Requirements (50 marks)
It is now 1 September 20X5.
Write a report to the board of Calavie to respond to the CEO’s instructions for work on the following areas:
(i) divisional performance measurement (16 marks)
(ii) the BCG analysis (18 marks)
(iii) management information at Calavie (12 marks)
Professional marks will be awarded for the format, style and structure of the discussion of your answer. (4 marks)
（现在考试的问题部分都表述的简略，因为对于问题的要求题干写的详细了，所以一定要回到题干弄清完整的问题）

Answer
1
Report
To: The board of Calavie Manufacturing (Calavie)
From: An Accountant
Date: September 20X5
Subject: Divisional performance and its measurement
（写的时候注意结构）
Introduction
This report evaluates each division’s performance using return on investment (ROI) and residual income (RI). It considers detailed aspects of the calculation and a comparison of these two divisional performance indicators. Second, the use of the Boston Consulting Group (BCG) analysis is discussed in general and then, specifically for the divisions of Calavie, where key financial performance indicators are recommended. Finally, the general aims of management accounting information are described and the qualities which good information should have are illustrated for Calavie.

(i) Overall divisional performance measurement
Workings:
Answer

	A	B	C	D	E	F
1	Workings:
2				Doilet	Essan	Fada
3	Simple measures:
4	Non-controllable ROI			16%	28%	23%
5	(operating profit/capital employed)
6
7	Non-controllable RI			33.4	45.3	3.6
8	(operating profit – notional charge)($m)
9
10
11
12
13				Doilet	Essan	Fada
14	Adjusted measures:
15	Controllable ROI			22%	34%	29%
16	(HO costs added back to operating profit)
17
18	Controllable RI			69.4	59.3	5.6
19	(HO costs added back to operating profit)($m)
20
21
22
23	Long-term spending as an asset(R&D and brand marketing added back to operating profit and to CE)
24				Doilet	Essan	Fada
25
26	Non-controllable ROI			17%	32%	38%
27
28
29	Non-controllable RI			37.8	56.9	10.7
30
31
32
33

On the simple measures, all divisions are performing well. They make a healthy ROI beating both the cost of capital and the industry average. Also, all divisions make a positive residual income which again implies healthy returns.
The simple measures of performance do not take account of the controllability of the profits of the divisions nor the long-term effect of some of the spending of the divisions.
–Controllability – The appropriate measure of the divisional management’s performance should only include those elements which are controllable by them and so should exclude allocated head office costs. This is especially important as management’s remuneration depends on this measure and it would be counter-productive if the divisional management felt this was being measured unfairly.

–Long-term effect of spending – Essan is building its brand for the long term through marketing and Fada is building its portfolio of products through research and development. It should be considered whether it is appropriate to include this spending as a period cost or whether it should be capitalised and then written off over a longer period from the balance sheet.
The capitalisation and amortisation of these costs may encourage divisional management to persist with these plans for the long-term benefit of Calavie. The calculation here is very crude as no estimate of opening balance of historic spending is possible nor one of the amortisation charge to the profit figure.
It is noteworthy that the use of operating profit in all of these calculations avoids the problem of including one-off costs (e.g. the restructuring costs) which would occur if profit before tax were used.
These adjustments to the divisional performance measures do not change substantively the conclusion of good performance by both divisions. However, they may provide unexpected results such as the notably large ROI of Fada if the effect of R&D spending is capitalised.

Comparing ROI and RI
ROI is a simple, commonly used measure of divisional performance. However, it can encourage divisions to delay investment in new assets since this measure improves as assets are depreciated with age. RI offers the possibility of applying different costs of capital to divisions with different risk profiles which is appropriate for Calavie, especially at the higher risk Fada.
Unlike ROI, RI would not help to judge relative divisional performance at Calavie as the divisions are not of similar size and so an absolute measure is not comparable.
It is worth noting that neither of the indicators is directly aligned with the aim of increasing shareholder wealth and so do not ensure a detailed match between divisional and corporate goals. Both ROI and RI have the disadvantage of being based on profit measures of performance rather than cash. Measures such as net present value and economic value added use cash flows, which are less subject to the interpretation of accounting rules, and are more directly aligned with shareholder interests.

(ii) BCG analysis and performance measurement within the divisions
The BCG analysis can be beneficial as it allows the company to view the prospects of its different divisions. A different style of management should be applied to each division based on this analysis. Those businesses which are in faster growing sectors will require more capital to be invested and may not generate cash as efficiently from profits (e.g. Fada). However, those businesses in slower growing mature markets should have a focus on cost control and cash generation. Business units identified as cash cows and, particularly, dogs should not be dismissed since if they are properly managed, they can provide a rich source of cash as they are run down.
The performance management systems and metrics used by the divisions should therefore be adjusted to reflect this analysis. The metrics for high growth prospects, Essan and Fada, will be based on profit and ROI while those in lower growth, such as Doilet, will be focused on margins and cash generation.

However, the BCG matrix is a very simple method of analysis. For example, using relative market share measured against the largest competitor, where a value of 1·0 is used as the cut off between large and small, means there is only one star or cow per market. It is notable that the consultant has treated Doilet as a cash cow although it might not strictly be judged as such.
BCG was designed as a tool for product portfolio analysis rather than performance measurement. As a performance system, it seems to downgrade traditional measures of performance such as profit and shareholder wealth and therefore may not be well aligned with all of the key stakeholders’ objectives. Therefore, although it may have been an appropriate view in the past as Calavie focused on growth, this may no longer be the case.
Additionally, it may be that different products within each business unit may not fit the unit’s classification. For example, Fada seems to have a variety of products performing at different levels. The model also fails to consider the links between the business units, for example, where the brand and products developed at Essan might have a valuable effect on the perception (by association) of Doilet’s products.

Doilet
As a cash cow, Doilet should focus on cash generation to fuel the growth of the other divisions where there is the need for brand-building and research and development. It should also focus on cost control in order to meet its aim to be a cost leader. Therefore, cash flow ROI or more simply net operating cash flow for the period may be better overall measures. Also, in order to address the aim of being a cost leader, either gross or operating profit margin compared to the industry average could be suitable. The decision between these measures will depend on the importance placed on the non-production overheads compared with its competitors.

Essan
As the star, the appropriate measure for Essan is profit based. Therefore, ROI or RI should be used depending on the board’s decision about which is to be the measure of divisional performance. It would appear that growth has been important in the past to Calavie and as the principal generator of growth for the company, this should continue to be monitored by growth of profit before tax. This would also show the strength of Essan’s brand which appears important from its marketing spending.

Fada
Fada depends significantly on research and development in order to develop a portfolio of new products. It should be judged on revenue growth as a method of measuring the success of these new products. In the early stages of product development, profit-based measures may not be suitable.
A second measure may be the research and development spending since this will need to be maintained in the face of failures as the division seeks to find successful products for its portfolio.

(iii) Management information
The general aims of management accounting information are to support measuring performance, controlling the business, planning and making decisions.
Performance measurement will occur at different levels within the organisation (company, divisional and departmental level). It also links to the assessment of the performance of individuals, for example, the rewards paid to divisional managers are based on divisional performance.
This performance measurement then allows the business to be controlled by measuring performance against targets or budgets. The information also feeds forward in time to assist in the preparation of plans and forecasts. Finally, managers must make decisions at strategic, tactical and operational levels of the business. These will often require management accounting information such as profit margins or (at the operational level) average time taken to produce a component.

The qualities of good information are that it should be:
Accurate – That is fair and free from bias. There is a danger that, motivated by the desire for the reward payment, divisional management provides an overly positive view of their performance.
Complete – All information must be reported. For example, project failures at Fada must be reported so that lessons can be learned for further new product development.
Cost-beneficial – The information should be more valuable than the cost to produce it. This would be especially true at Doilet since the business is mature and may not merit heavy investment as it is a well-understood division.
User-targeted – It is important that the divisions do not swamp the executive with detailed operational information so that they are unable to obtain an overview of the business.
Relevant – Different board members will have different skills and areas of interest and they should be supplied with more detailed information appropriate to those responsibilities, while all of the board should receive the same overview information.

Authoritative – The source of the information should be suitably qualified. This may require board information to be reviewed and signed off by senior divisional management if it is produced at a lower level within the division.
Timely – Information must reach the executive in time so that they can make strategic plans in time.
Ease to use – The information should be formatted for easy understanding. Financial information should be presented in a standardised format to make for easy comparison between divisions. The use of a single, agreed measure of divisional performance will aid this.
Tutorial note:A candidate does not need to use the ACCURATE acronym in order to score marks here.
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.