Answer
1
Report
To: CEO of Fiag
From: A. Accountant
Date: Sept 20X5
Subject: Performance reporting and other management issues at Fiag
（写的时候注意结构）

Introduction
This report evaluates the current performance report used by the board of Fiag, first against the accusations that it misrepresents performance and then, that it fails to measure Fiag’s performance against its objectives. Second, justified recommendations of performance indicators arising from an analysis of the external business environment are offered. Finally, the report examines an issue associated with budget setting and its effect on staff rewards in the production department.

（a） （i） Manipulation of board report
The non-executive director （NED）’s criticism of the current report seems to have good reason. The problems lie in omitting bad news by using classifications some of which appear to select only a positive view of performance and some which manipulate commonly used performance indicators.

Omitting the bad news
The report gives only one industry average （operating margin） but does not provide a revenue growth comparator. While cost and detailed profit information is often difficult to obtain, the revenue figures are clearly reported for most entities and so it should be straight-forward to see if Fiag’s fall of 6% is representative of the market as a whole.
The report does not calculate many of the year on year changes. This may be because important headings such as gross profit show a deteriorating performance. It could be argued that many of these calculations are unnecessary （such as for the detailed cost headings）. However, no such case can be made for not showing the percentage fall in operating profit.
The revenue performance fall may be worse than portrayed（表现） as the range without the electrical bicycle has seen revenue fall from $284m to $248m （13%）. This category covers 91% of the current revenue earned by Fiag.

Misclassification of costs
Exceptional costs relate to the development of the new electrical bicycle which appears to be part of the main activities and a central part of the strategy of the business. These costs should be considered normal. Their placement after the operating profit line means that key performance indicators such as return on capital employed are not affected so over-stating performance.
Administrative expenses includes government grant income which probably should be stated separately as it is material, short term and will not match to the full five years of costs associated with developing the electrical bicycle.

Commentary
The commentary appears misleading. It gives a positive impression of revenue growth by only selecting the growth in revenue from new models rather than noting the underperformance of the range as a whole. It quotes the improved profit before tax figure while ignoring the widely used operating profit figure, thereby bypassing the reason for the rise in profit before tax which is the fall in exceptional costs resulting from the completion of development of the new electrical bicycle model.
The description that a fall in operating margin is small ignores a number of facts. The fall is not 1·8% but 1·8 percentage points which is 27% on 20X4. Also, no reference is made to the industry comparator of 11% against which Fiag’s 4·8% looks poor.
Thus, the commentary fails to address the falling revenue, gross profit and operating profit and so is not representing the performance of Fiag accurately.

（ii） Measuring the achievement of the objectives of Fiag
The critical measure of whether the report is fit for its purpose is that it shows whether the business is achieving itsobjectives. Fiag’s overall objective is
– ‘to give the shareholders sustainable growth in returns’ and it intends to do this by:
– developing the best quality bicycles;
– manufacturing the best quality bicycles;
– bringing the joy of cycling to a broad customer base in Beeland.
Overall, the report is in the format of a statement of profit or loss, so it contains a number of common financial measures, but these are only loosely connected to the stated mission. The following problems are noted about how the report measures the achievement of the objectives:

1. There is no direct measure of shareholder returns in the report, not even profit after tax which would allow an earnings calculation. There is no statement of the gains which shareholders would make in income （dividends paid） or capital terms. While it is not possible to give capital growth through share price rise as Fiag is unlisted, shareholder wealth changes could be measured through NPV or economic value added.
Growth of the returns would require the change year on year of these indicators and this is only partially recognised in the existing report where not all growths are provided.
2. The sustainability of the returns are unclear from the report. These require the determinants of future performance to be measured. This should be done by examining the success of the supporting strategies.

3. The first two supporting strategies of the overall objective relate to the qualities of Fiag’s products. The report does not measure these individually. There is an indirect measure of customer attitude through the revenue growth figure but without competitor comparison or a market share, it is not possible to draw a conclusion about any of the qualities of the products. These elements relating to the products are difficult to measure overall as they are likely to be dependent on each product line individually.
4. The objectives also make clear the need to separately measure development and manufacture.
（a） There are no separate categories for all new products although there is a note on revenue from the Zoam. The number of development projects, their state of completion and then their market performance all require to be monitored.
（b） There is little apart from the gross profit to indicate the efficiency of the manufacturing process.

5. The failures in points 3 and 4 reflect the choice to use only data from the financial systems in the report. The measurement of these aspects requires Fiag to move beyond its traditional information systems.
6. There is no measure of the customer base and so the broadening of the customer base cannot be commented upon. This final aspect would appear to be addressed by the Zoam which seems attractive to those who may previously have not been willing or able （elderly） to make the physical effort. This failure also reflects the lack of external competitor/market information in the report where the only external data given is the industry average operating margin.

Other aspects
From the perspective of a board report, it should provide information to allow the board to perform its tasks of planning for the future of Fiag and controlling its existing activities. For planning purposes, the lack of external information about customers and competitors makes some of the number difficult to interpret.
For control purposes, there is previous year information given but not sufficient to establish a trend （which requires at least three years of information）. Also, there is no indication of whether the business is meeting its budgets through the provision of variances.
In terms of presentation, the report is clear and in a traditional profit and loss format, would be easily understood by most readers. It uses terms which would be recognisable to those used to reading accounts. It is helpful that a narrative commentary is provided.
However, problems with the quality of the narrative are noted above and often the commentary does not go beyond restating the figures in the table. It should provide the significant explanations for performance as measured by the key indicators which should be linked directly to the objectives of Fiag noted above.

（b） External business environment at Fiag
The political environment is characterised by government actions which appear aimed to increase the use of bicycles in Beeland. Tax allowances represent a financial incentive while the building of new cycle paths should make cycling safer and so increase participation. These factors are both beneficial to Fiag.
Suitable indicators of the impact of these factors on Fiag would be the increased demand for their products （volumes purchased） and also the increased participation rates with total number of kilometres cycled or if this is not available, then total market size for bicycles in Beeland. It is not unusual for retailers to ask if customers were buying under a government scheme and if Fiag did this, it could measure how well it was exploiting this free sales promotion. The growth of these indicators should be compared with revenue growth at Fiag.

The broad economic environment is characterised by growth and the populace of Beeland has become wealthier. For Fiag, this should mean growing volumes and margins although the cost base （e.g. staff costs） will inflate too. Again, the size and growth of the overall market and Fiag’s relative performance against these will show if it is developing a competitive advantage. The introduction of tariffs will increase the costs and can be measured at Fiag by the negative impact on profit margins.
The socio-cultural factors include demographic trends and changes in customers’ tastes. The increasing interest in health should again be a factor in driving the consumers’ taste towards cycling and so, as above, indicators of the market size/growth and Fiag’s relative performance are relevant.

The ageing demographic factor should seem to increase the attractiveness of the electrical bicycle over other models and so the market/growth of this particular sector and Fiag’s share along with the relative performance of electrical bicycles against the traditional models at Fiag should be monitored. Fiag seems at the forefront of this development and should be seeking to maintain that competitive advantage.
Technology impacts on Fiag in two ways. First, the development of new models, such as the Zoam, where the lightweight aspect will further enhance the model’s attractiveness especially to the elderly. In order to continue to monitor competitive advantage, the average weight of Fiag’s models （especially the Zoam） should be compared to the average of its competitors.
Second, new materials could improve further the contribution per unit as material costs are cut. The use of contribution or gross profit to measure this impact is plausible but may be indirect since this change may also influence the selling price. Therefore, a measure of direct material cost per unit would better capture the change.

（c） Production department
Fiag should consider measuring the SPM’s performance against factors within her control. The use of general variances does not do this and these should be split into planning and operational variances.
Planning variances are those which arise due to inaccurate forecasts or standards in the original budget setting. Operational variances are then the remainder due to the decisions of operational managers. A planning variance is the difference between the original standard and a revised one set with the benefit of hindsight. An operational variance is the difference between this revised standard and actual performance.

The SPM makes a reasonable case that she should not be penalised for poorly set budgets. The operational variances compare actual performance against a realistic standard set with the benefit of hindsight, eliminating misjudgements by senior management who set the budget.
The revised standard cost should have been $268. Therefore, the variance controllable by the SPM was the total operational cost variance.

The SPM is correct in feeling that she should have received a bonus as with the adjusted budget, it can be seen that her department has performed ahead of budget with a favourable variance. Fiag’s senior management should consider a change to the definition of variance in such bonuses to include only the controllable variances, otherwise cases such as these will cause staff to ignore the bonuses as not achievable and lead to the loss of their motivational effect.
The extent of the problem in standard cost setting for Fiag is clear from the adverse planning variance:

Fiag’s senior management should examine what could be learned for the future from this case, exploring whether the imposition of tariffs could have been foreseen and could have been mitigated by, for example, purchasing from local suppliers so avoiding importing.
This section of the exam contains two questions.
Each question is worth 25 marks and is compulsory.
This exam section is worth 50 marks in total.