ACCA APM Past Exam Rewritten - Q: Freuchie - Longer Case Q1

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ACCA APM Past Exam Rewritten - Q: Freuchie - Longer Case Q1

Q. FREUCHIE (SEPT/DEC 21)

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Exhibit 1 – Company information

Exhibit 2 – Performance reporting: quantitative

Exhibit 3 – Performance reporting: narrative

Exhibit 4 – Operational gearing and cost structure

Exhibit 5 – What gets measured, gets done

Exhibit 6 – Appendix 1 Freuchie Retail: Strategic Performance Report Year to 30 June 20X5

Exhibit 7 – Appendix 2 Freuchie – Additional Data

Required:

It is now 1 September 20X5.

Write a report to the chief executive officer (CEO) of Freuchie to respond to his instructions for work on the following areas:

(i) Current performance reporting: quantitative (17 marks)

(ii) Current performance reporting: narrative (10 marks)

(iii) The calculation of operational gearing and its implications (8 marks)

(iv) The quote ‘What gets measured, gets done’ (5 marks)

Professional marks will be awarded for the demonstration of skill in communication, analysis and evaluation, scepticism and commercial acumen in your answer. (10 marks)

(Total: 50 marks)

Answer:

Report

To: The board of Fruechie Retail (Frueuchie)

From: An Accountant

Date: Sept 20X5

Subject: Performance reporting and management issues at Freuchie

Introduction:

This report evaluates both the quantitative and narrative aspects of the current performance report used by the board for strategic review. Next, the meaning and calculation of operational gearing are discussed for Freuchie as are the implications of the results. Finally, the quote ‘What gets measured, gets done’ is discussed, along with certain other pieces of jargon with illustrations from the situation at Freuchie.

(i) – Refer to Chapter 6 Knowledge (Performance Reports for Management)

1. Relevance to Objectives (Up to 5 marks):

• Addresses Business Objectives (1 mark): The primary aim of Freuchie is to provide shareholder returns above the retail sector average. However, the report lacks clarity in measuring this objective against sector averages.
• Measurement of Core Objectives (1 mark): The report partly addresses the shareholder returns through dividend payments but omits share value measurements, making it challenging to gauge total shareholder return.
• Comparison to Industry Benchmarks (1 mark): There's no comparative analysis of Freuchie's performance against the broader retail sector's average, inhibiting strategic positioning.
• Supporting Strategies Examination (2 marks): The strategies to achieve superior customer experience — store appearance, clothing range, and enthusiastic selling — are vaguely represented in the report, not allowing a clear insight into their execution.

2. Data Completeness and Appropriateness (Up to 7 marks):

• Appropriate Information for Decision-making (1 mark): The report seems to be an assortment of internally-generated financial data. It lacks important external metrics which the board would need for decision-making.
• Key Performance Indicators (1 mark): While revenue growth is highlighted, it doesn't account for the influx from newly opened stores. This misrepresentation can skew KPI interpretations.
• Data Adjusted for Variables (1 mark): The sales data hasn't been normalized to factor in the newly added stores, leading to a misleading representation of organic growth.
• Capital Usage and ROI (2 marks): The report misses out on representing the capital employed and the subsequent returns. This omission is critical for understanding the financial health and profitability of the venture.
• Proper Segmentation (1 mark): The current representation fails to segregate the performance of the new stores from the existing ones, which is essential for a granular analysis.
• Core Information for Decisions (1 mark): It lacks non-financial KPIs, such as customer experience metrics, which would offer a holistic view of the brand's health.

3. Presentation Quality (Up to 5 marks):

• Clarity and Usability (1 mark): While the initial table is clear, much of the data presented is overly detailed or irrelevant to the mission, leading to potential information fatigue.
• Variances Highlighted (1 mark): The report provides both budget and actuals but lacks variance insights, which are essential for performance assessments.
• Relevance to Objectives (2 marks): The presented data does not seem directly tied to the firm's objectives, making it challenging to derive actionable insights.
• Data Overload (1 mark): The board is presented with a deluge of internal data, which may overshadow critical external environmental insights.

4. Comparative Analysis (Up to 4 marks):

• Trend Analysis (1 mark): The report showcases only the current year against the previous, limiting the depth of a multi-year trend analysis.
• Competitor Performance (1 mark): There's an absence of any comparative analysis with competitors, hindering competitive positioning insights.
• Data Against External Measures (2 marks): The report lacks a juxtaposition against external benchmarks like industry averages or competitor metrics, vital for strategic planning.

(ii) Narrative Assessment of Performance Reporting:

1. Clarity and Relevance (Total: 5 marks):

• Evaluation of the Current Commentary (3 marks):

The narrative in the report doesn't adequately substantiate if the business is on track to meet its mission.

The focus on dividends without elaborating on total returns to shareholders or a clear statement on their capital's return is a significant oversight. Furthermore, there's only an indirect reference to subsidiary strategies via revenue growth, which is tied to sales enthusiasm.

Absence of specifics on store aesthetics, clothing range, and the appeal of items offered is a missed opportunity for clarity. For instance, the gross margin difference between years (from 40.8% to 40.6%) should be explicitly mentioned, not implied.

• Relevance of Content (2 marks): The ending note on inventory write-downs seems misplaced. It doesn't tie back directly to the company's primary mission nor holds significant weight in terms of year-on-year change or overall impact.

2. Recommendation for Improvement (Total: 5 marks):

• Improved Commentary Focus (1 mark): Given the mandate of focusing on a maximum of four areas, the narrative should be concise and zero in on the most pivotal aspects of the business performance. The proposed areas are: Dividend and profits, revenue growth and store performance, clothing range performance, and salesforce enthusiasm.
• Proposed New Commentary (4 marks):
• Dividend and Profits (1 mark): RetailX's overall performance is commendable. Even though the business has retained its dividend, there's room for improvement as profits linger at a meager 0.2% of revenue.
• Revenue Growth and Store Performance (1 mark): A 10.5% revenue surge from the last period, mainly due to new store acquisitions, is noteworthy. However, a consistent revenue per store ($15.2m) indicates the need for enhancing the in-store customer experience.
• Clothing Range Performance (1 mark): An impressive X% of our clothing line met the set gross margin objectives, showcasing the potential of our product range.
• Salesforce Enthusiasm (1 mark): Our sales team's vigor is evident with X% achieving bonuses for surpassing their targets, a metric that underscores the importance of motivated personnel.

Overall, it's essential for RetailX's narrative to align more closely with its mission and key performance areas. A sharper focus, accompanied by relevant figures, can significantly enhance the clarity and relevance of the performance report.

(iii) Operational Gearing and Cost Structures:

Commentary on the General Meaning of Operational Gearing (3 marks):

Operational gearing is a metric that gauges the business risk associated with how shifts in sales volumes might influence profit declines, especially when fixed costs aren't adequately covered. A higher ratio signifies increased risk.

Essentially, it's defined as the ratio of contribution to operating profit, where contribution is the difference between revenue and variable costs. If the contribution is substantial but the operating profit remains low, as evidenced by Freuchie, it suggests that fixed costs are only marginally met.

This situation makes the company susceptible to potential losses with even slight revenue reductions, as seen in 20X4. Precise measurement of operational gearing is challenging since most costs have both fixed and variable components. In our analysis, costs have been distinctly classified based on their predominant behavior.

Calculations (5 marks):

Breakdown of the Adjustments (in relation to marks):

• Revenue - Variable Costs (1 mark): This is depicted by the contribution row, which is revenue minus cost of sales and adjustments.
• Variable - Excludes Other Operating Costs (1 mark): The adjustments account for the fixed costs including rent, property costs, marketing, head office costs, and more.
• Variable - Excludes Insurance, Utilities, and Depreciation (1 mark): These costs, even though they fluctuate with the number of stores, do not usually vary based on revenue per store and are thus treated as fixed.
• Handling Staff Costs Correctly (1 mark): Staff costs are largely fixed; however, the variable component like bonuses has been isolated and accounted for in the calculations.
• Operational Gearing (1 mark): This is the ratio of the contribution to PBIT, depicted in the final row of the table.

Commentary on Results (2 marks):

Freuchie's results highlight the inherent risks associated with high fixed costs. The comparison between this year's and the previous year's data underscores the sensitivity of the company's profitability to revenue fluctuations.

A mere 10.5% change in revenue transitioned Freuchie from a loss-making venture to a profitable one, also amplifying the operating profit. Such financial behavior typifies Freuchie as a high-risk business, prone to volatile financial outcomes.

(iv) What gets measured, gets done

Tutorial note: Refer to Chapter 1 Knowledge Framework.

1. Attention on Priority (1 mark):
• Central Idea: Metrics guide the allocation of company resources, making measured areas a focal point.
• Freuchie Context: If Freuchie continuously measures inventory losses, it indicates that inventory management is a priority, which could lead to decisions like limiting the clothing range.
2. Behavioral Influence (1 mark):
• Central Idea: The measurement criteria can dictate the behavior of employees, especially if their evaluations or rewards are based on these metrics.
• Freuchie Context: If Freuchie focuses on revenue and dividends in its performance evaluations, this may inadvertently result in staff neglecting other crucial aspects like profit margins.
3. Accountability (1 mark):
• Central Idea: What gets measured holds someone accountable because the performance against those metrics is visible.
• Freuchie Context: Without metrics on individual store profitability, there's a lack of accountability for store managers regarding the performance of their individual stores.
4. Continuous Improvement (1 mark):
• Central Idea: By measuring regularly, companies can spot trends and adjust strategies accordingly.
• Freuchie Context: If Freuchie were to track trends in store appearance and clothing range attractiveness, they might make continuous improvements in these areas.
5. Impact of Wrong Metrics (1 mark):
• Central Idea: Incorrect metrics can misdirect resources and focus.
• Freuchie Context: Over-monitoring inventory losses might detract from the main goal of having diverse and attractive clothing collections.
6. Limitations of Over-Focusing (1 mark):
• Central Idea: Relying heavily on a few metrics can lead to neglecting others.
• Freuchie Context: Concentrating solely on revenue might lead to overlooking other important metrics like customer satisfaction or store aesthetics.
7. Tunnel Vision (1 mark):
• Central Idea: Overemphasis on specific metrics can lead to tunnel vision, where broader goals are overlooked.
• Freuchie Context: Focusing only on measurable aspects might misalign with Freuchie's broader objectives like overall profitability or customer satisfaction.
8. Relevance of Balanced Approach (1 mark):
• Central Idea: While measurement is essential, a holistic view is equally important.
• Freuchie Context: Freuchie's management should ensure a balance between measured outcomes and broader business goals for overall growth.

Marking scheme:

Categories: : Advanced Performance Management (APM)