Advanced Performance Management (APM) Flashcards

In activity-based costing (ABC), which of the following is classified as a 'facility-sustaining' activity?

Answer: Factory rent and property insurance

Cooper and Kaplan's cost hierarchy classifies activities into four levels: unit-level (per unit produced), batch-level (per batch, e.g., setups), product-sustaining (per product line, e.g., product design), and facility-sustaining (support the whole facility, e.g., rent, insurance, general management). Facility-sustaining costs cannot be meaningfully traced to individual products and are often excluded from product costs in ABC systems.

A multinational company uses residual income (RI) to evaluate overseas divisions. Division X operates in a high-risk emerging market. To fairly evaluate Division X, the company should:

Answer: Apply a higher cost of capital charge to Division X to reflect the higher risk

When using RI across divisions with different risk profiles, the cost of capital charge should reflect each division's specific risk level. A division in a high-risk emerging market faces greater political risk, currency risk, and economic volatility, justifying a higher required return. Using a uniform rate would unfairly disadvantage low-risk divisions and subsidise high-risk ones, leading to misallocation of capital.

A company implements a balanced scorecard but finds that improvement in customer satisfaction scores has NOT led to improved financial performance. Which is the MOST likely explanation?

Answer: The assumed cause-and-effect relationship between customer and financial perspectives may not hold in this context

The balanced scorecard assumes causal relationships between its four perspectives (learning → internal processes → customer → financial). However, these links are assumed rather than proven, and they may not hold in all contexts. For example, satisfied customers might not increase purchases if they lack purchasing power, or competitors may match the improvements. The company should validate the assumed cause-and-effect linkages.

A company uses target costing for a new product. The target selling price is £50, the required profit margin is 20%, and the estimated current cost is £45. What is the cost gap that must be closed?

Answer: £5

Target cost = Target selling price × (1 - required margin) = £50 × (1 - 0.20) = £50 × 0.80 = £40. Cost gap = Estimated current cost - Target cost = £45 - £40 = £5. The company must find ways to reduce costs by £5 per unit through value engineering, design changes, or supply chain optimisation before the product can be launched profitably.

Which of the following is a key difference between benchmarking against competitors and benchmarking against best-in-class organisations in other industries?

Answer: Best-in-class benchmarking can identify breakthrough improvements beyond industry norms

Competitive benchmarking compares against direct competitors and typically identifies incremental improvements within existing industry practices. Best-in-class (or generic/functional) benchmarking looks at organisations excelling in similar processes across different industries (e.g., benchmarking logistics against Amazon regardless of your industry). This can identify revolutionary improvements that no competitor has yet adopted, breaking out of industry-standard thinking.

A non-profit organisation is considering implementing a performance management system. Which framework would be MOST appropriate given that financial performance is not the primary objective?

Answer: Balanced scorecard with the mission/stakeholder perspective at the top rather than the financial perspective

For non-profit organisations, the balanced scorecard can be adapted by placing the mission or stakeholder perspective at the top of the strategy map, rather than the financial perspective. Financial measures become a constraint or enabler (e.g., staying within budget) rather than the ultimate objective. This modification, advocated by Kaplan and Norton themselves, ensures the framework reflects the organisation's purpose of delivering social value rather than shareholder returns.