You are on page 1of 11

Advanced Performance

Management
Friday 5 June 2009

Time allowed
Reading and planning:
Writing:

15 minutes
3 hours

This paper is divided into two sections:


Section A BOTH questions are compulsory and MUST be attempted
Section B TWO questions ONLY to be attempted
Present Value and Annuity Tables are on pages 10 and 11.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

Paper P5

Professional Level Options Module

Section A BOTH questions are compulsory and MUST be attempted


1

The Royal Laurel Hospital (RLH) and The King Hardy Hospital (KHH) are government funded institutions which are
managed by the Glasburgh Trust. The following information is available for the year ended 31 May 2009.

Total inpatients
Number of inpatients waiting >5 weeks for admission
Number of inpatients waiting >11weeks for admission
Total outpatients
Number of outpatients waiting >5 weeks for treatment
Number of outpatients waiting >11 weeks for treatment
Number of outpatients waiting >13 weeks for treatment
Achievement (%) of target maximum waiting time of 2 weeks for
admission to Rapid Access Chest Pains Clinic
Number of emergency admissions
Number of 12 hour trolley waits for emergency admissions
Achievement (%) of target of 4 hours or less time spent in
accident and Emergency ward
Number of complaints received
Number of complaints responded to within 25 days
Number of deaths (all inpatients)
Infection control number of instances of infections reported
Number of drug administration errors
Number of staff shortages
Staff productivity measure (number of patient days per staff member)
Number of times of Government or agency staff usage
Bed occupancy (number of inpatient bed days)
Theatre utilisation (%)
% of inpatients requiring a single operation
Number of operations performed
Revenue from clinical and non-clinical activities ($m)
Medical staff costs ($m)
Other staff costs ($m)
Income and expenditure surplus margin
Number of days cash in hand

RLH
Actual
37,000
3,330
740
44,000
4,400
1,320
220

RLH
Budget
36,500
365
0
43,800
2,190
438
0

KHH
Actual
40,000
320
0
44,000
352
220
0

70
300
4

98
400
0

100
300
0

96
1,620
1,539
600
2
80
80
84
80
138,750
?
80%
29,008
542
223
55
(10)
31

98
803
803
730
6
100
60
74
60
146,000
?
80%
?
552
222
55
00
30

100
420
416
800
0
20
20
92
20
134,320
?
80%
31,840
602
196
40
40
35

Additional information:
(1) Both hospitals were in operation for 365 days during the year
(2) Each hospital has 42 wards, each of which accommodates 10 beds
(3) RLH budgeted that each inpatient would require a stay of four days and nights in hospital.
(4) Each hospital has ten operating theatres in each of which an average of nine operations per day were undertaken.
(5) No outpatient required an operation during the year.
(6) The management of the trust uses a balanced scorecard approach in order to assess the performance of each
hospital. Their balanced scorecard has four dimensions which are as follows:
(i)
(ii)
(iii)
(iv)

Access to services
Clinical
Efficiency
Financial management.

Required:
Prepare a report to the management of the Glasburgh Trust which:
(a) Critically assesses, on the basis of the above information, the performance of both hospitals for the year
ended 31 May 2009. You should use the four dimensions to perform your assessement as per note (6) above;
(20 marks)
(b) Evaluates the balanced scorecard used by the Glasburgh Trust and provides recommendations which would
improve its usefulness as a performance measurement tool.
(11 marks)
4 professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the
report and the quality of its content.
(4 marks)
(35 marks)

[P.T.O.

Franchising For You Ltd (F4U) markets a range of franchises which it makes available to its customers, the
franchisees. F4U supplies the franchisee with information of the mode of operation, detailed operation schedules and
back-up advice (by telephone, internet) and undertakes national advertising. Each franchisee must arrange for its own
premises, equipment and undertake local marketing.
F4U is considering the introduction of a Dance and Drama franchise which would have an expected life of six years.
From this project, the only income F4U will receive from franchisees comes from the initial franchise fee.
The following estimates have been made relating to the cash outflows and inflows for F4U in order that F4U can
evaluate the financial viability of the Dance and Drama franchise proposal:
1.

Initial investment of $6m. This will include a substantial element relating to the intellectual capital requirement
of the proposal.

2.

Development/improvement costs of $1m per year at the end of each of years two and three.

3.

300 franchises will be sold each year at a fee of $20,000 per franchisee.

4.

Variable costs, payable in full on the issue of each franchise, are estimated at $6,000 per franchise.

5.

Directly attributable fixed costs of $06m per year in each of years one to six. No further fixed costs will be
payable by F4U after this period.

6.

Corporation tax at the rate of 30%, payable in the year in which cash flow occurs. Tax allowances are not
available on the initial investment or development/improvement costs payable by F4U.

7.

All cash flows are stated in current prices and with the exception of the initial investment will occur at the end
of each year.

8.

The money cost of capital is 1544%. Annual inflation during the period is estimated at 4%.

Required:
(a) Calculate the net present value (NPV) of the Dance and Drama franchise proposal and recommend whether
it should be undertaken by F4U.
(6 marks)
(b) Discuss the elements to be considered as intellectual capital and issues associated with its valuation for
inclusion in the initial investment of $6m.
(6 marks)
(c) Discuss ways in which reliance solely on financial performance measures can detract from the effectiveness
of the performance management system within an organisation.
(6 marks)
F4U has identified key variables as follows:
1.

The number of franchises taken up each year. It is estimated that a flexible pricing policy will result in the
following outcomes:
Fee per franchise
$
22,000
20,000
18,000

2.

Number of franchises
sold each year
270
300
355

The variable cost per franchise may be $7,000, $6,000 or $5,000.

The NINE possible outcomes of a spreadsheet model used in calculating the NPV and incorporating the variables 1
and 2 above, have been identified as follows:

variable cost 5
per franchise 6
($000)
7

Payoff Matrix: NPV values


Fee per franchise ($000)
18
20
22
4,348,226
4,007,630
4,274,183
3,296,822
3,119,120
3,474,524
2,245,419
2,230,610
2,674,865

Required:
(d) State the franchise fee pricing strategy ($ per franchise) which will result from the operation of each of the
following decision rules:
(i) Maximax;
(ii) Maximin;
(iii) Minimax regret.
Your answer should explain the basis of operation of each of the three decision rules.

(7 marks)
(25 marks)

[P.T.O.

Section B TWO questions ONLY to be attempted


3

(a) The senior management of Universal University (UU) intend to develop both quantitative and qualitative
measures of performance in relation to lecturing staff.
As part of UUs mission to provide quality education to its students, lecturers are encouraged to apply their skill
and judgement in the creation, delivery and assessment aspects of the learning process.
Academic staff are organised on a departmental basis. Each department is expected to achieve and improve on
targets in the achievement of its role. As part of their development both personally and as departmental members,
staff are encouraged to participate fully in research publication, new course design and innovation in teaching
and learning methods.
Academic staff have differing views on whether action on their part in pursuing aspects of such goals is
compatible with their personal goals.
Required:
Using the above scenario, discuss in relation to the lecturing staff within (UU) each of the following:
(i)

The application of Agency Theory to staff, in their role as agents and provide examples of the
observability of their role in relation to outcomes and effort;

(ii) The application of Expectancy Theory with specific reference to the relationship between:

strength of motivation to do (X);


strength of preference for outcome (Y);
expectation that doing (X) will result in (Y).

(12 marks)

(b) Hard Accountability is deemed to apply to lecturing staff in each of three specific areas as follows:
(i) accounting for the numbers;
(ii) ensuring the numbers are accounted for;
(iii) being held accountable for events and circumstances leading to the numbers.
Required:
Describe how each of the areas (b)(i) to (iii) may be applied at UU and critically evaluate this approach to
performance measurement in the context of the scenario described above.
(8 marks)
(20 marks)

The McIntyre Resort (MR), which is privately owned, is a world famous luxury hotel and golf complex. It has been
chosen as the venue to stage The Robyn Cup, a golf tournament which is contested by teams of golfers from across
the globe, which is scheduled to take place during July 2009. MR will offer accommodation for each of the five nights
on which guests would require accommodation.
The following information is available regarding the period of the tournament:
(1) Hotel data:
Total rooms
Room mix:
Double rooms
Single rooms
Family rooms
Fee per room per night ($):
Double rooms
Single rooms
Family rooms
Number of guests per room:
Double rooms
Single rooms
Family rooms

2,400
75%
15%
10%
400
300
600
2
1
4

When occupied, all rooms will contain the number of guests as above.
Costs:
Variable cost per guest per night
Attributable fixed costs for the five-day period:
Double rooms
Single and family rooms (total)

$100
$516,000
$300,000

(2) Accommodation for guests is provided on an all-inclusive basis (meals, drinks, entertainment etc).
(3) The objective of the hotel management is to maximise profit.
(4) The hotel management expect all single and family rooms to be sold out for each of the five nights of the
tournament. However, they are unsure whether the fee in respect of double rooms should be increased or
decreased. At a price of $400 per room per night they expect an occupancy rate of 80% of available double
rooms. For each $10 increase/decrease they expect the number of rooms to decrease/increase by 40.
Required:
(a) (i)

Calculate the profit-maximising fee per double room that MR should charge per night during the
tournament;
(6 marks)

(ii) Calculate how much profit would be earned from staging the tournament as a consequence of charging
that fee.
(4 marks)
(b) The management of the hotel are concerned by the level of variable costs per guest night to be incurred in respect
of the tournament. A recent review of proposed operational activities has concluded that variable cost per guest
per night in all rooms in the hotel would be reduced by 20% if proposed changes in operational activities were
made. However, this would result in additional attributable fixed costs amounting to $200,000 in respect of the
five day period.
Required:
Advise management whether, on purely financial grounds, they should make the proposed changes in
operational activities.
(6 marks)
(c) Discuss TWO initiatives that management might consider in order to further improve the profit from staging
the golf tournament.
(4 marks)
(20 marks)
7

[P.T.O.

The There 4 U Company (T4UC) commenced trading on 1 January 2006. It was founded by Ken Matthews, who is
the managing director of T4UC.
The initial aim of T4UC was to provide good quality repairs and servicing to customers with domestic central heating
systems and domestic white goods (white goods are items such as washing machines, tumble dryers, dishwashers,
refrigerators and freezers).
T4UC provides contract services on an annual basis to individual customers who require insurance covering the repair
and servicing of their central heating systems and domestic white goods. T4UC charge an annual contract fee and
undertake all client repair and servicing requirements without further charge.
Ken, who has a very strong background in sales and marketing, recruited engineers who came from a variety of
engineering backgrounds.
Initial growth was prolific with Ken being very successful in establishing a good sized customer base within the first
two years of the business. Ken believes that staff utilisation is the key driver of profitability within T4UC.
T4UC set up a website where clients could access product manuals and other diagnostic data as well as being able
to book an appointment with a service engineer.
The following data is available:
Year
Number
Number
Number
Number
Number
Number

of
of
of
of
of
of

contracted clients
visits to contracted clients
clients gained via recommendation
telephone calls for product support received
telephone calls for product support answered
product support issues resolved by telephone

2006
13,000
23,400
200
52,500
52,000
46,800

2007
15,000
30,000
100
62,000
60,000
51,000

2008
14,800
32,000
5
59,500
58,000
46,400

At the end of 2008 Ken became anxious regarding the fact that the growth in the customer base had stopped and
that a number of clients had chosen not to renew their contracts with T4UC. In view of these facts, Ken undertook
an extensive survey of the customers who had entered into contracts with T4UC since it commenced trading.
Ken received the following comments which were representative of all other comments that he received.
T4UC ought to adopt a right first time mentality.
I booked an engineer for last Monday who never arrived but two engineers turned up on Tuesday!
You send me a different engineer each time to inspect my central heating system. Some are here for an hour and yet
others are here for the whole day and some of those even have to come back the next day.
Your people never seem to have the required parts with them and have to come back the next day!
An engineer arrived at my home to repair my washing machine but the required parts which were shipped to my
home direct from the manufacturer arrived three days later! Ive heard that Appliances R Us is the best organisation
in your service sector and that they provide a much more efficient service than T4UC and unlike T4UC is always
contactable on a twenty-four hours basis during every day of the year! When I have tried to contact you on Saturdays
and Sundays I have often given up out of sheer frustration!
Ken also obtained the following data from the Centre for Inter-Firm Comparison.
Customer satisfaction rating (%)
Remedial visits (%) of client visits
Cost per client per visit ($)
Client to staff ratio

T4UC
65
8
150
250:1

Appliances R Us
92
1
75
200:1

Industry average
75
4
100
225:1

Ken undertook further investigations which revealed remedial visits were frequently due to staff servicing appliances
with which they were not completely familiar.

Required:
(a) Describe the Six-Sigma methodology for the improvement of an existing process.

(8 marks)

(b) Explain how the above-mentioned problems at T4UC could be analysed and addressed using the Six Sigma
methodology. Your answer should include suggestions regarding additional activities that should be
undertaken in order to improve the performance of T4UC.
(12 marks)
(20 marks)

[P.T.O.

Present Value Table


Present value of 1 i.e. (1 + r)n
Where

r = discount rate
n = number of periods until payment
Discount rate (r)

Periods
(n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1
2
3
4
5

0990
0980
0971
0961
0951

0980
0961
0942
0924
0906

0971
0943
0915
0888
0863

0962
0925
0889
0855
0822

0952
0907
0864
0823
0784

0943
0890
0840
0792
0747

0935
0873
0816
0763
0713

0926
0857
0794
0735
0681

0917
0842
0772
0708
0650

0909
0826
0751
0683
0621

1
2
3
4
5

6
7
8
9
10

0942
0933
0923
0941
0905

0888
0871
0853
0837
0820

0837
0813
0789
0766
0744

0790
0760
0731
0703
0676

0746
0711
0677
0645
0614

0705
0665
0627
0592
0558

0666
0623
0582
0544
0508

0630
0583
0540
0500
0463

0596
0547
0502
0460
0422

0564
0513
0467
0424
0386

6
7
8
9
10

11
12
13
14
15

0896
0887
0879
0870
0861

0804
0788
0773
0758
0743

0722
0701
0681
0661
0642

0650
0625
0601
0577
0555

0585
0557
0530
0505
0481

0527
0497
0469
0442
0417

0475
0444
0415
0388
0362

0429
0397
0368
0340
0315

0388
0356
0326
0299
0275

0305
0319
0290
0263
0239

11
12
13
14
15

(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

1
2
3
4
5

0901
0812
0731
0659
0593

0893
0797
0712
0636
0567

0885
0783
0693
0613
0543

0877
0769
0675
0592
0519

0870
0756
0658
0572
0497

0862
0743
0641
0552
0476

0855
0731
0624
0534
0456

0847
0718
0609
0516
0437

0840
0706
0593
0499
0419

0833
0694
0579
0482
0402

1
2
3
4
5

6
7
8
9
10

0535
0482
0434
0391
0352

0507
0452
0404
0361
0322

0480
0425
0376
0333
0295

0456
0400
0351
0308
0270

0432
0376
0327
0284
0247

0410
0354
0305
0263
0227

0390
0333
0285
0243
0208

0370
0314
0266
0225
0191

0352
0296
0249
0209
0176

0335
0279
0233
0194
0162

6
7
8
9
10

11
12
13
14
15

0317
0286
0258
0232
0209

0287
0257
0229
0205
0183

0261
0231
0204
0181
0160

0237
0208
0182
0160
0140

0215
0187
0163
0141
0123

0195
0168
0145
0125
0108

0178
0152
0130
0111
0095

0162
0137
0116
0099
0084

0148
0124
0104
0088
0074

0135
0112
0093
0078
0065

11
12
13
14
15

10

Annuity Table
(1 + r)n
Present value of an annuity of 1 i.e. 1
r
Where

r = discount rate
n = number of periods
Discount rate (r)

Periods
(n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1
2
3
4
5

0990
1970
2941
3902
4853

0980
1942
2884
3808
4713

0971
1913
2829
3717
4580

0962
1886
2775
3630
4452

0952
1859
2723
3546
4329

0943
1833
2673
3465
4212

0935
1808
2624
3387
4100

0926
1783
2577
3312
3993

0917
1759
2531
3240
3890

0909
1736
2487
3170
3791

1
2
3
4
5

6
7
8
9
10

5795
6728
7652
8566
9471

5601
6472
7325
8162
8983

5417
6230
7020
7786
8530

5242
6002
6733
7435
8111

5076
5786
6463
7108
7722

4917
5582
6210
6802
7360

4767
5389
5971
6515
7024

4623
5206
5747
6247
6710

4486
5033
5535
5995
6418

4355
4868
5335
5759
6145

6
7
8
9
10

11
12
13
14
15

1037
1126
1213
1300
1387

9787
1058
1135
1211
1285

9253
9954
1063
1130
1194

8760
9385
9986
1056
1112

8306
8863
9394
9899
1038

7887
8384
8853
9295
9712

7499
7943
8358
8745
9108

7139
7536
7904
8244
8559

6805
7161
7487
7786
8061

6495
6814
7103
7367
7606

11
12
13
14
15

(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

1
2
3
4
5

0901
1713
2444
3102
3696

0893
1690
2402
3037
3605

0885
1668
2361
2974
3517

0877
1647
2322
2914
3433

0870
1626
2283
2855
3352

0862
1605
2246
2798
3274

0855
1585
2210
2743
3199

0847
1566
2174
2690
3127

0840
1547
2140
2639
3058

0833
1528
2106
2589
2991

1
2
3
4
5

6
7
8
9
10

4231
4712
5146
5537
5889

4111
4564
4968
5328
5650

3998
4423
4799
5132
5426

3889
4288
4639
4946
5216

3784
4160
4487
4772
5019

3685
4039
4344
4607
4833

3589
3922
4207
4451
4659

3498
3812
4078
4303
4494

3410
3706
3954
4163
4339

3326
3605
3837
4031
4192

6
7
8
9
10

11
12
13
14
15

6207
6492
6750
6982
7191

5938
6194
6424
6628
6811

5687
5918
6122
6302
6462

5453
5660
5842
6002
6142

5234
5421
5583
5724
5847

5029
5197
5342
5468
5575

4836
4988
5118
5229
5324

4656
4793
4910
5008
5092

4486
4611
4715
4802
4876

4327
4439
4533
4611
4675

11
12
13
14
15

End of Question Paper

11

You might also like