MA: Performance measurement

Answer: B. Residual income = Divisional profit − (Capital employed × Cost of capital). Imputed interest charge = £500,000 × 12% = £60,000. Residual income = £75,000 − £60,000 = £15,000. Return on investment (for comparison) = £75,000 ÷ £500,000 = 15%, which exceeds the 12% cost of capital — consistent with the positive residual income. A positive RI means the division is earning more than the minimum required return and is therefore creating value. The examiner regularly tests the ability to calculate both ROI and RI and explain their advantages and limitations. £3,000 does not follow from the figures; the 3% gap between ROI and the cost of capital applies to the whole £500,000 (3% × £500,000 = £15,000).

Answer: C. The balanced scorecard has four perspectives: Financial (profit, ROI, cash flow), Customer (satisfaction, retention, delivery, market share), Internal business process (efficiency, quality, cycle time), and Innovation and learning (employee development, systems capability). On-time delivery is a measure of what customers experience — it directly reflects service quality as perceived by the customer, making it a customer perspective measure. An internal process measure might be 'production cycle time' — the internal activity that drives the delivery performance the customer sees.

Answer: D. Value analysis classifies product features into four types. Exchange value is the price someone would pay — here £299. Use value relates to the functional benefit the feature provides to the user — the ability to disassemble for transport is a practical functional benefit, making this use value. Esteem value relates to prestige or status associated with owning the product. Cost value is the actual cost of producing the feature. The examiner's report specifically flagged value analysis as regularly examined — knowing all four classifications and being able to apply them to examples is essential.

Answer: D. ROCE = Operating profit ÷ Capital employed × 100 = £360,000 ÷ £3,000,000 × 100 = 12%. The examiner confirms ROCE uses profit before interest and tax (operating profit) divided by capital employed (total assets less current liabilities). Option B uses gross profit (£720,000 ÷ £3,000,000). Option A (30%) is the gross profit margin (£720,000 ÷ £2,400,000), not ROCE. Option C (15%) is a miscalculation. ROCE is the most commonly examined performance ratio in MA.

Answer: A. Rearranging the formula: Profit margin = ROCE ÷ Asset turnover = 18% ÷ 1.5 = 12% — option A. Option B (27% = 18% × 1.5) is the most common error: multiplying rather than dividing. A student who does not rearrange the formula correctly will arrive at this wrong answer. Option C (8%) has no clear derivation from the given data. Option D (2.7%) is a decimal-place misreading of option A. This relationship is regularly tested in the ACCA MA exam.

Answer: B. Current ROI = £112,000÷£800,000 = 14%. Project ROI = £26,000÷£200,000 = 13%. Since 13% < 14%, accepting the project dilutes divisional ROI — a manager assessed on ROI would reject it. RI approach: Additional RI = £26,000 − (£200,000 × 12%) = £26,000 − £24,000 = £2,000 positive. Positive RI means the project exceeds the cost of capital — a manager assessed on RI would accept it. This conflict illustrates why RI may be preferred as it aligns divisional decisions with company-wide value creation.

Answer: C. Non-financial indicators measure aspects of performance not directly expressed in monetary terms. Customer complaints per unit sold is a quality metric — it measures the customer experience outcome of the production process without using financial values. Options A, B and D are all financial ratios expressed in monetary or percentage terms derived from financial data.

Answer: D. Throughput accounting (Goldratt) defines throughput as sales revenue minus direct material costs only — not all variable costs. Labour and overheads are treated as fixed costs of the period (operating expenses) rather than product costs. The key metric is throughput per unit of bottleneck (constraining) resource. Option A includes labour in the deduction — incorrect in throughput accounting. Option B describes throughput rate, not throughput itself. Option C describes profit.

Answer: B. The balanced scorecard's four perspectives: Financial, Customer, Internal Business Process, and Learning and Innovation (also called Learning and Growth). Training hours per employee measures the organisation's investment in developing its people — a learning and innovation indicator. Customer perspective measures customer satisfaction and retention. Internal process measures operational efficiency. Financial measures profitability and returns.

Answer: A. Transfer pricing aims to motivate both divisions to transact internally. The minimum transfer price is variable cost (£28) — below this Division A loses money on each transfer. The maximum is market price (£50) — above this Division B would buy externally. Any price in the range £28–£50 gives both divisions an incentive to trade: Division A makes a contribution, Division B pays less than market price. A price of exactly £50 (B) gives Division A full market return but no incentive for Division B to prefer internal supply.

Answer: B. The three Es framework for public sector performance: Economy = acquiring resources at lowest cost without compromising quality. Efficiency = maximising outputs relative to inputs (doing things right). Effectiveness = achieving the intended objectives (doing the right things). This framework is used because profit is not a valid measure for public sector organisations. The other options misdefine one or more of the three Es.

Answer: B. Best-in-class or generic benchmarking compares against the best performers on specific processes or metrics, regardless of which industry they operate in. The logic is that the best customer service process (for example) may be found in a retailer, not an accounting firm. Competitive benchmarking (A) compares against direct industry rivals. Internal benchmarking (C) looks within the organisation. Historical benchmarking (D) compares current to past performance.

Answer: A. Option A is correct: the controllability principle holds that managers should only be assessed on costs they can influence. Head office costs are controlled centrally — the divisional manager cannot reduce or increase them, so including them in the performance report is demotivating and reduces the report's usefulness. Option B is superficially plausible but wrong: the issue is not that the costs are artificial, but that the manager cannot control them. Option C incorrectly implies the costs should be hidden from the manager rather than reported separately. Option D is too extreme — divisional managers are legitimately responsible for controllable fixed costs; the problem is uncontrollable costs, not fixed costs per se.

Answer: B. Efficiency measures the relationship between inputs and outputs — getting maximum output from given inputs (or minimum inputs for given outputs). Achieving service targets (outputs met) at twice the budgeted cost (excessive inputs) is an efficiency problem. Economy (A) relates to input costs — whether inputs were acquired at minimum cost. We don't know if unit input prices were excessive — the problem may be volume of inputs. Effectiveness (C) is not the issue — targets were achieved. The three Es are distinct (D).

Answer: A. When the supplying division is at full capacity, any internal transfer requires giving up an external sale. Minimum transfer price = Variable cost + Opportunity cost = £20 + (£35 − £20) = £20 + £15 = £35. The opportunity cost is the contribution forgone on each external unit sacrificed (£35 − £20 = £15). At full capacity, the minimum transfer price equals the external market price. £20 (B) is correct only when there is spare capacity. Options C and D have no theoretical basis.

Answer: B. The balanced scorecard's power comes from the cause-and-effect logic linking the four perspectives: investment in people (learning) improves processes (internal), which improves customer outcomes (customer), which drives financial results. This chain is called a strategy map. The perspectives are not independent (A). Positive non-financial measures do not automatically guarantee financial improvement if the causal logic is incorrect (C). No single perspective is inherently most important (D) — they form an integrated system.

Answer: C. EVA = NOPAT − (Capital employed × WACC) = £85,000 − (£500,000 × 14%) = £85,000 − £70,000 = £15,000. Positive EVA means the division is creating value above the cost of the capital employed. EVA is similar to residual income in concept. Option A is NOPAT only (ignores capital charge). Option B is the capital charge only. Option D would arise if NOPAT were £55,000 (below the capital charge).

Answer: B. Even with a three-year LTIP, managers may prioritise decisions that inflate EPS during the measurement window — cutting R&D, deferring maintenance, or making accounting choices that boost short-term earnings — at the expense of sustainable long-term value. This is a known limitation of any earnings-based incentive. Option A overstates the risk — not all LTIPs encourage excessive risk-taking. Option C is incorrect — three years does influence behaviour. EPS is a valid (if imperfect) performance metric (D).

Answer: C. A practical limitation of BSC is the risk of measure proliferation — organisations can end up tracking dozens of KPIs across four perspectives, overwhelming managers. The remedy is disciplined selection of a small number of genuinely strategic measures. Option A is the opposite of the BSC's purpose — it explicitly includes non-financial perspectives. Option B is wrong — BSC was quickly adapted for services and not-for-profits. Option D is wrong — BSC measures should evolve as strategy changes.

Answer: A. Controllable profit excludes costs the manager cannot influence — particularly centrally allocated head office costs. This focuses the performance assessment on what the manager can actually affect: their revenue decisions and the direct costs within their control. Net profit with full allocation (B) mixes controllable and uncontrollable elements, reducing the motivational value and fairness of the measure. Gross profit (C) may exclude some controllable fixed costs. Revenue only (D) ignores cost management.

Answer: B. Goal congruence means that what is good for the division is also good for the group — divisional objectives and group objectives are aligned. Performance measurement systems should be designed to encourage goal congruence: managers who maximise their division's performance should simultaneously be maximising group performance. Option A describes sub-optimisation (the opposite). Option C describes uniform central targets that may not be appropriate for diverse divisions. Option D describes agency problems.

Answer: D. Step 1 — profitability index (PI = NPV ÷ Investment): A = 0.30; B = 0.35; C = 0.20; D = 0.12. PI ranking: B, A, C, D. Step 2 — check all feasible combinations within £300,000: B + C = £120k + £180k = £300k, NPV = £78,000; A + D = £200k + £100k = £300k, NPV = £72,000; B + D = £120k + £100k = £220k, NPV = £54,000 (£80k undeployed); A alone = £200k, NPV = £60,000. Maximum NPV = £78,000 from B + C — option D. Option B (A + D, £72,000) is the PI-ranking trap: PI suggests B then A, but B + A costs £320k which exceeds the limit, so the correct combination requires checking all feasible pairs. Option C (A only) leaves £100,000 of capital undeployed. Option A (B + D) also leaves capital undeployed unnecessarily.

Answer: A. Employee satisfaction directly measures the organisation's investment in and management of its people — this is a learning and innovation (or people) perspective measure. Employee satisfaction drives process quality (internal process), which drives customer outcomes (customer), which drives financial results (financial) — demonstrating the BSC's cause-and-effect logic. It is not a customer measure (B) — customers are external. Not an internal process measure (C) — processes are activities, not people satisfaction. Not financial (D).