Skip to content

CMA Final · Strategic Performance Management and Business Valuation

Performance Measurement, Evaluation and Improvement Tools for Paper 20A

This chapter covers how a business measures performance and improves it: KPIs, the Balanced Scorecard, divisional measures (ROI, Residual Income, EVA), frameworks like the Performance Pyramid, benchmarking, and cost tools such as target costing, value analysis and lean. Learn each tool's purpose, formula and limits, then practise recommending action from the numbers.

What this chapter covers

This chapter is about one question: how do you know a business, a division or a process is doing well, and what do you do when it is not? You start with the basics of measurement and KPIs. You then move to frameworks that organise measures (Balanced Scorecard, Performance Pyramid, Building Block). Divisional measures such as ROI, Residual Income and EVA turn performance into numbers you can compare. Finally, improvement tools such as benchmarking, target costing, value analysis and lean show how to act on what you measure.

The chapter mixes two kinds of content. Some topics are conceptual and are tested through short descriptive answers and MCQs. Others are numerical, mainly ROI, RI, EVA and target costing, and are tested through workings followed by a recommendation. You need both skills.

The chapter also connects to the rest of Paper 20A. Business valuation uses value-based ideas, and EVA links performance measurement to value creation. The tools here give you the language to discuss why a business is worth more or less, and what management can change. Keep that link in mind when you read the valuation chapters.

Paper 20A opens with a compulsory Section A of 15 MCQs, made up of 10 standalone MCQs and one case scenario with 5 MCQs, and this chapter suits both formats: definitions, formula checks and short scenarios on which measure or tool fits. The descriptive section rewards application, so a student who can compute ROI, RI or EVA and then say what management should do will score better than one who only recalls definitions. The chapter is also practical and builds on ideas you may already see at work, so the effort pays back quickly and carries into the valuation material.

Performance Measurement, Evaluation and Improvement Tools: topics in the order to study them

  1. 1Performance Measurement Fundamentals and KPIsIt sets the vocabulary of inputs, outputs, outcomes, financial and non-financial measures, which every later topic uses.
  2. 2Balanced ScorecardIt shows how KPIs are grouped into perspectives and linked to strategy, so it follows directly from KPI basics.
  3. 3Divisional Performance: ROI, Residual Income and EVAThis is the main numerical topic; learn it once the idea of financial measures and their limits is clear.
  4. 4Performance Pyramid, Building Block and Other FrameworksComparing these with the Balanced Scorecard is easier once you know that framework well.
  5. 5Benchmarking and Continuous Improvement ToolsAfter measuring performance, you learn how to compare it with others and improve it step by step.
  6. 6Cost Management Tools: Target Costing, Value Analysis and LeanThese are the action tools for cost, and the target costing numerical is best attempted last with the earlier ideas in place.

How to prepare Performance Measurement, Evaluation and Improvement Tools

Split your time between understanding and practice. Concept topics need clear comparison notes; numerical topics need repeated working.

  1. Read the chapter once for the big picture, noting which topics are conceptual and which are numerical.
  2. For each framework, write a one-page note: purpose, components, strengths, limits. Use a small comparison table in your own notebook.
  3. For ROI, RI and EVA, write the formulas from memory, then solve at least five problems, including ones where ROI and RI give different decisions.
  4. For target costing, practise the chain: target price, less target profit, equals target cost, then compare with current cost and state the gap and action.
  5. After every numerical, write one or two lines of recommendation. Make this a habit, since the written section rewards decisions.
  6. Attempt MCQs by topic, then mixed sets. For each wrong answer, note whether the cause was a concept gap or a calculation slip.
  7. In the last week, redo your comparison notes and two full numerical questions under timed conditions.

Common mistakes in Performance Measurement, Evaluation and Improvement Tools

  • Writing definitions of tools without saying when each is suitable.

    Fix: End every theory answer with a line on where the tool fits, its main benefit and its main limitation.

  • Mixing up capital employed and invested capital, or using the wrong profit figure in ROI, RI and EVA.

    Fix: Underline the profit and capital figures given in the question, state your definition at the top of the working, and keep it consistent.

  • Giving ROI, RI or EVA numbers with no recommendation.

    Fix: Add a clear decision, such as accept or reject the project, and a brief reason based on the result and the measure's limits.

  • Treating the Balanced Scorecard, Performance Pyramid and Building Block model as the same thing.

    Fix: Keep a comparison note covering structure, focus and best use for each framework, and revise it often.

  • Calculating target cost but ignoring the cost gap.

    Fix: Always compare with the current cost, state the gap, and suggest actions such as value analysis or lean to close it.

  • Skipping non-numerical topics like benchmarking and continuous improvement because they seem easy.

    Fix: Learn the types and steps precisely, and practise MCQs so you can separate similar-looking options.

Last-day revision: Performance Measurement, Evaluation and Improvement Tools

  • A KPI is a measure tied to a strategic objective; a measure that does not link to strategy is just data.
  • Use a mix of financial and non-financial measures so short-term profit does not hide long-term decline.
  • The Balanced Scorecard has four perspectives: financial, customer, internal business process, and learning and growth.
  • ROI = Profit ÷ Capital employed × 100; define profit and capital the way the question states.
  • Residual Income = Profit − (Capital employed × required rate of return).
  • ROI can make a manager reject a project that is above the company's required return but below the division's current ROI; RI avoids this.
  • EVA = NOPAT − (Invested capital × WACC); it is a form of residual income with adjusted figures.
  • A positive RI or EVA means value is created after charging for capital.
  • The Performance Pyramid links corporate vision to operations across levels, with external effectiveness and internal efficiency measures.
  • Benchmarking compares your performance with a standard, a competitor or the best practice, then acts on the gap.
  • Target Cost = Target selling price − Target profit; work backwards from the market.
  • Value analysis asks whether each function is delivered at the lowest cost; lean aims to remove waste while keeping value.

Performance Measurement, Evaluation and Improvement Tools practice questions

Performance Measurement, Evaluation and Improvement Tools in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Performance Measurement, Evaluation and Improvement Tools: frequently asked questions

Is this chapter more theory or numericals?

It is a mix. Frameworks, benchmarking and lean are mostly conceptual, while ROI, Residual Income, EVA and target costing are numerical. Prepare both, because the exam can test either in MCQs or in written answers.

Which topic should I practise most?

Spend extra time on divisional performance (ROI, RI and EVA) and target costing, since they involve workings and a decision. Practise stating a recommendation after each calculation.

How do ROI and Residual Income differ in decisions?

ROI is a percentage, so a manager may reject a project that lowers the division's average ROI even if it earns more than the required return. Residual Income is an absolute amount after a capital charge, so it supports accepting any project earning above the required rate.

Is there negative marking in the MCQs?

Neither the question papers nor the ICMAI prospectus provide for negative marking. Still, answer carefully and use the case scenario facts to choose between close options.