## **Learning Outcomes**

After reading this article, you should be able to identify outliers in performance data, recognise and interpret seasonal patterns, and apply data smoothing techniques to discern meaningful trends. You will understand the impact of anomalies and seasonality on decision-making and how to transform raw data into clear, actionable information for Advanced Performance Management exam scenarios.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand how data analysis supports strategic performance evaluation. This article focuses on the following syllabus areas:

- Identify and address the impact of outliers on performance measurement and reporting
- Recognise and analyse seasonality in time series data relevant to business performance
- Apply and evaluate appropriate data smoothing techniques, such as moving averages
- Advise on selecting and interpreting performance reports that distinguish between true trends and random fluctuations

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the principal risk of failing to identify outliers before analysing business performance data?
   a) Improved predictive accuracy
   b) Masked performance problems or spurious results
   c) Eliminating seasonal variation
   d) Enhancing qualitative information

2. Which of the following best describes seasonality in a time series?
   a) Occasional data errors
   b) Fluctuations that follow random, one-off patterns
   c) Regular, predictable changes that recur within a fixed period
   d) Fundamental trend growth over many years

3. Explain briefly what a moving average is and how it is used in analysing business data.

4. True or false? Removing outliers from data always leads to better management decisions.

## **Introduction**

Accurate performance analysis depends on the quality of the data reviewed by management accountants. Performance reports often contain raw figures that may be misleading due to outliers—extremely unusual values—or patterns created by recurring seasonal effects. Understanding and adjusting for these effects is key in producing reliable, actionable information. This article explores how to identify and treat outliers, understand and manage seasonality, and use data smoothing techniques to reveal genuine business trends supporting strategic decisions.

> **Key Term: outlier**
> An outlier is a value in a data set that is significantly different from most other values, often resulting from errors, rare events, or special circumstances.
>
> **Key Term: seasonality**
> Seasonality refers to periodic fluctuations in data that recur in a regular pattern over a specific time frame, such as increased sales every December.
>
> **Key Term: data smoothing**
> Data smoothing is the process of using statistical techniques to reduce random variation in data, making patterns and trends easier to observe.

## **Outliers in Performance Data**

Outliers are individual data points that deviate sharply from the rest of the time series. They may be caused by data entry errors, system glitches, or unusual external events (such as a one-off contract or a major disruption). If not addressed, outliers can distort calculations such as averages, trends, regression lines, and variance analyses, leading to inaccurate performance assessments.

Outliers must be investigated, not simply deleted. The cause should be established—if due to an error, correct the data; if the outlier is valid, management must consider its implications. For example, an unusual one-off customer order may inflate monthly sales figures and bonuses, misleading future targets.

### **Worked Example 1.1**

A retail company monitors monthly sales. In October, sales spike 150% compared to the average for the previous 9 months due to an unexpected bulk government contract.

Identify the key performance reporting issue and explain how it should be managed.

> **Answer:**
> The October data point is an outlier. Including it in standard average calculations would distort the fundamental trend, potentially causing managers to overestimate sustainable sales levels. Management should report the outlier separately, explain its cause in the commentary, and avoid using it for setting future targets or trend analyses.

### **Exam Warning: Outliers**

Be wary of basing recommendations on unadjusted data containing obvious outliers. The ACCA examiner expects you to explain the impact on summary statistics and justify when and how to adjust or exclude outliers.

## **Seasonality in Business Data**

Most businesses experience seasonality; for example, retailers see higher sales in December, hotels are busier in summer, and utility consumption changes by season. Seasonality means periodic, predictable variation within a set time frame, such as monthly, quarterly, or annually.

Recognising seasonality is essential for setting realistic budgets, interpreting variances, and benchmarking. Failure to account for it can lead to misinterpretation—such as assuming a quarterly sales dip is a permanent problem rather than a recurring pattern.

### **Worked Example 1.2**

A hotel’s quarterly occupancy rates are consistently higher in Q2 and Q3, with Q1 and Q4 showing declines.

How should the management accountant present this information in performance reports?

> **Answer:**
> The accountant should adjust for seasonal factors to provide a “seasonally adjusted” performance report. Comparing the same quarter across different years or applying seasonal indices allows management to separate true trend changes from seasonal effects, supporting better decision-making and fair performance appraisal.

## **Data Smoothing Techniques**

Raw data often includes random fluctuations that can obscure real trends. Data smoothing helps management spot stable, long-term patterns by reducing short-term “noise.”

Common data smoothing methods include:

- **Moving averages:** Calculate the average of a fixed number of consecutive periods (e.g., 3-month average). This “smooths” bouncing data, enabling clearer identification of trends or cycles.
- **Weighted moving averages and exponential smoothing:** Assign different weights to recent versus older data points, emphasising recent changes.

> **Key Term: moving average**
> A moving average is a statistical technique that calculates the mean of a set number of sequential data points to smooth out irregular short-term variations and highlight longer-term trends.

### **Worked Example 1.3**

A manufacturer records the following monthly production volumes:

Jan: 100, Feb: 110, Mar: 130, Apr: 95, May: 120

Calculate the 3-month moving average for March, April, and May.

> **Answer:**
>
> - March: (100+110+130) ÷ 3 = 113.3
> - April: (110+130+95) ÷ 3 = 111.7
> - May: (130+95+120) ÷ 3 = 115.0

The moving average line allows management to see that despite fluctuations, fundamental production is stable to slightly increasing. This is more informative than reacting to each month’s raw figure alone.

### **Exam Warning: Data Smoothing**

In the exam, avoid using only raw figures for commentary or forecasts when asked to assess trends or make projections. Use appropriate smoothing techniques and explain your rationale.

## **Choosing and Interpreting Techniques**

Selecting the right analytics technique depends on the data’s nature and the management question at hand:

- Use outlier identification before running trend, regression, or variance analyses.
- Adjust for seasonality when comparing periods or benchmarking.
- Apply smoothing before forecasting or commenting on overall performance direction.

Random noise, seasonality, and outliers each require tailored treatment; blending or confusing them can result in incorrect recommendations.

### **Revision Tip**

Always provide transparent explanations in your performance commentary. State if you have adjusted for outliers, seasonality, or used a moving average—demonstrating professional scepticism and technical skill expected in the ACCA exam.

## **Summary**

Outliers, seasonal effects, and short-term fluctuations can easily mislead performance analysis. Management accountants are expected to apply professional judgement: identify and address outliers, correctly account for seasonality, and use data smoothing such as moving averages. These techniques ensure decision-makers receive reliable and actionable information, aligned with true long-term business trends.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Identify and explain outliers and their effects on management information
- Recognise and account for seasonality in time series data
- Apply data smoothing methods, including moving averages, to analyse performance
- Interpret performance trends, avoiding errors from unadjusted data
- Choose and communicate the correct technique to reveal true business performance

## **Key Terms and Concepts**

- outlier
- seasonality
- data smoothing
- moving average

Analytics techniques and intelligence generation - Outliers seasonality and data smoothing