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© The Chartered Institute of Management Accountants 2011
T4 T
est o
f Pro
fess
iona
l Com
pete
nce
– Pa
rt B
Cas
e St
udy
Exam
inat
ion
T4 – Part B Case Study Examination Thursday 26 May 2011
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination
begins during which you should read the question paper and, if you
wish, make annotations on the question paper. However, you will not
be allowed, under any circumstances,to open your answer book and
start writing or to use your calculator during the reading
time.
This booklet contains the examination question and both the
pre-seen and unseen elements of the case material.
Answer the question on page 13, which is detachable for ease of
reference. The Case Study Assessment Criteria, which your script
will be marked against, is included on page 14.
Maths Tables and Formulae are provided on pages 19 to 22.
Write your full examination number, paper number and the
examination subject title in the spaces provided on the front of
the examination answer book. Also write your contact ID and name in
the space provided in the right hand margin and close to seal.
Contents of this booklet:
Page
Pre-seen material – BZCS construction case 2
Pre-Seen Appendices 1- 4
9
Question Requirement Case Study Assessment Criteria
13
14
Unseen Material 15 - 18
Maths Tables and Formulae
19 - 22
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T4 Part B Case Study 2 May 2011
BeeZed Construction Services (BZCS) case Construction industry
background Due to the current economic climate, the demand for
building work in Europe has fallen overall by over 10% from 2008
levels. Furthermore, it is forecasted that the volume of
construction work will not increase until the start of 2011. Many
companies in the construction industry have suffered falls in
profits as a direct result of the slowdown in new contracts being
awarded. Many European construction companies are involved in a
large range of projects in many countries worldwide. Few large
construction companies (except some house building companies)
operate only within their national boundaries. Most construction
companies have established a range of expertise in specific types
of project, such as construction of office buildings, hospitals,
airports, roads or schools. This expertise allows the construction
companies to use their skills and reputation to bid for, and win,
further projects in Europe and in other countries around the world.
Many large construction projects are financed using Private Finance
Initiatives (PFI). PFI is defined as private finance being used to
fund public infrastructure work. Private finance is defined as
finance provided mainly by banks, institutional investors and
pension funds. The Private Finance Initiative (PFI) is a way of
creating Public Private Partnerships (PPP). PPP is defined as
agreements between public bodies or central governments and private
construction companies to deliver the agreed projects. Examples of
public infrastructure works are road building and construction of
new schools. PFI projects also involve the private sector
construction company taking on responsibility for providing an
on-going service. This typically includes maintaining and managing
the project over the life of the building or for a fixed term of 20
years or longer. Therefore, PFI projects generate revenue streams
for the construction company for the initial construction project
as well as for long-term maintenance and management of the asset.
PFI projects involve the private construction company as a partner
in the project and this has generated favourable outcomes in
respect of the percentage of projects completed on time and
completed to the agreed budget. In the construction industry there
are 3 main types of contract, which are:
1. Fixed price contracts – this is where the revenue for the
private construction company is fixed at the contract stage,
subject to changes in specifications agreed during
construction.
2. “Cost plus” contracts – this is where the revenue for the
private construction company
will comprise all of the actual costs of the project plus an
agreed profit element.
3. Long-term PFI projects – this is where the revenue for the
private construction company will include the contracted
construction revenue as well as revenues for on-going maintenance
and property management for a long-term project, typically 20+
years.
The process for private construction companies to win a new
contract for a large construction project is summarised in the
following steps:
1. A company or government body will invite tenders 2. The
construction company will tender for the contract by preparing a
detailed bid 3. A company or government body will select its
“preferred contractor” 4. The bid price and the contract details
will be negotiated and agreed 5. Contracts are then signed 6.
Selection and appointment by the construction company of suppliers
for manpower
resources (sub-contractors), as well as for materials 7. Work
commences
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May 2011 3 T4 Part B Case Study
It should be noted that during construction work, there are
often many requests for changes to the original contract
specifications or design which are submitted to the construction
company. These changes usually affect costs and manpower. All of
these change requests have to be negotiated and additional revenues
agreed before the changes can be made. BeeZed BeeZed is a
construction and property management company listed on a European
stock exchange. BeeZed has 3 wholly owned subsidiary companies
which are:
• BeeZed Construction Services (BZCS) – concerned with a wide
range of construction projects
• BeeZed Professional Services (BZPS) – concerned with offering
consultancy services
• BeeZed Building Support Services (BZBSS) – concerned with
property management
and maintenance services. In respect of PFI projects, the parent
company, BeeZed, will sign the overall contract for the project.
BZCS will be involved only with the construction work and BZBSS
will manage the ongoing maintenance and property management work.
When a PFI contract is signed, the parent company, BeeZed, will
agree on how the revenues will be split between BZCS and BZBSS.
This case study is concerned ONLY with BeeZed Construction Services
(BZCS). BZCS BZCS has many construction projects around the world,
ranging from road building, construction of public sector
buildings, including hospitals, schools and university buildings to
commercial contracts for office buildings. Some of the construction
projects that BeeZed is involved with are financed by PFI. However,
only the revenue related to the construction project is allocated
to BZCS. The revenue relating to the ongoing maintenance and
property management work is allocated to BZBSS and is not
included in this case study. BZCS has a good reputation in this
industry for quality and safety as well as its ability to deliver
projects on time. These are all critical success factors for
keeping its existing customers content and for providing a basis
for winning future business.
BZCS has 6 divisions, which are:
1. Office Buildings Division – includes building bespoke office
buildings for specific company orders, as well as speculative
construction of office buildings in city centres or on business
park complexes.
2. Sports Facilities Division – includes the construction of
large sports stadiums as well as
the construction of small regional sports facilities. 3.
Environmental Projects Division – includes the construction of
water treatment facilities,
the construction of sophisticated waste management facilities
and marine projects, including the construction of container
terminals and marinas.
4. Infrastructure Projects Division – includes road building and
airport construction.
5. Community Projects Division – includes the construction of
hospitals and smaller
healthcare facilities as well as schools and university
facilities.
6. Energy Projects Division – includes the construction of gas
storage facilities and power stations.
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T4 Part B Case Study 4 May 2011
Each of these 6 divisions is headed by a Commercial Director who
is responsible for all of the projects undertaken by that division.
A summary of the organisational structure for BZCS, effective from
1 January 2011, is shown in Appendix 1 on page 9. In the year ended
30 September 2010, BZCS generated total revenues of €1,267 million
and operating profit of €34.7 million. BZCS is a wholly owned
subsidiary of BeeZed. An extract from the accounts for BZCS is
shown in Appendix 2 on page 10. All of the non-current liabilities
represent inter-company long-term loans from its parent company,
BeeZed. BeeZed has a range of non-current liabilities with several
external bodies including bank loans. BZCS’s cash flow statement
for the year ended 30 September 2010 is shown in Appendix 3 on page
11. Geographical analysis of revenues BZCS currently has
construction projects operational throughout Europe, the USA, the
Middle East and in some other countries, mainly in Asia. The
geographical analysis of the total construction services revenue of
€1,267 million for the year ended 30 September 2010 was as
follows:
Analysis of revenues and operating profit by division The
revenues and operating profit for each of BZCS’s 6 divisions for
the year ended 30 September 2010 are shown in a table on the next
page:
Europe €690 m
USA €369 m
Middle East €110 m
Rest of World €98 m
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May 2011 5 T4 Part B Case Study
Revenue
Operating profit
Office buildings
€ million
220.0
€ million
8.5
Sports facilities 145.2 3.4
Environmental projects 193.1 4.2
Infrastructure projects 365.2 16.8
Community projects 213.6 1.3
Energy projects 129.9 0.5
Total
1,267.0
34.7
Financials The operating profit margins achieved by BZCS are
low, as is the norm for this industry. However, for some of BZCS’s
PFI construction projects, BZBSS, which is part of the BeeZed
group, earns additional revenues for a further 10 to 30 years for
the ongoing maintenance and property management of the PFI
projects. Whilst BZCS prepares annual financial accounts, all of
the accounting for each construction project is accounted for on a
project basis. All direct costs are allocated to the respective
project, including salary and associated costs for all of BZCS’s
employees working on each project as well as sub-contractor costs.
All non-project based overhead costs are allocated to projects
using activity based costing techniques based on appropriate cost
drivers. The monthly management accounts show the following
information for all on-going operational construction projects:
• Contract revenues and costs • Approved change requests to
contracts and amended revenues and costs • Cumulative costs to date
for the project (spanning current and past financial years) •
Forecast of costs for the remainder of the project (which are split
between costs to be
incurred in the current financial year and costs to be incurred
in future financial years) BZCS uses a project management system
called BZPM. Each Project Manager is responsible for all direct
costs incurred on the project for which he / she is responsible.
Each Project Manager is responsible for presenting the projects’
financial and operational issues that have occurred for each
project on a monthly basis. These presentations are to senior
management groups chaired by the Commercial Director for the
relevant division of BZCS. These presentations cover all aspects of
the project, including safety issues, forecasts for the delivery of
the project against plan and any significant operational problems
or successes. If there is a significant problem, the Project
Manager will be expected to travel to BZCS’s Head Office to present
the information to the BZCS Board. Where there are no operational
or financial concerns, the Project Manager conducts his monthly
presentation by video conferencing. Order book At 30 September 2010
BZCS had an order book valued at over €2,400 million. This is 30%
higher than the level of BZCS’s order book at the 30 September
2009. The order book represents the value of contracts signed which
have either not yet been commenced or are currently in
progress.
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T4 Part B Case Study 6 May 2011
Project Management BZCS uses a project management system to plan
each project, called BZPM. The contract details and agreed key
stages are set up in BZPM when the contract is signed for each new
construction project. A Project Manager is appointed for each
project. He or she is responsible for controlling all stages of the
project using BZPM. This includes control of resources, both BZCS
employees and outsourced sub-contractors, timings for each stage of
the project, project planning and managing contract change
requests. The Project Manager is also responsible for control and
reporting of costs against the original contract and the updated
budget for the project. The finance system interfaces directly with
BZPM allowing data on payments for materials and sub-contractors,
payroll costs and revenues to be directly allocated to each stage
of the relevant project. The Project Manager and his team, assisted
by the Finance Department, prepare monthly accruals based on
activities undertaken in the month, which have not been invoiced.
BZPM is able to generate reports on all aspects of each project,
including forecast timings for all activities and costs, by the end
of day 3 after each month end. Corporate Social Responsibility BZCS
takes its Corporate Social Responsibility (CSR) very seriously. The
BZCS Board is committed to safety on all projects and also to the
reduction of waste from sites and the reduction of carbon
emissions. It is also very aware of environmental concerns and
works closely with the communities in which it operates. BZCS’s
commitment to health and safety and environmental issues is shown
below. Health and Safety Health and safety is a top priority for
BZCS. BZCS continues to enhance its culture of safety throughout
the company and its supply chain, to ensure that its employees,
sub-contractors and the public are safe. BZCS also ensures that
environmental safety is adhered to, so as to try to ensure that the
communities in which it operates are not damaged or polluted. BZCS,
like all construction companies, adheres to all Health and Safety
legislation and BZCS goes beyond what is required by law. It trains
all of its employees to ensure their competency and full
understanding of what and why safety is so important in all aspects
of the company. This training covers all aspects of health and
safety, from construction work at building sites to transportation
of materials and disposal of waste. BZCS continues to measure its
performance against a range of key Health and Safety indicators.
BZCS’s annual accident frequency rate has fallen over the last 7
years and is currently 0.16 accidents per 100,000 work hours. This
is the lowest accident rate ever achieved by BZCS and is amongst
the lowest of the top construction companies globally. 20,000
person days of Health and Safety training has been provided by BZCS
during the last financial year ended 30 September 2010. BZCS
recognises that it is also important that its supply chain is
fundamental to the safe delivery of all construction projects and
it works closely with the companies in its supply chain. It tries
to ensure that best practice is promoted and that a positive safety
culture is created. BZCS provides Health and Safety awareness
training to its key suppliers to ensure that they meet BZCS’s
challenging Health and Safety requirements. BZCS also conducts
audits of its suppliers. Recently some suppliers’ contracts were
not renewed as they did not meet the criteria set by BZCS for
Health and Safety standards. Environmental issues BZCS is committed
to complying with a European Union (EU) wide programme to reduce
the volume of waste that goes to landfill sites. Where possible
waste from construction sites is sorted by category of material
(such as earth, packaging or materials which can be recycled) and
is recycled or disposed of in a safe way. BZCS has a range of waste
management contractors which manage the safe disposal of site
waste. They have demonstrated their
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May 2011 7 T4 Part B Case Study
abilities to divert waste from landfill sites. Last year, ended
30 September 2010, BZCS’s target was to dispose of, or recycle, 60%
of site waste that would otherwise have ended up in landfill sites.
BZCS exceeded this target and disposed of, or recycled, 62% of its
waste from its construction sites. BZCS is committed to reducing
its carbon footprint and to minimising its impact on the
environment. BZCS uses the latest technology on its construction
projects so that new buildings are able to operate in an
environmentally responsible way and utilise efficient electrical
fittings. Many of the buildings contracted by European government
departments, such as schools and hospitals, use renewable energy
sources and BZCS works closely with the architects to ensure that
the buildings will help to deliver planned reductions in carbon
emissions. BZCS’s Mission Statement and CSR initiatives are shown
in Appendix 4 on page 12. Contracts BZCS is continuously working on
bids for possible new contracts. It has specialised teams headed up
by Bid Managers in each of BZCS’s 6 divisions. When a bid has been
won and a contract signed, then a Project Manager is appointed to
manage the project. Sometimes, on a particularly complicated
project, the initial Bid Manager will become the Project Manager.
Each of BZCS’s 6 divisions usually has between 1 and 5 projects in
progress at any point in time. Furthermore, each of the 6 divisions
is usually involved in the bid preparation and the bidding process
for several other proposed projects. Whilst BZCS has been the
preferred supplier for some European government departments in the
past for infrastructure projects and community projects, these
large customers are now imposing increasingly strict criteria for
suppliers to meet. Bids need to be competitive in the current
challenging economic climate. Therefore, BZCS, like many other
construction companies, is not successful in winning all of the
projects for which it bids for. In order to balance the risk of
relying on specific construction sectors and a relatively small
customer base, BZCS tries to win contracts from a wide selection of
organisations. These include government and private sector
customers. BZCS also undertakes a wide range of different types of
construction project. BZCS has secured some construction projects
for the London 2012 Olympic Games. At any point in time BZCS
usually has between 12 and 20 projects in progress, with bid
preparations taking place for a further 10 or more projects. The
bid value of a contract varies greatly, ranging from €5 million to
over €800 million for individual contracts. Contract duration often
spans more than 2 years. As at the end of December 2010, BZCS has
14 projects currently operational, of which 10 are due for
completion during 2011 and the remaining 4 are due to be completed
in 2012. Bid tendering process In the UK, the Government’s
regulator, the Office of Fair Trading (OFT) has been undertaking
investigations of “bid-rigging” in the construction industry. The
OFT has established that there is widespread evidence of
construction companies which have been involved in manipulating the
bidding process. This has allowed specific companies to win
Government awarded construction projects at higher prices than
could be achieved through a fair competitive bidding process. This
on-going investigation has involved the OFT accessing paperwork for
over 100 contracts from 20 construction companies. It will also
impact on the ways that construction companies, including BZCS, bid
for new projects in the future. In order to be treated leniently,
BZCS has advised the OFT that it did have discussions with some
other construction companies concerning the level of its bid for a
UK hospital construction project that it won the contract for in
2008. The project is proceeding on time and it is forecast that it
will not over-run the agreed fixed price budget.
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T4 Part B Case Study 8 May 2011
BZCS is waiting to hear the outcome of the OFT’s investigation
into this specific contract. BZCS has included a provision for a
contingent liability, for a possible fine, in the accounts for the
current financial year ending 30 September 2011. Re-structuring of
BZCS During 2009 and the early part of 2010, BZCS underwent a
re-structuring process to enable it to become more competitive
following the downturn in construction projects due to the current
economic environment. The Board of BZCS recognised the need to
become more flexible and to sub-contract a greater volume of its
core construction work. Following a Board decision in March 2009,
BZCS reduced the number of its employees by 1,800 within 1 year. At
the end of September 2010, BZCS had 10,100 employees. Many of
BZCS’s ex-employees have joined some of BZCS’s supply chain
companies, which are BZCS’s sub-contractors. Therefore some of
these people work on the same project as previously but now are
employed by sub-contractors or have become short-term freelance
contractors to BZCS. BZCS has also focused on winning a wider range
of private construction projects as many European governments have
cut the budgets on public sector projects and bidding is more
competitive than ever. A summary of the organisational structure
for BZCS, effective from 1 January 2011, is shown in Appendix 1 on
page 9. Within each division, the Commercial Director has
responsibility for each of the Project Managers who are each
responsible for one operational project. Projects that are
operational are defined as a project in which the contracts have
been signed but construction is not complete. Each division also
has Bid Managers responsible for preparing bids or tenders for new
projects and Sales and Marketing Managers for selling to, and
liaising with, customers. Additionally there is a Post Completion
Manager responsible for all projects that have ongoing problems or
require minor rectification work after the project has been
completed. Re-structuring of the Procurement Department Before the
re-structuring of BZCS, each division was responsible for the
procurement for each of the projects under its control. Effective
from 1 January 2011, there is a new central Procurement Department
for the whole of BZCS. This is under the direct control of an
experienced Procurement Director, who reports directly to BZCS’s
Managing Director. The new Procurement Director was recruited from
a rival construction company and joined BZCS in October 2010. The
employees who worked in the procurement departments within each of
BZCS’s 6 divisions have been brought together in one centralised
Procurement Department, based in Europe. This should help to
facilitate better control over purchases and achieve higher bulk
discounts, especially for some raw materials. On an operational
level, all of BZCS’s Project Managers at construction sites in each
country will now make all purchases through the new centralised
Procurement Department. They will be given limited authority to
purchase goods locally where no global contract is in place for
particular materials. The new centralised Procurement Department is
in the process of selecting “preferred suppliers” within each
country in which it operates. Where possible, the preferred
supplier will be another large international company that can
provide materials to BZCS in many of the countries in which BZCS
has on-going construction projects. The Finance Department is
working closely with the Procurement Director in the selection and
appointment of new and existing suppliers. The re-structuring of
BZCS’s Procurement Department has resulted in an overall reduction
in headcount in procurement employees. The new centralised
Procurement Department will help meet BZCS’s target for Head Office
cost savings.
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Mar
ch a
nd M
ay 2
011
9 T4
Par
t B C
ase
Stud
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App
endi
x 1
BZCS
’s n
ew o
rgan
isat
iona
l str
uctu
re –
eff
ecti
ve fr
om 1
Janu
ary
2011
BZCS
–
Man
agin
g D
irec
tor
Spor
ts
Faci
litie
s D
ivis
ion
– Co
mm
erci
al
Dir
ecto
r
Off
ice
Build
ings
D
ivis
ion
– Co
mm
erci
al
Dir
ecto
r
Envi
ronm
enta
l Pr
ojec
ts
Div
isio
n –
Com
mer
cial
D
irec
tor
Infr
astr
uctu
re
Proj
ects
D
ivis
ion
– Co
mm
erci
al
Dir
ecto
r
Com
mun
ity
Proj
ects
D
ivis
ion
– Co
mm
erci
al
Dir
ecto
r
Ener
gy
Proj
ects
D
ivis
ion
– Co
mm
erci
al
Dir
ecto
r
BZCS
Fi
nanc
e D
irec
tor
BZCS
Pu
blic
Re
latio
ns a
nd
Mar
ketin
g D
irec
tor
BZCS
Pr
ocur
emen
t D
irec
tor
Post
Co
mpl
etio
n M
anag
er
Proj
ect
Man
ager
s –
for
each
pr
ojec
t
BZCS
-
IT M
anag
er
Bid
Man
ager
s –
for
each
ne
w p
ropo
sed
proj
ect W
ithin
eac
h D
ivis
ion
Sale
s &
M
arke
ting
Man
ager
s –
for
each
pr
ojec
t.
BZCS
H
uman
Re
sour
ces
Dir
ecto
r
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T4 Part B Case Study 10 May 2011
Appendix 2
Extracts from BZCS’s Statement of Comprehensive Income,
Statement of Financial Position and Statement of Changes in
Equity
Statement of Comprehensive Income
Year ended 30 September 2010
Year ended 30 September 2009
€ million
€ million
Sales revenue 1,267.0 1,280.0 Cost of sales 1,210.3 1,222.0
Gross profit 56.7 58.0 Administrative expenses 22.0 22.8 Operating
profit
34.7
35.2
Finance income 0.2 0.3 Finance expense 7.5 8.7 Profit before tax
27.4 26.8 Tax expense (effective tax rate is 20%) 5.5 5.4 Profit
for the period
21.9
21.4
As at Statement of Financial Position 30 September 2010
As at 30 September 2009
€ million
€ million
€ million
€ million
Non-current assets (net)
241.0 234.0
Current assets Inventory 3.1 3.4 Trade receivables 167.0 167.8
Cash and cash equivalents 23.4 31.2 193.5 202.4 Total assets 434.5
436.4 Equity and liabilities
Equity Share capital 10.0 10.0 Retained earnings 176.0 154.1
186.0 164.1 Non-current liabilities Inter-company loan (provided by
parent company BeeZed)
125.0
145.0 Current liabilities Trade payables 118.0 121.9 Tax
payables 5.5 5.4 123.5 127.3 Total equity and liabilities 434.5
436.4
Note: Paid in share capital represents 10 million shares of
€1.00 each at 30 September 2010 which are 100% owned by parent
company BeeZed
Share Statement of Changes in Equity Capital
Share premium
Retained earnings
Total
€ million
€ million
€ million
€ million
Balance at 30 September 2009 10.0 - 154.1 164.1 Profit - - 21.9
21.9 Dividends paid - - - - Balance at 30 September 2010 10.0 -
176.0 186.0
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May 2011 11 T4 Part B Case Study
Appendix 3
Cash Flow Statement
Year ended 30 September 2010
€ million
€ million
Cash flows from operating activities: Profit before taxation
(after Finance costs (net)) 27.4 Adjustments: Depreciation 88.0
Finance costs (net) 7.3 95.3 (Increase) / decrease in inventories
0.3 (Increase) / decrease in trade receivables 0.8 Increase /
(decrease) in trade payables (excluding taxation)
(3.9)
(2.8) Cash generated from operations 119.9 Finance costs (net)
paid (7.3) Tax paid (5.4) (12.7) Cash generated from operating
activities 107.2 Cash flows from investing activities:
Purchase of non-current assets (95.0) Cash used in investing
activities
(95.0)
Cash flows from financing activities: Repayment of inter-company
loans (20.0) Cash flows from financing activities
(20.0)
Net decrease in cash and cash equivalents
(7.8)
Cash and cash equivalents at 30 September 2009 31.2 Cash and
cash equivalents at 30 September 2010
23.4
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T4 Part B Case Study 12 May 2011
Appendix 4
BZCS’s Mission Statement and CSR initiatives
BZCS’s mission statement is: “To be the preferred supplier for
quality construction projects and to strive to implement a
long-term relationship with our customers based on safety, quality
and a timely service” BZCS has the following CSR initiatives:
Prudent use of natural resources:
• Reducing waste • Improving design • Improving the use of
resources • Improving its supply chain • Increasing the use of
locally sourced resources
Environmental issues:
• Reducing water pollution • Reducing emissions into the
atmosphere • Reducing waste going to landfill sites
Social issues:
• Improving Health and Safety for our employees and
sub-contractors • Supporting our employees • Giving due
consideration to the communities in which we work • Developing the
skills of our employees
Economic growth
• Investing in the communities in which we operate • Rewarding
our shareholders • Satisfying our customers • Managing our
risks
End of pre-seen material
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May 2011 13 T4 Part B Case Study
BZCS - Construction company case – Unseen material provided on
examination day Additional (unseen) information relating to the
case is given on pages 15 to 18. Read all of the additional
material before you answer the question. ANSWER THE FOLLOWING
QUESTION You are the Management Accountant of BZCS.
The Finance Director has asked you to provide advice and
recommendations on the issues facing BZCS. Question 1 part (a)
Prepare a report that prioritises, analyses and evaluates the
issues facing BZCS and makes appropriate recommendations.
(Total marks for Question 1 part (a) = 90 Marks) Question 1 part
(b) In addition to your analysis in your report for part (a), the
Finance Director has asked you to prepare an email to be sent to
non-financial managers in the Office Buildings Division of BZCS
explaining the principles and the meaning of NPV calculations in
general, together with your recommendation on the office building
proposal. Your email should contain no more than 10 short
sentences.
(Total marks for Question 1 part (b) = 10 Marks) Your script
will be marked against the T4 Part B Case Study Assessment Criteria
shown on the next page.
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T4 Part B Case Study 14 May 2011
Assessment Criteria
Criterion Maximum
marks available
Analysis of issues (25 marks) Technical 5 Application 15
Diversity 5 Strategic choices (35 marks) Focus 5 Prioritisation 5
Judgement 20 Ethics 5 Recommendations (40 marks) Logic 30
Integration 5 Ethics 5 Total 100
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May 2011 15 T4 Part B Case Study
BZCS - Construction company case – unseen material provided on
examination day Read this information before you answer the
question Waste materials Charlie Rix is a junior procurement
manager for BZCS. In the course of his work he came across some
documents concerning the collection of waste materials from a site
where BZCS is constructing a new water treatment plant. On
investigation, Charlie Rix has found that the collected waste has
not been sent to specialist waste disposal sites, but instead has
been delivered to a local landfill site. Charlie Rix is concerned
that some of the site waste could contain toxic chemicals. In your
role as Management Accountant you had been asked to provide an
analysis of the volumes of waste handled by all of BZCS’s waste
material sub-contractors and the levels of materials recycled. You
had a meeting with Charlie Rix last week to discuss gathering this
information. However, when you met with him, he showed you the
documents he has found concerning the disposal of this waste
material which has been sent to a landfill site. Unfinished sports
club BZCS signed a contract in August 2010 to construct 2 sports
clubs for a small chain of private sports clubs called EXX Sports
(ES) to be completed by December 2011. The contract was for a fixed
price of €25 million for each of the 2 sports club buildings. All
construction work would use BZCS employees and very few
sub-contractors, as BZCS had employees immediately available to
work on this project. BZCS planned to complete the first sports
club before work started on the second, and this was acceptable to
ES. An initial payment of €5 million for the first building was
paid by ES when contracts were signed. Work commenced on the first
of these 2 sports clubs in November 2010, but work was suspended
temporarily when ES did not make the first stage payment of €5
million due in December 2010. Payment was made in late January 2011
and work was re-started. The next stage payment for another €5
million, became due at the end of April 2011, but was not paid on
time. BZCS was informed that payment would be made in 10 days time
and work continued. Following media speculation concerning ES’s
cash problems, ES was put into liquidation on Friday 13 May 2011.
All work on site was suspended that day. The 50 BZCS employees
working on this project have not yet been allocated to other
projects. To date ES has only paid €10 million. BZCS has applied to
the liquidator to be added to the list of creditors. BZCS is
claiming the contract revenue of €25 million for the first sports
club which is partially completed, less the €10 million already
paid, as well as the loss of profit of €3 million for the second
sports club which has not been started. BZCS’s total claim is for
€18 million. The liquidator is not optimistic and has indicated
that all creditors may receive only around 10% of their claims.
Alternatively, BZCS is considering a proposal to contact ES’s
liquidator with an offer to pay €3 million to take on legal
ownership of the unfinished sports club. If BZCS were to take legal
ownership of the sports club, it considers that the maximum it
could realise from the sale of the completed building would be €20
million, due to current depressed market conditions. BZCS has spent
€14 million so far on the partially completed sports club. It is
forecast that BZCS would need to spend a further €8 million to
complete it. The Finance Director has asked you, as Management
Accountant, to advise on whether BZCS should pursue the proposal to
try to take ownership of the incomplete sports club. You should
also advise on what would be the maximum that BZCS should pay to
take on the unfinished sports club, if BZCS’s offer of €3 million
is not accepted.
-
T4 Part B Case Study 16 May 2011
Office building proposal BZCS has worked with a leading
international architect, Ben Bleur, on many projects previously.
All of the projects were commercially successful and some building
designs have won awards. BZCS has recently been asked by Ben Bleur
to be the developer of, and to construct, an innovatively designed
50 floor office building in a European capital city. The project
would utilise the latest environmentally sound technology to
recycle heat and reduce carbon emissions. Ben Bleur’s building
design has just received planning permission to proceed. He is now
selecting a company to develop and construct the office building
and has been approached by several interested competitors of BZCS.
The deadline for BZCS to make a decision is 31 May 2011. The
Commercial Director of BZCS’s Office Buildings Division is very
confident that the proposed building design and the association
with Ben Bleur will attract corporate buyers of prestige office
space. This would be the first city centre large office building
that BZCS has considered constructing without first identifying
customers to buy the completed office space. Therefore, if BZCS
decided to proceed with the development it would bear all of the
commercial risk of this proposal, including the purchase of the
land at €50 million. BZCS’s parent company has confirmed that it
could secure sufficient external financing for this proposed
development. If BZCS decided to proceed with this proposal, then it
would need to generate publicity in order to secure sales of the
office space. As is usual with the construction of such an office
building, the actual construction work would not commence until a
certain specified level of sales of office space had been made.
BZCS would commence a sales campaign to sell whole floors in the
building to customers “off plan”. An “off plan” sale is defined as
a contracted sale of office space (usually a specified floor or
several floors) before building work has even commenced. The “off
plan” sales would be subject to BZCS selling a specified percentage
of the building by a certain date. The Sales and Marketing Manager
for the Office Buildings Division of BZCS has proposed that the
percentage that should be sold before building work commences
should be set at 30% by 31 December 2011. Usually, when a building
is under construction, sales are easier to achieve as potential
customers can see the style of the building under construction and
are often attracted by the media interest it generates. However, if
the 30% target for off-plan sales were not achieved, then BZCS
could sell the undeveloped city centre building plot, although it
may receive less than the €50 million that it would have paid for
it. BZCS’s civil engineers have forecast that this project would
use around 900 employees each year, as well as specialised
sub-contractors. It is forecast that the total cost of the building
would be €525 million (based on 2011 prices) over 4 years,
including the cost of the land. It is forecast that the sale of all
office space will be achieved over 4 years and will generate sales
revenue of €700 million (based on 2011 prices). It is forecast that
all office space will be sold within 1 year of the planned
completion of the building in September 2014. The Finance Director
recognises the need to secure sales of office space and you have
been asked to discuss what actions the Office Buildings Division of
BZCS should take in order to secure the sales of office space in
order to generate the forecast cash inflows shown in the table on
the next page. A sale of part, or all, of the building is sometimes
made to a property management company rather than a corporate
customer. The forecast cash inflows from sales shown in the table
on the next page include all sales, irrespective of whether it
represents the end customer or not. Following preliminary
discussions with corporate customers looking for new office
premises, DJ, a global insurance company, has expressed a serious
interest in purchasing 25 floors of the building, which represents
50% of the office space. However, DJ has stated that the maximum
price it is prepared to pay is €300 million, spread over 3 years, a
discount of €50 million. However, an early sale of a significant
proportion of the office building will also help attract other
corporate customers.
-
May 2011 17 T4 Part B Case Study
Note: All figures shown below are based on 2011 prices
Year ended: 30 Sept 2011
30 Sept 2012
30 Sept 2013
30 Sept 2014
30 Sept 2015
Totals
All figures pre-tax € million
€ million
€ million
€ million
€ million
€ million
Cash outflows 50 180 170 125 0 525 Cash inflows: Without sale to
DJ 0 120 150 180 250 700 With sale of 25 floors to DJ 0 140 170 200
140 650
The pre-tax cash flows are summarised in the table above. You
should assume that the effective tax rate is 20% and that tax is
paid, or refunded, 1 year in arrears. It should be assumed all cash
flows shown in the table above are eligible for tax relief. The
Finance Director has stated that the relevant post-tax discount
rate is 15%, which includes a premium for the risk of this project.
Problems with BZPM BZCS uses a project management system called
BZPM. It is an off-the-shelf project management system which is
widely used. BZCS pays an annual software licence fee to the
software company, EAG. This IT system is used by all of BZCS’s
Project Managers for each project to help them plan and monitor the
progress, costs and resources for each project. This system is key
to the day to day management of all projects and holds details of
all current contracts and forecast cost details, as well as
manpower resource planning details. The BZPM system interfaces with
other BZCS IT systems. This allows the transfer of data
electronically into BZPM in respect of payroll costs, supplier and
sub-contractor invoices, all of which are charged to each activity
within each individual project. The IT department installed the
recently released upgraded software for BZPM last weekend, after
all users had been informed that BZPM would be unavailable for the
weekend. The upgraded BZPM was then tested and the IT department
issued an email to all users on Monday morning of this week,
informing them that the upgraded system was operational again. The
IT department reminded all users about the new features of the
upgraded BZPM and asked for any queries to be directed to the IT
Manager, Nicos Talli. By the end of Tuesday of this week, 2 days
after the upgrade was installed, Nicos Talli had received over 80
emails with queries from almost all of the Project Managers and
their administrative staff. Nicos Talli is totally overwhelmed by
the volume of emails with queries and problems raised by users
throughout all of the divisions of BZCS. He has chased, by phone
and by emails, his contact person at the software company, EAG,
which has now admitted that it has other customers who are also
experiencing some problems with the new software release. Nicos
Talli has suggested that BZPM is closed down for 2 days whilst he
investigates the problems. However, the Finance Director is under
pressure to keep BZPM operational. He has asked Nicos Talli to
check the integrity of the data contained in BZPM and to
investigate what data has been corrupted, as some Project Managers
have stated that dates have been changed within a project. He has
also asked Nicos Talli to propose what actions should be taken. One
of the Project Managers has suggested to Nicos Talli that the last
backed-up version of BZPM from last Friday night, before the
software update was installed, should be re-installed. However,
there has been 3 days of new input of data, as well as transfers of
data from other BZCS IT systems, since the last backed-up version
of all the operational projects in BZCS. The Finance Director has
asked you, as Management Accountant, to work with Nicos Talli to
establish what actions are necessary in order to make BZPM fully
operational and reliable.
-
T4 Part B Case Study 18 May 2011
Safety checks BZCS has a very good track record on safety issues
and training and this is an important issue for its construction
site workforce. At one of the government funded road building
projects which BZCS is under pressure to complete in 3 weeks’ time,
the required weekly safety checks on site machinery have not been
completed for the last 2 weeks. The Project Manager is concerned
that an accident could occur. He has repeatedly phoned and emailed
BZCS’s Head Office every day for the last week. He has now stated
that unless the safety checks are carried out by 5 pm tomorrow,
work on site will completely stop. The cost of all employees and
sub-contractors is €80,000 per day. BZCS’s Head Office has
instructed the Project Manager to continue working on site. The
Project Manager has been told by BZCS’s Head Office that a new
contractor, TT, was appointed 2 weeks ago to carry out BZCS’s
safety checks in this European country. BZCS’s Head Office has
advised that this delay is just a one-off effect of the transfer to
TT. However, on further investigation, TT has now admitted that it
cannot undertake the safety checks at this site, as well as some
other BZCS sites, for a further 4 weeks due to insufficient
staffing. The Project Manager at the road building site has
identified a suitable local safety management company, which has
quoted a premium rate of €20,000 per week for all safety checks to
be performed immediately for the road building site only. However,
the contract is for a minimum period of 12 weeks.
End of unseen material
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May 2011 19 T4 Part B Case Study
APPLICABLE MATHS TABLES AND FORMULAE Present value table Present
value of 1.00 unit of currency, that is (1 + r)-n where r =
interest rate; n = number of periods until payment or receipt.
Periods
(n) Interest rates (r)
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952
0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890
0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816
0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735
0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650
0.621 6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8
0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914
0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905
0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896
0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887
0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879
0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870
0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861
0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 16 0.853
0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 17 0.844
0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 18 0.836
0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 19 0.828
0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 20 0.820
0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
Periods
(n) Interest rates (r)
11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885
0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769
0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658
0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552
0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456
0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370
0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296
0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10
0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11
0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12
0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13
0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14
0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15
0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16
0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17
0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18
0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19
0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20
0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
-
T4 Part B Case Study 20 May 2011
Cumulative present value of 1.00 unit of currency per annum,
Receivable or Payable at the end of
each year for n years
−+−
rr n)(11
Periods
(n) Interest rates (r)
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952
0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833
1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624
2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312
3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890
3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8
7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566
8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471
8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368
9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255
10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134
11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004
12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865
12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718
13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17
15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756
8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604
8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594
9.818 9.129 8.514
Periods
(n) Interest rates (r)
11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885
0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647
1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283
2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798
2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199
3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498
3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706
3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10
5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11
6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12
6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13
6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14
6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15
7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16
7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17
7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18
7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19
7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20
7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
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May 2011 21 T4 Part B Case Study
FORMULAE
Valuation Models (i) Irredeemable preference share, paying a
constant annual dividend, d, in perpetuity,
where P0 is the ex-div value:
P0 = prefk
d
(ii) Ordinary (Equity) share, paying a constant annual dividend,
d, in perpetuity, where P0 is the ex-div value:
P0 = ek
d
(iii) Ordinary (Equity) share, paying an annual dividend, d,
growing in perpetuity at a constant rate, g, where P0 is the ex-div
value:
P0 = gk
d
-e
1 or P0 =
gk
g
−
+
e
0 ][1d
(iv) Irredeemable (Undated) debt, paying annual after tax
interest, i (1-t), in perpetuity, where P0 is the ex-interest
value:
P0 = net
][1
dk
ti −
or, without tax:
P0 = dk
i
(v) Future value of S, of a sum X, invested for n periods,
compounded at r% interest:
S = X[1 + r]n
(vi) Present value of £1 payable or receivable in n years,
discounted at r% per annum:
PV = n
r ][1
1
+
(vii) Present value of an annuity of £1 per annum, receivable or
payable for n years, commencing in one year, discounted at r% per
annum:
PV =
+
−n
rr ][1
11
1
(viii) Present value of £1 per annum, payable or receivable in
perpetuity, commencing in one year, discounted at r% per annum:
PV = r
1
-
T4 Part B Case Study 22 May 2011
(ix) Present value of £1 per annum, receivable or payable,
commencing in one year, growing in perpetuity at a constant rate of
g% per annum, discounted at r% per annum:
PV = gr −
1
Cost of Capital (i) Cost of irredeemable preference capital,
paying an annual dividend, d, in perpetuity, and
having a current ex-div price P0:
kpref = 0P
d
(ii) Cost of irredeemable debt capital, paying annual net
interest, i (1 – t), and having a current ex-interest price P0:
kdnet = 0
][1
P
ti −
(iii) Cost of ordinary (equity) share capital, paying an annual
dividend, d, in perpetuity, and having a current ex-div price
P0:
ke =
0P
d
(iv) Cost of ordinary (equity) share capital, having a current
ex-div price, P0, having just paid a dividend, d0, with the
dividend growing in perpetuity by a constant g% per annum:
ke = gP
d+
0
1 or ke = g
P
gd+
+
0
]1[0
(v) Cost of ordinary (equity) share capital, using the CAPM:
ke = Rf + [Rm – Rf]ß
(vi) Weighted average cost of capital, k0:
k0 = ke
+
++ DE
Dd
D
E
VV
Vk
V
V
EV
-
May 2011 23 T4 Part B Case Study
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T4 Part B Case Study 24 May 2011
T4 – Test of Professional Competence - Part B Case Study
Examination
May 2011
Present value tablePresent value of 1.00 unit of currency, that
is (1 + r)-n where r = interest rate; n = number of periods until
payment or receipt.Cumulative present value of 1.00 unit of
currency per annum, Receivable or Payable at the end of each year
for n yearsFORMULAEValuation ModelsCost of Capital