ACCA Strategic Professional · Advanced Performance Management

Performance optimisation in specific contexts: formula sheet

Full chapter guide

Key formulas

Economy: Economy = spending less on inputs for the required quality (cost of inputs compared with budget or benchmark); Concerned with the cost of resources. Example: cost per nurse hour or price paid per supply item.
Efficiency: Efficiency = outputs ÷ inputs (or cost per unit of output); Concerned with getting the most output from the resources used. Example: cost per patient treated.
Effectiveness: Effectiveness = actual outcomes achieved compared with intended objectives; Concerned with whether the service achieves its aim. It needs a clear objective to compare against.
Value for money: Value for money = economy + efficiency + effectiveness (the 3Es), sometimes extended with equity; These are linked. Cutting cost for economy may harm effectiveness. Always comment on the balance.
Economy: Economy = actual cost of inputs compared with budgeted or benchmark cost of inputs of the required quality; Inputs only. Look at price paid per unit of resource, with quality held constant. Lower cost for the same quality means better economy.
Efficiency: Efficiency = outputs ÷ inputs (or cost per unit of output); Compare with a target, prior period or similar bodies. For example, cost per patient treated or students per teacher.
Effectiveness: Effectiveness = extent to which outputs achieve stated objectives (outcomes achieved ÷ outcomes intended); Needs clear objectives. Outcomes, not activity, are the test.
Equity: Equity = fairness of access to, and benefit from, the service across groups; An extension to the 3Es. Measure by comparing service levels across groups or regions.
Chain of VFM: Inputs → (efficiency) → Outputs → (effectiveness) → Outcomes; economy relates to the cost of inputs; Use this to place each measure in the right E.
Four service characteristics: Intangibility, Heterogeneity, Perishability, Simultaneity; Some texts add ownership (no transfer of ownership). Use the four above as your core list and link each to a measurement problem.
Building Block model: Dimensions + Standards + Rewards; Dimensions say what to measure. Standards say what level to aim for. Rewards say how to motivate.
Results dimensions: Competitiveness + Financial performance; These show the outcome of past strategy. Examples: sales growth, market share, profitability, liquidity, capital structure.
Determinants dimensions: Quality + Flexibility + Resource utilisation + Innovation; These drive the results. Examples: complaints, waiting time, staff utilisation, new services launched.
Standards: three criteria: Ownership + Achievability + Fairness; Staff should help set targets, targets should be realistic, and they should be fair across teams.
Rewards: three criteria: Clarity + Motivation + Controllability; Staff must understand the reward, want it, and be able to influence the measure.
Capacity utilisation: Utilisation % = Capacity used ÷ Capacity available × 100; Useful for perishable services such as rooms, seats and chargeable hours.
Return on investment (ROI): ROI = divisional profit ÷ capital employed × 100%; State which profit and capital measure you use, for example controllable profit and net assets. Be consistent.
Residual income (RI): RI = divisional profit − (capital employed × cost of capital); Accept a project if it gives positive RI at the group's required return.
Minimum transfer price: Minimum price = marginal cost of the selling division + opportunity cost to the group; With spare capacity the opportunity cost is nil. With full capacity it is the contribution lost on external sales.
Maximum transfer price: Maximum price = lower of net marginal revenue to the buyer and the external price for the input; Net marginal revenue is the final selling price less the buyer's further processing costs.
Foreign currency translation: Home currency amount = foreign amount ÷ rate quoted as foreign per home unit, or × rate quoted as home per foreign unit; Check how the rate is quoted before converting.
Cash runway (start-up): Cash runway (months) = Cash balance ÷ Monthly net cash burn; Use when a start-up is loss-making. Net burn means cash outflow less cash inflow per month, and assumes burn stays constant.
Gross profit margin: Gross profit margin = Gross profit ÷ Revenue × 100%; A simple, cheap measure for small firms. Compare with the past and with similar businesses.
Cost per unit of outsourced service: Cost per unit = Total contract charge ÷ Units of service delivered; Compare with the in-house cost to judge whether the outsourcing deal gives value.
SLA compliance rate: Compliance % = Number of service targets met ÷ Total targets set × 100%; Report by KPI, not only as one average, so a weak area is not hidden.
Tailoring rule: Measure = Objective + Context + Users + Cost of data; Not a calculation. A reminder to justify any measure against these four points.
Mendelow matrix: high power, high interest: Key players → manage closely and involve in target setting; Their objectives must be reflected in the main targets.
Mendelow matrix: high power, low interest: Keep satisfied; They can become key players if an issue affects them.
Mendelow matrix: low power, high interest: Keep informed; Often employees, local communities or service users. They may gain power by joining together or using media.
Mendelow matrix: low power, low interest: Monitor with minimal effort; Do not ignore them permanently.
Characteristics of a good target (SMART): Specific, Measurable, Achievable, Relevant, Time-bound; Targets that fail these tests invite gaming or demotivation.
Fitzgerald and Moon building block link: Standards should be Ownership, Achievability, Fairness; Use this when the question is about setting targets and gaining buy-in.

Quick revision

Not-for-profits have multiple objectives, so no single profit measure fits.
Value for money is judged through the 3Es: economy, efficiency and effectiveness.
Economy is about low input cost, efficiency is output per input, effectiveness is achieving objectives.
Chasing economy alone can harm quality and effectiveness.
Service output is intangible, variable, perishable and hard to store, so measure quality and capacity use.
Use financial and non-financial measures together in services.
Divisional managers should be judged on what they control.
Transfer pricing affects goal congruence, divisional profit and tax in multinational groups.
Currency and local conditions complicate comparing overseas subsidiaries.
Targets shape behaviour, so check for short-termism and gaming.
Stakeholders have different aims, so state the conflict and recommend a balance.
Always tie each point to the facts in the scenario.

Common mistakes

Using profit-based measures such as ROCE or profit margin as the main yardstick. Fix: Start from the mission. Use profit measures only as a minor point, for example surplus needed for sustainability, and lead with service outcomes.
Treating the 3Es as the same thing or listing them without applying them. Fix: Define each in one line, then give a scenario example for each. Economy is about inputs, efficiency is output per input, effectiveness is outcome against objective.
Confusing efficiency with effectiveness. Fix: Efficiency is output per input. Effectiveness is whether objectives are achieved. Ask: is this about how much we got for what we used, or about whether it worked?
Calling a low-cost purchase efficient. Fix: Low price of inputs is economy. Efficiency needs outputs in the comparison.
Listing the four service characteristics without applying them to the scenario. Fix: After each characteristic, add a scenario example and a measurement consequence. Say what it means for this business.
Mixing up results and determinants. Fix: Results are outcomes: competitiveness and financial performance. Determinants are drivers: quality, flexibility, resource utilisation and innovation.
Stating that a higher ROI always means a better division. Fix: Compare ROI with the cost of capital and show that a high ROI can lead managers to reject worthwhile projects.
Using the wrong capital charge in RI, such as applying it to profit rather than capital employed. Fix: Write RI = profit − capital employed × cost of capital, then compute the charge on its own line.
Applying large-company tools such as EVA or a full balanced scorecard to a tiny firm without comment. Fix: Say whether the tool is practical. Suggest a simplified version, such as a handful of scorecard measures, and give the reason.
Assuming profit is the only objective of a private sector business. Fix: Check the scenario for owner goals such as independence, family income, growth or survival, and build measures around them.

Exam tips

Always start from the mission. Examiners reward answers that judge performance against purpose, not profit.
Use scenario data. Calculate unit costs or ratios if numbers are given, then comment on what they mean for quality.
Show professional skills: weigh up stakeholder conflicts, challenge the data, and give a clear recommendation.
For every measure you suggest, add a limit or a risk of distorted behaviour. This is where many students lose marks.
Write short, structured points with a heading per stakeholder or per E, so the marker can follow your answer.
Define each E in one line, then spend most of your time applying it to the scenario figures. Marks go to application.
Always say whether a measure is an input, output or outcome before labelling it. This avoids misplaced Es.
Where you calculate cost per unit, compare it with a budget, last year or a similar body. A number alone earns little.