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Coal Creek Nursing Homes (CCNH) is a company operating residential care homes for the elderly in Geeland. Residents are those elderly people who can no longer care for themselves at home and whose family are unable to look after them. There are 784 homes with about 30,000 residents under the care of the company. There are about 42,500 staff, who range from head office staff through the home managers to the care staff and cleaners and caterers. The company is a private company which aims to make a suitable return to its shareholders. It had revenues of $938m in the last year and is one of the largest providers of residential care places in Geeland.<br>The company is split into two divisions: General Care (GC) which handles ordinary elderly residents and Special Care (SC), which is a newer operation that handles residents who need intensive care and attention due to physical or mental ailments.<br>The company does not own its homes but rents these from a number of large commercial landlords. It has taken on a large number of new homes recently in order to cope with the expansion of SC, which has proved successful with 24% pa revenue growth over the last two years. GC is a mature business with little growth in a sector that is now fully supplied. GC has seen volumes and margins falling as price pressure comes from its main customers (public sector health organisations who contract out this part of their care provision).<br>A new chief executive officer (CEO) has just taken over at CCNH. She was appointed because the board of CCNH believed that the company was in difficulty. The previous CEO had been forced to leave following a scandal involving a number of the homes where residents’ money had gone missing and their families had called in the police. The finance director and the operations director had also resigned, leaving the company without any experienced senior management.<br>The board have tasked the new CEO with ascertaining the current position of the business and identifying a strategy to address the issues that arise. The CEO wants to address the strategy, deciding whether to divest or retain elements of the business.<br>The CEO has come to you, as the most senior member of finance staff, for assistance with this task. The first area that she wants help on is the problem that the business is having with its landlords. The company struggled to meet its most recent rental payment, which the bank eventually agreed to cover through an increase to the overdraft, as CCNH had no ready cash. She is upset that the chosen strategic measures of performance (earnings per share growth and operating profit margin) did not identify the difficulties that the firm is now facing. One of the other directors had mentioned gearing problems but she did not follow what this meant.<br>Also, she has heard of qualitative models for predicting corporate failure and wants to apply one at CCNH. Obviously, she wants to know if CCNH exhibits any symptoms of failure.<br>You have been given the outline financial statements to help with this task (see Appendix on the next page).<br>Required:<br>(a) Discuss why indicators of liquidity and gearing need to be considered in conjunction with profitability at CCNH. Illustrate your answer with suitable calculations. (11 marks)<br>(b) Explain one qualitative model for predicting corporate failure (such as Argenti) and comment on CCNH’s position utilising this model. You are not expected to give scores, only to comment on the areas of weakness at CCNH. (9 marks)
问答题
The Drinks Group (DG) has been created over the last three years by merging three medium-sized family businesses. These businesses are all involved in making fruit drinks. Fizzy (F) makes and bottles healthy, fruit-based sparkling drinks. Still (S) makes and bottles fruit-flavoured non-sparkling drinks and Healthy (H) buys fruit and squeezes it to make basic fruit juices. The three companies have been divisionalised within the group structure. A fourth division called Marketing (M) exists to market the products of the other divisions to various large retail chains. Marketing has only recently been set up in order to help the business expand. All of the operations and sales of DG occur in Nordland, which is an economically well-developed country with a strong market for healthy non-alcoholic drinks.<br>—————————————————————————————————————————<br>The group has recruited a new finance director (FD), who was asked by the board to perform. a review of the efficiency and effectiveness of the finance department as her first task on taking office. The finance director has just presented her report to the board regarding some problems at DG.<br>Extract from finance director’s Report to the Board:<br>‘The main area for improvement, which was discussed at the last board meeting, is the need to improve profit margins throughout the business. There is no strong evidence that new products or markets are required but that the most promising area for improvement lies in better internal control practices.<br>Control<br>As DG was formed from an integration of the original businesses (F, S, H), there was little immediate effort put into optimising the control systems of these businesses. They have each evolved over time in their own way. Currently, the main method of central control that can be used to drive profit margin improvement is the budget system in each business. The budgeting method used is to take the previous year’s figures and simply increment them by estimates of growth in the market that will occur over the next year. These growth estimates are obtained through a discussion between the financial managers at group level and the relevant divisional managers. The management at each division are then given these budgets by head office and their personal targets are set around achieving the relevant budget numbers.<br>Divisions<br>H and S divisions are in stable markets where the levels of demand and competition mean that sales growth is unlikely, unless by acquisition of another brand. The main engine for prospective profit growth in these divisions is through margin improvements. The managers at these divisions have been successful in previous years and generally keep to the agreed budgets. As a result, they are usually not comfortable with changing existing practices.<br>F is faster growing and seen as the star of the Group. However, the Group has been receiving complaints from customers about late deliveries and poor quality control of the F products. The F managers have explained that they are working hard within the budget and capital constraints imposed by the board and have expressed a desire to be less controlled.<br>The marketing division has only recently been set up and the intention is to run each marketing campaign as an individual project which would be charged to the division whose products are benefiting from the campaign. The managers of the manufacturing divisions are very doubtful of the value of M, as each believes that they have an existing strong reputation with their customers that does not require much additional spending on marketing. However, the board decided at the last meeting that there was scope to create and use a marketing budget effectively at DG, if its costs were carefully controlled. Similar to the other divisions, the marketing division budgets are set by taking the previous year’s actual spend and adding a percentage increase. For M, the increase corresponds to the previous year’s growth in group turnover.’<br>End of extract<br>—————————————————————————————————————————<br>At present, the finance director is harassed by the introduction of a new information system within the finance department which is straining the resources of the department. However, she needs to respond to the issues raised above at the board meeting and so is considering using different budgeting methods at DG. She has asked you, the management accountant at the Group, to do some preliminary work to help her decide whether and how to change the budget methods. The first task that she believes would be useful is to consider the use of rolling budgets. She thinks that fast-growing F may prove the easiest division in which to introduce new ideas.<br>F’s incremental budget for the current year is given below. You can assume that cost of sales and distribution costs are variable and administrative costs are fixed.<br>On the basis of the Q1 results, sales volume growth of 3% per quarter is now expected.<br>The finance director has also heard you talking about bottom-up budgeting and wants you to evaluate its use at DG.<br>Required:<br>(a) Evaluate the suitability of incremental budgeting at each division. (8 marks)<br>(b) Recalculate the budget for Fizzy division (F) using rolling budgeting and assess the use of rolling budgeting at F. (8 marks)<br>(c) Recommend any appropriate changes to the budgeting method at the Marketing division (M), providing justifications for your choice. (4 marks)<br>(d) Analyse and recommend the appropriate level of participation in budgeting at Drinks Group (DG). (6 marks)
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Section A – BOTH questions are compulsory and MUST be attempted<br>Lincoln & Lincoln Advertising (LLA) is an advertising agency based in Veeland, which is a large well-developed country considered to be one of the wealthiest in the world. LLA operates out of three regional offices (North, East and West) with its head office functions based in the East offices. The business offers a wide range of advertising services:<br>Strategic: Advising on an overall advertising campaign (mix of advertising channels and overall themes);<br>Buying: Advising and buying advertising space (on television, radio, websites and in newspapers and magazines); and<br>Creative: Designing and producing specific adverts for the customers’ use.<br>The company is one of the three largest agencies in Veeland with many years of experience and many awards won. Competition in advertising is fierce, as advertising spending by businesses has suffered recently during a general economic downturn. Most new business is won in tender competitions between different advertising agencies.<br>Veeland is a large country with considerable diversity of markets, economic conditions and fashions across its regions. As a result, the regional offices have developed with a considerable amount of decision-making autonomy. This also reflects the temperament of the key creative employees of the firm who have a strong attachment to their campaign ideas and take great personal pride in their success. The individualism of the key employees also comes from the way that LLA has grown. The business has been built through acquisition of small, local businesses in each of the three regions. Each of these acquisitions has been consolidated into the appropriate regional office.<br>You have been recruited in to LLA in order to take up the newly created post of senior management accountant. Your recruitment caused some concern amongst the board but was championed by the chief executive officer (CEO) as ‘necessary to stay ahead of the game’. The board have asked that you prove yourself and also give a fresh perspective on LLA by providing them with a report. Initially, you have been asked to provide an assessment of the current financial position of the three regional offices. The most recent management accounts are in Appendix 1. The basic assessment calculations have already been accurately completed by one of the junior staff and the results are in Appendix 2.<br>As part of the briefing for this exercise, you attended part of a recent board meeting where you were told that the board want your views on the choice of net income as the performance measure for each of the regional offices. They want you to suggest other measures and why they are appropriate for each office. The CEO has advised you that you may want to use different key measures for each office, rather than have a ‘one-size fits all policy’. During the board’s discussion, issues around controllability and responsibility accounting appear to be the main concerns of the board. The CEO also stated that the board would not be interested in a long list of which numbers have gone up and which have gone down. They will want to be given a coherent picture of what is going on at each of the regional offices.<br>Finally, the CEO said, ‘Well, if you are not completely tired out at the end of this little project then I’d also like you to comment on our remuneration policy at the regional offices including ideas based on your assessment of performance measures.’ Later, the CEO gave you a note (see Appendix 3) describing these policies at LLA.<br>Required:<br>Write the report to the board of LLA to:<br>(i) Assess the recent performance of the three regional offices by interpreting the data given in Appendices 1 and 2. (10 marks)<br>(ii) Evaluate the choice of net income as the performance measure for the regional offices and suggest other measures and why they are appropriate for each office. (10 marks)<br>(iii) Using the information provided, evaluate LLA’s remuneration policy suggesting changes as appropriate. (10 marks)<br>Professional marks will be awarded in question 1 for the format, style, structure and clarity of the discussion of your answer. (4 marks)<br>Note: the Appendices follow on the next two pages.<br>Appendix 1: LLA financial data<br>The figures are drawn from the regional offices’ management accounts for year to September 2012.<br>Notes:<br>1. East office data is for the regional office only. It excludes any costs of the head office function based there other than the allocated costs listed.<br>2. Notional cost of capital at LLA is 9%.<br>3. Current assets contains only accounts receivable for each office.<br>Appendix 2: Basic calculations<br>[These can be assumed to be calculated correctly.]<br>Notes<br>1. Other costs and allocated head office costs are fixed.<br>2. Margins are calculated as a percentage of revenue.<br>Appendix 3: Note on remuneration from the CEO:<br>There are broadly five grades of staff at each regional office. The following is an outline of their remuneration packages. (The head office staff are treated separately and are not part of this exercise.)<br>Senior management<br>All staff at this level are paid a basic fixed salary, which reflects industry norms over the last few years, plus a bonus dependent on the net income of their office.<br>Creative staff<br>The ‘creatives’ are on individual packages which reflect the market rates in order to recruit them at the time that they were recruited. Some are fixed salary and some have a fixed element plus a bonus based on their office’s revenues.<br>Buying staff<br>The buyers are paid a fixed salary plus a bonus based on the prices for advertising space that they negotiate compared to the budgeted cost of space. The budget is set by the finance team at head office based on previous years’ experience and their forecast for supply and demand in the year in question.<br>Account management staff<br>Account management handles relationships with clients and also develops new clients. They are paid a fixed marketbased salary.<br>Administration staff<br>These staff are paid the market rate for their jobs as a fixed salary based on hours worked.
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Callisto Retail (Callisto) is an on-line reseller of local craft products related to the historic culture of the country of Callistan. The business started ten years ago as a hobby of two brothers, Jeff and George. The brothers produced humorous, short video clips about Callistan which were posted on their website and became highly popular. They decided to use the website to try to sell Callistan merchandise and good initial sales made them believe that they had a viable business idea.<br>Callisto has gone from strength to strength and now boasts sales of $120m per annum, selling anything related to Callistan. Callisto is still very much the brothers’ family business. They have gathered around themselves a number of strategic partners into what Jeff describes as a virtual company. Callisto has the core functions of video clip production, finance and supplier relationship management. The rest of the functions of the organisation (warehousing, delivery and website development) are outsourced to strategic partners.<br>The brothers work from their family home in the rural North of Callistan while other Callisto employees work from their homes in the surrounding villages and towns. These employees are involved in video editing, system maintenance, handling customer complaints and communication with suppliers and outsourcers regarding inventory. The employees log in to Callisto’s systems via the national internet infrastructure. The outsourced functions are handled by multinational companies of good reputation who are based around the world. The brothers have always been fascinated by information technology and so they depend on email and electronic data interchange to communicate with their product suppliers and outsourcing partners.<br>Recently, there have been emails from regular customers of the Callisto website complaining about slow or non-delivery of orders that they have placed. George has commented that this represents a major threat to Callisto as the company operates on small profit margins, relying on volume to drive the business. He believes that sales growth will drive the profitability of the business due to its cost structure.<br>Jeff handles the management of outsourcing and has been reviewing the contracts that exist between Callisto and its strategic partner for warehousing and delivery, RLR Logistics. The current contract for warehousing and delivery is due for renewal in two months and currently, has the following service level agreements (SLAs):<br>1. RLR agree to receive and hold inventory from Callisto’s product suppliers.<br>2. RLR agree to hold 14 days inventory of Callisto’s products.<br>3. RLR agree to despatch from their warehouse any order passed from Callisto within three working days, inventory allowing.<br>4. RLR agree to deliver to customers anywhere in Callistan within two days of despatch.<br>Breaches in these SLAs incur financial penalties on a sliding scale depending on the number and severity of the problems. Each party to the contract collects their own data on performance and this has led to disagreements in the past over whether service levels have been achieved although no penalties have been triggered to date. The most common disagreement arises over inventory levels held by RLR with RLR claiming that it cannot be expected to deliver products that are late in arriving to inventory due to the product suppliers’ production and delivery issues.<br>Required:<br>Assess the difficulties of performance measurement and performance management in complex business structures such as Callisto, especially in respect of the performance of their employees and strategic partners.
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Section A – BOTH questions are compulsory and MUST be attempted<br>Metis is a restaurant business in the city of Urbanton. Metis was started three years ago by three friends who met at university while doing courses in business and catering management. Initially, their aim was simply to ‘make money’ although they had talked about building a chain of restaurants if the first site was successful.<br>The three friends pooled their own capital and took out a loan from the Grand Bank in order to fit out a rented site in the city. They designed the restaurant to be light and open with a menu that reflected the most popular dishes in Urbanton regardless of any particular culinary style. The dishes were designed to be priced in the middle of the range that was common for restaurants in the city. The choice of food and drinks to offer to customers is still a group decision amongst the owners.<br>Other elements of the business were allocated according to each owner’s qualifications and preferences. Bert Fish takes charge of all aspects of the kitchen operations while another, Sheila Plate, manages the activities in the public area such as taking reservations, serving tables and maintaining the appearance of the restaurant. The third founder, John Sum, deals with the overall business issues such as procurement, accounting and legal matters.<br>Competition in the restaurant business is fierce as it is easy to open a restaurant in Urbanton and there are many competitors in the city both small, single-site operations and large national chains. The current national economic environment is one of steady but unspectacular growth.<br>The restaurant has been running for three years and the founders have reached the point where the business seems to be profitable and self-sustaining. The restaurant is now in need of refurbishment in order to maintain its atmosphere and this has prompted the founders to consider the future of their business. John Sum has come to you as their accountant looking for advice on aspects of performance management in the business. He has supplied you with figures outlining the recent performance of the business and the forecasts for the next year (see the performance report below). This table represents the quantitative data that is available to the founders when they meet each quarter to plan any short-term projects or initiatives and also, to consider the longer-term future. Bert and Sheila have often indicated to John that they find the information daunting and difficult to understand fully.<br>John Sum has come to you to advise him on the performance reporting at Metis and how it could be improved. He feels that the current report is, in some ways, too complex and, in other ways, too simple. He wants to look at different methods of measuring and presenting performance to the ownership group. As a starting point, he has suggested to you that you consider measures such as NPV, EVA？, MIRR as well as the more common profit measures. John is na？ve and wants the NPV and MIRR to be appraised as if the business was a three-year project up to 2012 so he knows the performance of the business to date. He has requested that other calculations in your performance review should be annual based on the 2012 figures although he is aware that this may be omitting in his words ‘some important detail’.<br>At recent meetings, Sheila has been complaining that her waiters and waitresses are not responding well to her attempts to encourage them to smile at customers although her recent drive to save electricity by getting staff to turn off unnecessary lights seems to be working. Bert stated that he was not convinced by either of Sheila’s initiatives and he wants her to make sure that food is collected from the kitchen swiftly and so delivered at the right temperature to the customer’s table. Also, Bert has said that he feels that too much food is becoming rotten and having to be thrown out. However, he is not sure what to do about it except make the kitchen staff go through lengthy inventory checks where they review the food held in store. John is worried about these complaints as there is now an air of tension in the owners’ meetings. He has been reading various books about performance management and has come across the quote, ‘What gets measured, gets done.’ He believes this is true but wants to know how it might apply in the case of his business.<br>Metis Performance Report<br>Additional notes:<br>1. The business was founded with $600,000 which comprised $250,000 of equity from the founders and the remainder in a loan from Grand Bank. Under the terms of the loan, all principal is repayable in 10 years’ time and interest is charged at a fixed rate of 8·4% per year.<br>2. John has estimated the overall cost of capital to be 12·5%.<br>3. The company earns 4·5% on any returns in its deposit account.<br>4. John wishes you to use the $600,000 original investment as the capital employed figure for analysis purposes as no new capital has been input and the owners have taken out all residual earnings so far as dividends.<br>5. The corporation tax rate for Metis is 30%, paid in the same year as profits are generated. Accounting depreciation is a tax allowable cost. 6. Marketing spending is for the short-term promotion of offers only.<br>Required:<br>Prepare a report to Mr John Sum addressing the following issues:<br>(i) Critically assess the existing performance report and suggest improvements to its content and presentation; (12 marks)<br>(ii) Calculate and briefly evaluate<br>(a) the use of John’s suggested performance measures and<br>(b) other profit-based measures, using the most recent year’s actual figures where appropriate as examples; (14 marks)<br>(iii) Assess how the quote ‘What gets measured, gets done’ could apply to Metis. (10 marks)<br>Professional marks will be awarded in question 1 for format, style, structure and clarity of the discussion. (4 marks)
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Albacore Chess Stores (Albacore) is a chain of 12 shops specialising in selling items associated with the game of chess: boards, pieces, clocks, software and books. Three years ago, the company was the subject of a venture capital buyout from a larger group. A new senior management team was put in place after the buyout. They have the aim of running the business in order to maximise profits.<br>The Chief Financial Officer (CFO), along with the other members of senior management, sets the annual budget and uses a standard costing approach with variance analysis in order to control individual shop performance. The head office handles all capital purchases and brand marketing. All inventory purchasing is done centrally and the shop opening times are set as standard across the company. As an illustration of senior management attitude, the CFO had set the budget for 2011 staff costs at $7 per hour for part-time staff and this was rigorously observed in the period.<br>Each shop is run by a manager who reports their financial results to head office. The shop managers recruit and manage the staffing of their shop. They have some autonomy in setting prices locally and have been given authority to vary prices by up to 10% from a master list produced by the CFO. They also have a local marketing budget agreed each year by the shop’s manager and the marketing director as part of the annual appraisal process.<br>The shop managers have approached the Chairman of Albacore to complain about the way that they are managed and their remuneration. They feel that their efforts are unrecognised by senior management. One manager commented, ‘I have had a successful year in hard economic circumstances. I have run a number of promotions in the shop that have been well received by the customers. However, the budgets that are set are impossible to achieve and as a result I have not been paid any bonus although I feel that I have done everything in my power to bring in good profits.’<br>The shop managers at Albacore are paid a basic salary of $27,000 with bonuses of up to 30% of basic salary dependent on two factors: performance above budget and the operational director’s performance assessment. The budget for the next year is prepared by the CFO and presented at the shop manager’s annual appraisal.<br>The Chairman has come to you to ask if you can consider the system of performance assessment for the shop managers and give an independent perspective on the reward systems at Albacore. She has provided the following illustrative information from the previous year for one shop:<br>Albacore Chess Stores<br>Tunny Branch Year to Sept 2011<br>Notes:<br>Property costs includes heating, lighting and rental.<br>Positive variances are favourable.<br>The manager of this shop commented at the appraisal meeting that she felt that the assessment was unfair since her failure to make budget was due to general economic conditions. The industry as a whole saw a 12% fall in revenues during the period and the budget for the period was set to be the same as the previous period. She was not paid a bonus for the period.<br>Required:<br>(a) Assess the suitability of the branch information given as a means of assessing the shop manager’s performance for this store, providing suitable additional calculations. (8 marks)<br>(b) Analyse the performance management style. and evaluate the performance appraisal system at Albacore. Suggest suitable improvements to its reward system for the shop managers. (12 marks)
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