This two-part article aims to give clarity on the level of response that is required in a APM answer. It will address a specific past exam question that caused considerable difficulty in the March 2021 session. This part will present and discuss two possible poor solutions to this question.
Reading through the answer and the marker’s comments should help candidates to avoid basic mistakes and gain a better understanding of the breadth and depth of solution that a marker is expecting. Comments are made in [ ] after each paragraph, where appropriate.
Before reading this article, it is essential to have read the scenario and requirement for Question 1 part (b)(i) of the March 2021 APM exam and it will be helpful to keep these to hand. The requirement is repeated here for clarity.
Requirement:
Write a report to the chief executive officer (CEO) to respond to his instructions for work on the following areas:
(b) the performance report at Fiag focused on
(ii) whether the report addresses the company’s objectives and the report’s presentation
(14 marks)
A solution focused on an assessment of performance has not been reproduced here, since it is not actually an answer to the question – being, as the title the states - an assessment of the performance, not of the report. However, an explanation of why this is the case may help to clarify your understanding of the requirement. There are also some examples of the same kind of mistaken thinking in example solution 2.
This is a common mistake in the APM examination in many sessions and so, it is worth noting some of the ways in which a candidate could have realised that ‘an assessment of the performance’ was not what was required.
The most plausible explanations for this error are either a lack of preparation (practising past exams, reading examiner’s reports and articles) and/or entering the examination room with an expectation of the questions in the exam – ie that it would begin with a performance evaluation, which was then followed regardless of the question asked. It is wise to remember that proper preparation and then careful reading of the question are pre-requisites for success in the exam.
The remainder of this article will look at a detailed commentary on a weak solution in order to give advice about how it could be improved. This solution represents a single answer of roughly the length often seen in the actual examination, but it is made up of a series of common mistakes. It is also written in a specific order and whilst this may be a good approach to formatting an answer, even the order here is a common mistake as will be seen.
A good way to approach studying this solution is to read it as if you are the marker and see if you can spot the mistake. Then when you do see something wrong try to think about how you would rewrite that paragraph in order to improve it. The marker’s comments are at the end of each paragraph.
Fiag operates in a declining market that will not see much growth. Bicycles are becoming less relevant in today’s car-based societies. People are also less active and less fit so they will be less willing to buy bicycles as they require physical effort to use.
[Comment: These remarks seem a little odd. In many markets bicycle sales, (whilst volatile as mentioned in the scenario) are not in permanent decline and there is no sign of this here, after all we only have two years-worth of data to go on. Sustainability issues in many countries where cars can be afforded are actually moving populations back to cycling. Also, the new Zoam product and cycles like it are designed for the less fit to enjoy cycling, which could further increase or stabilise sales. There is no clear data to support this, and it is an odd assertion to begin with].
The current performance report is very informative containing a mix of financial and non-financial information. This will help both financial managers and other managers to understand Fiag’s performance.
[Comment: For a marker reading such a comment it shows that the scenario has not been read carefully. The report is exclusively financial. This mistake may arise from assuming that the commentary is effectively non-financial as it’s written or that second appendix, which is for a separate part of the question, is part of the report].
Fiag has improved its revenue by 200% (per the commentary given). This will have a positive impact on their profit. It does not appear that this is reflected in this report, so perhaps there may be an error in the report or in the commentary. This will be very confusing for the managers reading this.
[Comment: Although the commentary talks about a 200% increase this is just for new and redesigned bikes. Total revenue for Fiag is actually reducing. Notwithstanding this misinterpretation of the data, revenue growth seems confused with profit growth here, the sales do not translate directly to profit. This point also suggests an error in the report – if the writer had stopped to think more carefully about this remark, they may have realised that the ‘error’ was theirs in confusing the commentary point with total revenue].
The report compares this year with last year, which is a good comparison as it gives the company an indication of how it has performed compared to what it did before.
[Comment: This could be more effectively explained by saying: ‘The report compares year on year results, which is a good comparison as it gives the company an indication of how it has improved or worsened during the year.’ This is better as it begins to show more detail in the purpose of including last year’s information, not just ‘compared’ but ‘improved or worsened’.]
The report does not show any segmental data for the revenue, which would be helpful to show the revenue from the new Zoam product separately in particular. Knowing which models are selling well can help management to take strategic decisions. If they could see what products were popular, they could use this to help the business. If Fiag has lots of products this could be a difficult exercise.
[Comment: Segmenting the revenue would indeed help to make more sense of the numbers. It would show the change in new and redesigned bike revenue at least. However, the comment as it stands is too vague and has not shown why this extra data would be useful, which is a crucial point, along with how this will link to the objectives of the organisation. It also does not effectively explain why this would help to make decisions and how it would ‘help the business’. The final sentence shows that the scenario has not been read carefully as it clearly states that Fiag only makes eight types of bicycle.]
The report does not break down the cost of sales by categories or product either, so we cannot clearly see where the cost is being spent. ABC will be useful to split the costs by bicycle type. This type of costing identifies the drivers of cost and the cost pools attached to them. It attaches costs to specific activities which can then be charged to the bicycle types to get a more realistic costing and to enable pricing and profit per model to be reviewed. With this extra data the products’ profits could be calculated. This may then allow Fiag to change their process to save costs and increase profits.
[Comment: This is common mistake when using models/techniques in the APM exam, trying to explain how the model/technique works, wasting time on definitions and theory rather than just using it, and showing how it will be useful. This point does try to finish with the reason for using ABC, but the comment is too vague, and not linked to the objectives of Fiag].
The report shows that Fiag has just about maintained its gross profit, this must be due to a stable market and shows good performance. There is only a 7% difference here which is good.
[Comment: The objective of Fiag is to give sustainable growth in returns and although gross profit is not the final amount available to shareholders, if it reduces there is unlikely to be growth at the profit after tax level. The market comment is also incorrect as the case clearly states that the market is becoming more volatile. Also, we cannot tell if this performance is good or not, as we have no other comparator, and remember that the question is not asking about how the company is performing].
Administrative expenses have gone down, which is good. However, it should display the administrative expenses split into categories as this will add value to the report. The managers need to see where the money is being spent.
[Comment: No justification is offered for the additional cost of preparing these metrics, nor consideration of the impact of further confusing a purely financial report with more financial metrics. Given that these types of expenses are often very fixed in nature, a splitting out of the detail may not help at all and we have no comparators to confirm whether this is a ‘good’ performance or not. Again, this is looking at the performance of Fiag and not the report].
The commentary mentions that the operating margin has only worsened by a small amount – 1.8%. This small reduction compared to the 7% at the gross profit level means that the intervening costs have been controlled well. This will ensure that the shareholders do achieve their returns.
[Comment: This point is trying to address the objective of shareholder returns, but it is very confused. The 1.8% change is incorrect – it is the number of percentage points change but not the percentage change in the margin ((6.6-4.8)/6.6 = 27.2%). As well as this error the 7% at gross profit level is the margin itself but here it is compared with the incorrect change in margin].
The report only shows one industry ratio to assist with benchmarking of operating margin. We do not know if any other aspects of performance are any good compared to competitors.
[Comment: Whilst benchmarking is indeed useful there is no detail given here as to what it would be useful to add and why this will be helpful for Fiag to know. Simply stating it will help us to see if we are ‘good’ compared to competitors is too vague, what would Fiag then use that knowledge to do? How does this link to the objectives]?
There is a good performance in the distribution expenses, they have gone down year on year. The same is true for selling and marketing expenses. Fiag must be controlling these well.
[Comment: Having started to stray into looking at the performance of Fiag this next point continues along the same, incorrect, theme].
Overall profit after tax shows a great performance for Fiag. They have improved this number by 86%, this is very good. The shareholders will be very happy with this number.
[Comment: Yet another point here looking at the performance itself and not the report].
The commentary is very useful as it can explain the numbers in the report for any less financially aware managers reading it. This is a good thing to have in any performance report.
[Comment: As a general point it is indeed true that commentary can be useful and particularly helpful to non-financial managers].
The notes make the nature of the exceptional costs clear so that there is no confusion when reading the report. This makes it easier to analyse the financial data to see if the company is reaching its objectives.
[Comment: Another general point here and an attempt to link to Fiag’s objectives but it is a little weak].
The report is very numbers based and contains a lot of financial information. This would not be good for non-financial user to read. However, the numbers have at least been stated as millions to avoid there being too much detail to review. There are only a few comments and notes.
[Comment: It would have been helpful to give examples of broad improvements necessary here. This comment is also rather confusing given the earlier insistence that the report included a good spread of financial and non-financial data and the points about the commentary and notes].
Also, it only contains two years’ worth of information. It does not show the budget data, so we do not know if the performance is as expected or not.
[Comment: There are two points here. The first relating to the year-on-year data – it is useful to have this for comparison, but it would usually need more years to discern a trend for Fiag’s results to identify if they are meeting their objectives. The second point relates to the budget data, again it can be helpful to have budget and variance data, but the comment does not give a clear indication for the reason with regard to objectives although it does show that the writer understands some of the reasons for including the budget].
Fiag’s mission statement is to maximise shareholders’ wealth, but the report does not give any indicators on how or even whether this is happening. It should show EPS ratios or information on how it is targeting to improve their wealth.
[Comment: This is right on the mark but sadly not given the priority it deserves – ie it should be at the beginning of the answer which should then cover the objectives in turn. If the answer had started with this comment, it may have prompted the writer to include many more helpful comments as the detail of the report was discussed].
Fiag also mentions quality in its objectives but there are no measures that could be helpful to measure this in the report. Internal measures of wastage and reworks and external measures such as customer satisfaction will be needed for this.
[Comment: This is another very good link to the objectives and as the above point it is heading in the right direction. It does however fall short of explaining why the measures would be helpful to look at this aspect, the point is not developed well].
Summary:
This answer tries hard but consistently fails to make its points relevant and justified in assessing the performance report for Fiag using the information in the scenario.
It shows how not to answer this question. Like the first answer that we did not reprint here, it strays into reporting on the performance of Fiag. There is some attempt at structure here – following the headings in the report, but there is it is little thought of how the points should be organised and prioritised with regard to the objectives.
Before reading the improved solutions (the next article), it would be an excellent exercise for you to now write your own solution. This should only take about 20–25 minutes as you have done the preparation!
Written by members of the APM examining team