13,000 x N500) = N5,500,000 – N6,500,000 = N1,000,000 Adverse

- Standard Margin = (Standard Sales Price – Standard Cost per unit) = N500 – N410 = N90

- Sales Volume Variance = N90 N500 x N1,000,000 1 = N180,000 Adverse Working Notes N’000 Budgeted contribution N90.00 × 13,000 units 1,170.0 Budgeted fixed costs (600.0) Budgeted profit 570.0 76 Actual profit N’000 N’000 Sales 5,720.0 Materials 2,970.0 Less closing inventory (3,000kg ×N40.00) (120.0) 2,850.0 Labour 1,422.0 Variable overheads 1,170.7 Fixed costs 400.0 Total (5,842.7) Actual loss in the period (122.7)

b) If the company uses absorption costing with a direct labour hour absorption rate, we can calculate an expenditure, capacity and efficiency variance for fixed production overheads. Budgeted absorption rate per hour: Budgeted labour hours: 13,000 × 3 = 39,000 hrs Budgeted fixed cost N600,000 Budgeted absorption rate: N600,000 /39,000 = N15.38 Fixed overhead expenditure variance N’000 Budgeted fixed overhead costs 600 Actual fixed overhead costs 400 Fixed overhead expenditure variance 200 (F) Fixed overhead capacity variance hours Budgeted hours of work 39,000 Actual hours worked 36,000 Capacity variance in hours 3,000 (A) Standard fixed overhead rate per hour N15.38 Fixed overhead capacity variance in N. N46,140 (A) Fixed overhead efficiency variance Efficiency variance in hours = 3,000 hours (A) – see answer to (a). Fixed overhead efficiency variance = 3,000 hours (A) ×N15.38 = N46,140(A). 77 ALTERNATIVE SOLUTION

• Fixed Overhead Expenditure Variance = Actual Cost – Budgeted Cost = N400,000 – N600,000 = N200,000 Favourable

• Fixed Overhead Capacity Variance = (Budgeted Cost – Standard Cost) = (Budgeted Hours x Standard Cost per hour) – (Actual Hours x Standard Cost per hour) = (BH x SC) – (AH x SC) =(13,000 x3 N600,000 13,000 𝑥 3 - (36,000 x (N600,000 39,000 ) = N600,000 – N553,846 = N46,154 Adverse

- Fixed Overhead Efficiency Variance = = (Standard Cost - Standard Cost of Actual Production) = (AH x SC) – (SCAP) = (36,000 x (N600,000 39,000 ) – (11,000 x (N600,000 𝑥 3 39,000 ) = N553,846 - N507,692 = N46,154 Adverse N/B: Due to round-off or, any answer between N46,140 (A) to N46,154 (A) will be accepted.

(c) Labour rate The labour rate variance is favourable indicating a lower rate per hour was paid than expected. This is perhaps because lower grade of labour were used during production. Though less likely, it is possible that staff had a pay cut imposed upon them/decrease in buy rate. Finally, an incorrect or outdated standard could have been used. Labour efficiency This is significantly adverse, indicating staff took much longer than expected to complete the output. This may relate to the favourable labour rate variance, reflecting employment of less skilled or experienced staff. Staff demotivated by a pay cut are also less likely to work efficiently. 78 It may also relate to the reliability of machinery as staff may have been prevented from reaching full efficiency by unreliable equipment. Others include: • Decrease in machine set up time

• Idle time

• Lack of motivation

• Faulty equipment/Machine breakdown

Marking Guide Marks Marks Marks a. Reconciliation Statement (16 ticks @ ½ mark) 8.0

- Workings (8 ticks @ ½ mark) 4.0 12.0 b. Recalculation of Fixed overhead variances

- 3 fixed overhead variances (1 mark each) 3.0 - Working ( 2 ticks @ ½ mark each) 1.0 4.0 c. Labour rate variance (Any 2 points at 1 point = 1 mark) 2.0 Labour efficiency Variance (Any 2 points @ 1 point = 1 mark) 2.0 4.0 20.0

Examiner’s Report The question tests candidates’ understanding of application of standard costing and variance analysis. Majority of the candidates attempted the question. The performance of candidates was above average. The major pitfall was candidates inability to understand the application of standard costing using marginal costing as well as treatment of fixed overhead under absorption costing approach. Another pitfall was candidates’ failure to understand the treatment of inventory under standard costing principle. Candidates are encouraged to read the Institute’s study text when preparing for future examination of the Institute. 79

ADEB NIGERIA LIMITED

(a) Profit statements in December

(i) Operating at 80% capacity Transfer price ₦200 Transfer price ₦180 Eastern division Northern division Total Eastern division Northern division Total ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 Sales: External (₦180x5000) 900 1,200 2,100 900 1,200 2,100 Transfers (₦200x3000) 600 - 0 540 - 0 Total 1,500 1,200 2,100 1,440 1,200 2,100 Costs Tr

(ii) Operating at 100% capacity Transfer price ₦200 Transfer price ₦180 Eastern division Northern division Total Eastern division Northern division Total ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 Sales: External (₦180x5000) 900 1,600 2,500 900 1,600 2,500 Transfers (₦200x5000) 1,000 - 0 900 - 0 Total 1,900 1,600 2,500 1,800 1,600 2,500 Costs Transfers - (1,000) 0 - (900) 0 Variable (700) (300) (1,000) (700) (300) (1,000) Fixed (150) (60) (210) (150) (60) (210) Total (850) (1,360) (1,210) (850) (1,260) (1,210) Profit 1,050 240 1,290 950 340 1,290 N/B: Under the Northern Div. External Sales = ((₦32x5000x10 blocks) = ₦1,600,000 Under the Northern Div. Variable Costs = ((₦60x5000) = ₦300,000

(b) The effect of a change in the transfer price from ₦200 to ₦180 will result in lower profit for Eastern division and higher profit for Northern division, but the total profit for the company as a whole will be unaffected. A reduction in the transfer price to ₦180 (or possibly lower) is recommended, because this is the price at which Northern division can buy the materials externally. At any price above ₦180, Northern division will want to buy externally, and this would not be in the interests of the company as a whole. Significantly, at a transfer price of both ₦200 and ₦180, Northern division would suffer a fall in its divisional profit if it reduced the selling price of blocks to ₦32 and increased capacity by 20,000 blocks each month. A reduction in price would be in the best interests of the company as a whole, because total profit would rise from ₦1,150,000 per month to ₦1,290,000.

(c) Ignoring the transfer price, the effect on Northern division of reducing the sale price of blocks to ₦32 would be to increase external sales by ₦640,000 and variable costs in Northern division by ₦120,000 (2,000 tonnes × ₦60). Cash flows would therefore improve by ₦520,000 per month (₦640,000 less ₦120,000). To persuade Northern division to take the extra 2,000 tonnes, the transfer price should not exceed ₦260 (₦520,000/2,000). This is above the current external market price which is ₦180 although there is strong price competition in the market. 81 The transfer price for Eastern division should not be less than the variable cost of production in Eastern division, which is ₦70 per tonne. In the final analysis, an optimal transfer price suggested should be between ₦70 to ₦180.

Marking Guide Marks Marks Marks a. (i) Profit Statement @ 80% capacity (50 ticks @ 1 mark for 10 ticks) 5.0 (ii) Profit Statement @ 100% capacity (50 ticks @ 1 mark for 10 ticks) 5.0 10.0

b. Comments on effect on transfer price change (2 points @ 2½ marks per point) 5.0 c. Other transfer price to provide incentive (2 points @ 2½ marks per point) 5.0 20.0

Examiner’s Report The question tests candidates’ understanding of transfer pricing technique. The attempt on this question by candidates was moderate. The performance of candidates is above average. The major pitfall was candidates poor understanding of the requirements of the question especially in areas of varying capacity for production and sales as well as determination of optimum transfer price. Candidates are advised to read the Institute’s study text when preparing for the Institute’s examination in future.

DAT AIR

(a) The four perspectives Financial perspective – this perspective is concerned with how a company looks to its shareholders. How can it create value for them? Kaplan and Norton identified three core financial themes which will drive the business strategy: revenue growth and mix, cost reduction and asset utilisation Customer perspective – this considers how the organisation appears to customers. The organisation should ask itself: ’to achieve our vision, how should we appear to our customers?’ The customer perspective should identify the customer and market segments in which the business will 82 compete. There is a strong link between the customer perspective and the revenue objectives in the financial perspective. If customer objectives are achieved, revenue objectives should be too. Internal perspective – this requires the organisation to ask itself: ’what must we excel at to achieve our financial and customer objectives?’ It must identify the internal business processes which are critical to the implementation of the organisation’s strategy. These will include the innovation process, the operations process and the post-sales process. Learning and growth perspective – this requires the organisation to ask itself whether it can continue to improve and create value. The organisation must continue to invest in its infrastructure – i.e. people, systems and organisational procedures – in order to improve the capabilities which will help the other three perspectives to be achieved.

(b) Goals and Measures: Perspective Goal Performance Measure Comments/Remarks Customer To improve on the existing level of cleaningness of Airplanes Rating of the cleaning by the customers. This constitute a major factor adding value to customers. Customer To ensure that flights are on time. To reduce the number of flight cancelled “On time arrival” ranking from the aviation authority. The number of flights cancelled. DAT Air is currently No. 2 in the ranking and customers are more likely to use it. If flights are frequently cancelled, customers will not use it as it will be received as unreliable. Internal Extending operations to other cities where no airline fly to currently The number of customer base and fights in a year This represents area where the airline has been excelling Internal To improve turnaround time on the ground. To improve the cleaningness of DAT’s Planes. To develop the online booking system. On the ground time % of customers happy with the standards of the planes (customer satisfaction) percentage downtime Less time spent on ground means fewer planes are needed, reduce leasing costs. About 85% of customers are happy meaning 15% can result in loss of revenue. Since the company relies on booking system. It is critical in situation of growing number of customers. 83 This Financial (a) To continue to use will help to make one model of aircraft superior returns to the shareholders of the company. Financial (b) To use fewer planes to transport customers.

(c) To increase set revenue per plane Operating efficiency will be driven by getting more customers on fewer planes. This measures the cost side. This covers the first part of achieving operating efficiency by having fewer empty seats on planes Innovation & Learning Cost of lease of plane per customer Revenue per available passenger It is critical to the company that its workforce are reliable as absentee staff will lead to flight cancellation. If ground crew are better trained, they reduce the time the place stays on the ground, resulting in fewer planes being required and thus lowers costs. Cleaning results in customer satisfactory and retention will increase Innovation & Learning To reduce the The number of days employee absentee absent per employee. rate. Number of days’ To increase ground training per ground crew training on crew members cleaning and refuelling procedures Taking advantage of The increase in This area will help the new developments in number of customers airline to maintain its the e-commerce to who book online in competitive position in the improve business advance industry operations The extent reduction in maintenance and operational costs when compared with increase in customers’ base and revenue.

c. APPRAISAL OF THE USEFULNESS OF THE BALANCED SCORECARD AS A PERFORMANCE EVALUATION TECHNIQUE

• Better Strategic Planning The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which helps managers to think about cause-and-effect relationships between the different strategic objectives. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance are identified to create a complete picture of the strategy.

• Improved Strategy Communication & Execution Having a one-page picture of the strategy allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This 'plan on a page' facilitates the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of the strategy. The thing to remember is that it is difficult for people to help execute a strategy which they don’t fully understand.

• Better Alignment of Projects and Initiatives The Balanced Scorecard helps organisations map their projects and initiatives to the different strategic objectives, which in turn ensures that the projects and initiatives are tightly focused on delivering the most strategic objectives.

• Better Management Information The Balanced Scorecard approach helps organisations design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and better decision-making.

• Better Process Alignment Well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.

Marking Guide Marks Marks Marks a. (i) Listing of each perspective ( 1 mark each) 4.0

(ii) Discussing each perspective (½ mark each) 2.0 6.0 b. Goods/Performance measures of the perspectives

- Any 3 of the perspective goals 3.0 - Any 3 corresponding measures 3.0 - Any 3 corresponding explanations 3.0 9.0 c. Usefulness of Balance Scorecard (2 points @ 2½ marks per point) 5.0 20.0

Examiner’s Report The question tests candidate knowledge of the concept of balance scorecard as an instrument of identifying corporate goals and associated performance measures. The performance of students is below average. The major pitfall was candidates’ inability to identify the corporate goals and the associated measures. Candidates are advised to read the ICAN study text when preparing for future examinations of the Institute.

LAPEZ (a) 2018 2017 Northern Southern Northern Southern ROCE % 38.0 41.7 29.3 26.7 Staff costs/revenue % 63.9 57.7 62.1 58.2 Other operating costs/revenue % 25.6 27.2 26.3 27.6 Asset turnover 3.6 2.8 2.5 1.9 Operating profit/revenue % 10.6 15.1 11.6 14.2 Depreciation N’000 375.0 450.0 375.0 450.0 Op costs-depreciation N’000 315.0 562.0 375.0 480.0 Op costs- depreciation/revenue % 11.7 15.1 13.2 14.2 Revenue per member N 392 395 404 406 Staff costs per member N 251 228 251 236 Residual Income 172.50 360.50 161.25 210.00 Absolute Profit N 285 N 563 N 330 N 480 In 2017 the Northern division generated the higher ROCE and the General manager of that division would have received the bonus. The revenue for the Northern division was lower than that of the southern division but so was its capital employed. This is because it had a lower investment in non-current assets and its assets are older (assuming that all assets in each particular division were acquired at the same date). Revenue at the Northern division has fallen by 5.3% between 2017 and 2018. Also. revenue per member slightly fell from N404 in 2017 to ₦392 in 2018. Therefore, it can be concluded that the decline in revenue is due to the fall in number of members. The opposite is true for the Southern division, as revenue has increased by 10.2% over the period. Revenues per member are in line with the Northern division at N395 and have been maintained over the period. The operating profit has fallen over the period at the Northern division due to a fall in revenue and also less effective cost management with operating profit margins decreasing from 11.6% to 10.6%. Conversely, in the Southern division, the operating profit margin has increased from 14.2% to 15.1%. However further information can be obtained from a deeper analysis of the figures:

• Staff expenses as a percentage of revenue have increased for the Northern division but decreased for the Southern division. Given that revenue is almost directly linked to the number of members, it could be argued that this is to be expected given that it is highly likely that many of the staff costs are fixed.

• Operating costs as a percentage of revenue have fallen for both divisions but if depreciation is excluded it can be seen that they have increased for the Southern division. The General manager of the southern division would earn the bonus in 2018. b. Year N’000 Disc factor PV N Investment 0 -1,200 1.000 -1,200 Cash inflow 1-5 351 3.352 1,177 Sales of assets 5 525 0.497 261 NPV 238 The NPV of the project is N238,000. This NPV is positive.

Workings Calculation of Depreciation for each year = N675,000 5 year = N135,000 Calculation of Adjusted Annual Cashflows = Operating Profit = N 216,000 Add: Depreciation = N 135,000 = N 351,000 The NPV of the investment is positive and therefore this investment should have been made.

Marking Guide Marks Marks Marks a. Computation/discussion of ROCE and two other performance measures for 2017/2018:

- Computation of ROCE @ 1 mark 4.0 - Discussion of relative performance for ROCE 1.0 - Computation of any other two measures @ 1 mark 8.0 - Discussion of relative performance 2.0 15.0 b. Computation/Appraisal of Investment (5 ticks @ 1 mark) 5.0 20.0

Examiner’s Report The question tests candidates knowledge of company divisional performance and the use of appropriate parameters when financial data are provided on divisional basis. The question also test’s candidates’ ability in investment appraisal technique. Majority of the candidates attempted the question. The performance of candidates is above average. The major pitfall was inability of candidates to carry out thorough and relevant appraisal of the ratios computed. Also, candidates inability to apply the annuity table since the cash flow is regular for the duration of the investment is a major pitfall. Candidates are advised to read the Institute’s study text when preparing for the Institute’s examination in future. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA