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The Chartered Institute of Management Accountants 2011

T4

TestofProfess

ionalCompeten

cePartBCas

eStudyExamin

ation

T4 Part B Case Study ExaminationTuesday 1 March 2011

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination beginsduring which you should read the question paper and, if you wish, makeannotations on the question paper. However, you will not be allowed, underany circumstances, to begin using your computer to produce your answer orto use your calculator during the reading time.

This booklet contains the examination question and both the pre-seen andunseen 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 markedagainst, is included on page 14.

Maths Tables and Formulae are provided on pages 21to 24.

Your computer will contain two blank files a Word and an Excel file.

Please ensure that you check that the file names for these two documentscorrespond with your candidate number.

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 - 19

Maths Tables and Formulae 21 - 24

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T4 Part B Case Study 2 March 2011

BeeZed Construction Services (BZCS) case

Construction industry background

Due to the current economic climate, the demand for building work in Europe has fallen overallby over 10% from 2008 levels. Furthermore, it is forecasted that the volume of construction workwill not increase until the start of 2011. Many companies in the construction industry havesuffered 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 manycountries worldwide. Few large construction companies (except some house buildingcompanies) operate only within their national boundaries. Most construction companies haveestablished a range of expertise in specific types of project, such as construction of officebuildings, hospitals, airports, roads or schools. This expertise allows the construction companiesto use their skills and reputation to bid for, and win, further projects in Europe and in othercountries around the world.

Many large construction projects are financed using Private Finance Initiatives (PFI). PFI isdefined as private finance being used to fund public infrastructure work. Private finance isdefined as finance provided mainly by banks, institutional investors and pension funds. ThePrivate Finance Initiative (PFI) is a way of creating Public Private Partnerships (PPP). PPP isdefined as agreements between public bodies or central governments and private constructioncompanies to deliver the agreed projects. Examples of public infrastructure works are roadbuilding and construction of new schools. PFI projects also involve the private sectorconstruction company taking on responsibility for providing an on-going service. This typicallyincludes maintaining and managing the project over the life of the building or for a fixed term of20 years or longer. Therefore, PFI projects generate revenue streams for the constructioncompany 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 inthe project and this has generated favourable outcomes in respect of the percentage of projectscompleted 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 isfixed at the contract stage, subject to changes in specifications agreed duringconstruction.

2. Cost plus contracts this is where the revenue for the private construction companywill 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 companywill include the contracted construction revenue as well as revenues for on-goingmaintenance 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 constructionproject is summarised in the following steps:

1. A company or government body will invite tenders2. The construction company will tender for the contract by preparing a detailed bid3. A company or government body will select its preferred contractor4. The bid price and the contract details will be negotiated and agreed5. Contracts are then signed6. Selection and appointment by the construction company of suppliers for manpower

resources (sub-contractors), as well as for materials7. Work commences

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March 2011 3 T4 Part B Case Study

It should be noted that during construction work, there are often many requests for changes tothe 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 benegotiated and additional revenues agreed before the changes can be made.

BeeZed

BeeZed is a construction and property management company listed on a European stockexchange.

BeeZed has 3 wholly owned subsidiary companies which are:

BeeZed Construction Services (BZCS) concerned with a wide range of constructionprojects

BeeZed Professional Services (BZPS) concerned with offering consultancy services

BeeZed Building Support Services (BZBSS) concerned with property managementand maintenance services.

In respect of PFI projects, the parent company, BeeZed, will sign the overall contract for theproject. BZCS will be involved only with the construction work and BZBSS will manage theongoing maintenance and property management work. When a PFI contract is signed, theparent company, BeeZed, will agree on how the revenues will be split between BZCS andBZBSS.

This case study is concerned ONLY with BeeZed Construction Services (BZCS).

BZCS

BZCS has many construction projects around the world, ranging from road building, constructionof public sector buildings, including hospitals, schools and university buildings to commercialcontracts for office buildings. Some of the construction projects that BeeZed is involved with arefinanced by PFI. However, only the revenue related to the construction project is allocated toBZCS. The revenue relating to the ongoing maintenance and property management work isallocated to BZBSS and is not included in this case study. BZCS has a good reputation in thisindustry for quality and safety as well as its ability to deliver projects on time. These are allcritical success factors for keeping its existing customers content and for providing a basis forwinning future business.

BZCS has 6 divisions, which are:

1. Office Buildings Division includes building bespoke office buildings for specificcompany orders, as well as speculative construction of office buildings in city centres oron business park complexes.

2. Sports Facilities Division includes the construction of large sports stadiums as well asthe 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 smallerhealthcare facilities as well as schools and university facilities.

6. Energy Projects Division includes the construction of gas storage facilities and powerstations.

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Each of these 6 divisions is headed by a Commercial Director who is responsible for all of theprojects undertaken by that division.

A summary of the organisational structure for BZCS, effective from 1 January 2011, is shown inAppendix 1 on page 9.

In the year ended 30 September 2010, BZCS generated total revenues of 1,267 million andoperating profit of 34.7 million.

BZCS is a wholly owned subsidiary of BeeZed. An extract from the accounts for BZCS is shownin Appendix 2 on page 10.

All of the non-current liabilities represent inter-company long-term loans from its parentcompany, BeeZed. BeeZed has a range of non-current liabilities with several external bodiesincluding bank loans.

BZCSs cash flow statement for the year ended 30 September 2010 is shown in Appendix 3 onpage 11.

Geographical analysis of revenues

BZCS currently has construction projects operational throughout Europe, the USA, the MiddleEast and in some other countries, mainly in Asia.

The geographical analysis of the total construction services revenue of 1,267 million for theyear ended 30 September 2010 was as follows:

Analysis of revenues and operating profit by division

The revenues and operating profit for each of BZCSs 6 divisions for the year ended 30September 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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Revenue Operatingprofit

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 BZCSs PFI construction projects, BZBSS, which is part of the BeeZedgroup, earns additional revenues for a further 10 to 30 years for the ongoing maintenance andproperty management of the PFI projects.

Whilst BZCS prepares annual financial accounts, all of the accounting for each constructionproject is accounted for on a project basis. All direct costs are allocated to the respective project,including salary and associated costs for all of BZCSs employees working on each project aswell as sub-contractor costs. All non-project based overhead costs are allocated to projectsusing activity based costing techniques based on appropriate cost drivers.

The monthly management accounts show the following information for all on-going operationalconstruction 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 beincurred 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 responsiblefor 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 issuesthat have occurred for each project on a monthly basis. These presentations are to seniormanagement 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 thedelivery of the project against plan and any significant operational problems or successes. Ifthere is a significant problem, the Project Manager will be expected to travel to BZCSs HeadOffice to present the information to the BZCS Board. Where there are no operational or financialconcerns, 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 BZCSs order book at the 30 September 2009. The order book

represents the value of contracts signed which have either not yet been commenced or arecurrently in progress.

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abilities to divert waste from landfill sites. Last year, ended 30 September 2010, BZCSs targetwas to dispose of, or recycle, 60% of site waste that would otherwise have ended up in landfillsites. BZCS exceeded this target and disposed of, or recycled, 62% of its waste from itsconstruction 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 buildingsare 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 andhospitals, use renewable energy sources and BZCS works closely with the architects to ensurethat the buildings will help to deliver planned reductions in carbon emissions.

BZCSs 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 teamsheaded up by Bid Managers in each of BZCSs 6 divisions. When a bid has been won and acontract 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 BZCSs 6 divisions usually has between 1 and 5 projects in progress at any point intime. Furthermore, each of the 6 divisions is usually involved in the bid preparation and thebidding process for several other proposed projects. Whilst BZCS has been the preferredsupplier for some European government departments in the past for infrastructure projects andcommunity projects, these large customers are now imposing increasingly strict criteria forsuppliers 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 theprojects for which it bids for.

In order to balance the risk of relying on specific construction sectors and a relatively smallcustomer 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 ofdifferent 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 bidpreparations taking place for a further 10 or more projects. The bid value of a contract variesgreatly, ranging from 5 million to over 800 million for individual contracts. Contract durationoften spans more than 2 years.

As at the end of December 2010, BZCS has 14 projects currently operational, of which 10 aredue for completion during 2011 and the remaining 4 are due to be completed in 2012.

Bid tendering process

In the UK, the Governments regulator, the Office of Fair Trading (OFT) has been undertakinginvestigations of bid-rigging in the construction industry. The OFT has established that there iswidespread evidence of construction companies which have been involved in manipulating thebidding process. This has allowed specific companies to win Government awarded constructionprojects at higher prices than could be achieved through a fair competitive bidding process. Thison-going investigation has involved the OFT accessing paperwork for over 100 contracts from20 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 constructionproject that it won the contract for in 2008. The project is proceeding on time and it is forecastthat it will not over-run the agreed fixed price budget.

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BZCS is waiting to hear the outcome of the OFTs investigation into this specific contract. BZCShas included a provision for a contingent liability, for a possible fine, in the accounts for thecurrent 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 tobecome more competitive following the downturn in construction projects due to the currenteconomic environment. The Board of BZCS recognised the need to become more flexible and tosub-contract a greater volume of its core construction work. Following a Board decision in March2009, BZCS reduced the number of its employees by 1,800 within 1 year. At the end ofSeptember 2010, BZCS had 10,100 employees. Many of BZCSs ex-employees have joinedsome of BZCSs supply chain companies, which are BZCSs sub-contractors. Therefore some ofthese people work on the same project as previously but now are employed by sub-contractorsor have become short-term freelance contractors to BZCS.

BZCS has also focused on winning a wider range of private construction projects as manyEuropean 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 inAppendix 1 on page 9.

Within each division, the Commercial Director has responsibility for each of the ProjectManagers who are each responsible for one operational project. Projects that are operationalare defined as a project in which the contracts have been signed but construction is notcomplete. Each division also has Bid Managers responsible for preparing bids or tenders fornew 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 ongoingproblems or require minor rectification work after the project has been completed.

Re-structuring of the Procurement DepartmentBefore the re-structuring of BZCS, each division was responsible for the procurement for each ofthe projects under its control. Effective from 1 January 2011, there is a new central ProcurementDepartment for the whole of BZCS. This is under the direct control of an experiencedProcurement Director, who reports directly to BZCSs Managing Director. The new ProcurementDirector was recruited from a rival construction company and joined BZCS in October 2010.

The employees who worked in the procurement departments within each of BZCSs 6 divisionshave been brought together in one centralised Procurement Department, based in Europe. Thisshould help to facilitate better control over purchases and achieve higher bulk discounts,especially for some raw materials. On an operational level, all of BZCSs Project Managers atconstruction sites in each country will now make all purchases through the new centralisedProcurement 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 supplierswithin each country in which it operates. Where possible, the preferred supplier will be anotherlarge international company that can provide materials to BZCS in many of the countries inwhich BZCS has on-going construction projects. The Finance Department is working closelywith the Procurement Director in the selection and appointment of new and existing suppliers.The re-structuring of BZCSs Procurement Department has resulted in an overall reduction inheadcount in procurement employees. The new centralised Procurement Department will helpmeet BZCSs target for Head Office cost savings.

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March2011

9

T4PartBCaseStudy

Appendix1

BZCSsnew

organisationalstructur

eeffectivefrom1

January2011

BZCS

Managing

Director

Sports

Facilities

Division

Commercial

Director

Office

Buildings

Division

Commercial

Director

Environmental

Pro

jects

Division

Commercial

Director

Infrastructure

Projects

Division

Commercial

Director

Community

Projects

Division

Commercial

Director

Energy

Projects

Division

Commercial

Director

BZCS

Finance

Director

BZCS

Public

Relationsand

Marketing

Director

B

ZCS

Procu

rement

Dir

ector

Post

Completion

Manager

Project

Managers

foreach

project

BZCS-

ITManager

BidManagers

f

oreach

new

proposed

p

roject

WithineachDivision

Sales&

Marketing

Managers

foreach

project.

BZCS

Human

Resources

Director

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Appendix 3

Cash Flow Statement

Year ended30 September 2010

million millionCash flows from operating activities:

Profit before taxation (after Finance costs (net)) 27.4

Adjustments:Depreciation 88.0Finance costs (net) 7.3

95.3(Increase) / decrease in inventories 0.3(Increase) / decrease in trade receivables 0.8Increase / (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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Appendix 4

BZCSs Mission Statement and CSR initiatives

BZCSs mission statement is:

To be the preferred supplier for quality construction projects and to strive to implement along-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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BZCS - Construction company case Unseen material provided on examination day

Additional (unseen) information relating to the case is given on pages 15 to 19.

Read all of the additional material before you answer the question.

ANSWER THE FOLLOWING QUESTION

You are the Management Accountant of BZCS.

The Commercial Director of the Sports Facilities Division has asked you to provideadvice and recommendations on the issues facing this division of BZCS.

Question 1 part (a)Prepare a report that prioritises, analyses and evaluates the issues facing the SportsFacilities Division of 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), you should draft an email to theCommercial Director of the Sports Facilities Division on the advantages anddisadvantages of attempting to complete the Binnet City sports complex project before

the end of December 2011, together with your recommendation on this issue.

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 Criteriashown on the next page.

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Assessment Criteria

Criterion Maximummarks

availableAnalysis of issues (25 marks)

Technical 5

Application 15

Diversity 5

Strategic choices (35 marks)

Focus 5

Prioritisation 5

Judgement 20

Ethics 5Recommendations (40 marks)

Logic 30

Integration 5

Ethics 5

Total 100

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BZCS - Construction company case unseen material provided on examination day

Read this information before you answer the question

Sports complex in Binnet

BZCS won the contract to build a replacement sports complex in the European City of Binnet toserve its population of 400,000. The project is funded wholly by the local government. Theexisting local sports complex is over 30 years old and must close by 31 December 2011, as itdoes not meet new European Health and Safety standards, which will be effective from 1January 2012. The contract is to build a multi-functional sports complex on a new site, withindoor sports facilities for a range of sports, a gym, an indoor 50 metre swimming pool andoutdoors athletics facilities. BZCS, or any part of the BeeZed group, will not be involved with on-going maintenance of this sports complex.

BZCS has been involved with this proposed project for over 2 years and submitted its bid inOctober 2009. Work was originally scheduled to start in December 2009. However the local

government of Binnet delayed its selection of the construction company. BZCS only signedcontracts in September 2010. The contract is for a fixed price of 64.0 million. The contractincludes a clause for penalties for late delivery by BZCS. The penalties comprise a fixed penaltyof 3.0 million if the sports complex is not fully completed and delivered by 31 December 2011(week 52), even if the project is delivered 1 day late. There are further penalties of 0.1 millionfor each week the sports complex is delivered late beyond week 52 of 2011.

The plans prepared for the bid in October 2009 were based on costs totalling 57.6 millionwhich generated an operating profit for BZCS of 6.4 million, a 10% operating profit margin.

Change in Project Manager

When the contract was signed in September 2010, BZCS appointed a Project Manager. Work

on site commenced in October 2010. The project plan was to deliver the completed project byOctober 2011 and to work 5.5 (five and a half) days per week, which is normal in this industry. Aclause in the contract with Binnets local government stated that BZCS would only be allowed towork 7 days each week for a maximum of 22 weeks during the contract period.

The Project Manager responsible for the Binnet sports complex has recently resigned and heleft BZCS on 4 February 2011, after serving his 1 months notice period. BZCSs seniormanagement were slow to appoint a successor as they considered this project was running asplanned. All of BZCSs Sport Facilities Divisions Project Managers had been allocated to otherprojects, including to Olympic Games construction projects. A new Project Manager, RogerPebble, has now been appointed. He had previously been a Project Manager in BZCSsCommunity Projects Division. He arrived on site yesterday, Monday 28 February 2011.

Procurement issues

Roger Pebble has identified that a number of activities that should have taken place by nowhave not occurred. This includes placing the order for the agreed specification of the sportscomplexs glass panels. These are to be made from special glass that retains heat, which willreduce heat loss from the building. These should have been ordered in early January 2011. Thespecialist supplier has stated that there is a 16 week lead time. There are no alternativesuppliers for these specialised glass panels. Furthermore, alternative suppliers of standard glasspanels cannot deliver any quicker.

The new centralised Procurement Department was set up on 1 January 2011. The newProcurement Director had thought that this order for the glass panels had already been placedby the Project Manager before he left BZCS. With the changeover to the central Procurement

Department, and then the resignation of the previous Project Manager, this key contract has notbeen placed with the supplier.

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The contracted specification for the interior of the sports complex includes high usage ofrecycled materials and wooden flooring using wood from sustainable forests. However, it hasbeen identified that the lead time from one particular supplier is longer than previously advised.Therefore, obtaining these materials may cause a further delay to the completion of the projectunless the orders are placed this week. Any possible delay in ordering these materials is not

included in the 12 weeks for Activity H shown below.

Sports complex project running late

Roger Pebble has reviewed the projects progress on site and he has used BZCSs projectmanagement system to prepare a critical path analysis. The critical path analysis is shown inAppendix 5 to this unseen material (Appendices 1- 4 are included in the Pre-seen material). Hehas discovered that the project has not been well managed and that the project is running late.He communicated his concerns to his line manager, BZCSs Commercial Director for the SportsFacilities Division. BZCSs Commercial Director for the Sports Facilities Division has askedRoger Pebble to work with you, the Management Accountant, to assess what activities still needto happen and also to prepare an update on the projects profitability.

Roger Pebble has also identified an activity that had not been included in the original costings.This is Activity B, which is additional external drainage and is forecast to cost 0.9 million.

Some of the activities shown below are dependent on others. For example, the table belowindicates that Activity C cannot begin until Activity A is complete. The critical path in Appendix 5is based on the activities below which are required to complete the sports complex:

Activity Description of activity Precedingactivity

Duration Cost ofeach

activity

A Order for sports centre glass panels-

Weeks

16

million

9.0

B Inadequate external drainage newdrainage to be installed

- 2 0.9

C Completion of the roof and installation ofglass panels to make the building watertight

A 8 3.6

D Construction of all interior walls andconstruction of the swimming pool

C 4 2.2

E Initial fixing of electrics and water supplies D 3 2.0

F Construction of all outdoor athleticsfacilities

B 8 4.2

G Outdoor spectators stand constructed B 3 1.6

H All interior construction completed E 12 5.2

I Final fix of electrics and water supplies H 5 4.0

J Swimming pool completed, filled andtested

I 3 7.8

K Construction of final road surface, carparking and landscaping

F and G 2 1.2

Totals 66 weeks 41.7 m

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The BZPM (BZCSs Project Management system) has prepared the forecast costs for eachactivity up to completion, based on the originally planned number of BZCSs employeesallocated to this project and sub-contractors existing contracts. The manpower costs included ineach of the above activities cannot be reduced.

It is now the first week in March 2011 (week 9) and next week is the start of week 10.

Up to and including the end of the current week (week 9), the actual cumulative expenditure(including accruals) for this project is 16.4 million.

Proposals to use additional manpower resources

BZCS has a choice to incur higher costs by using additional manpower resources (both its ownemployees and sub-contractors) to try to deliver the project by the end of week 50 in 2011,allowing a possible further slippage of 2 weeks before the contract penalty payments would beimposed. Roger Pebble has not yet informed the local government of Binnet of the potentialdelay, as he is waiting for a decision by the Commercial Director of the Sports Facilities Divisionon what possible action could be taken to bring forward the completion date.

There are 3 proposals. It should be noted that alternatives 1 and 2 are mutually exclusive.

Proposal 1 Working 7 days each weekTo increase the working week from 5.5 days to a full 7 day working week for all employees andsub-contractors currently on site. The additional cost, for working 7 full days each week, i.e. togenerate an extra 1.5 days each week, is 90,000 per week. This option could only operate fora maximum of 22 weeks, generating an extra 33 days in total. Proposal 3 below, usingadditional manpower can be used together with this proposal.

Proposal 2 Overtime workingTo pay overtime to employees and sub-contractors currently on site, in addition to the normal5.5 working days each week. Normal working hours are 40 hours per week. With 11 hoursovertime per week, this would approximately generate an additional 1.5 days over each working

week. The total overtime that would be incurred each week is forecast to cost an additional100,000 per week, covering all employees and sub-contractors on site. This option cannot beused at the same time as Proposal 1, shown above.

Proposal 3 Additional manpowerTo increase the number of manpower resources (some of BZCSs employees but mainly sub-contractors) allocated to this project. This would cost 350,000 for each week saved.

Roger Pebble considers that irrespective of whichever of the above 3 proposals is used to bringthe project forward, that all employees and sub-contractors on site should be awarded a bonus ifthe sports complex is completed by the end of week 50. The bonus is forecast to cost 200,000in total.

The Commercial Director of the Sports Facilities Division has asked you, as ManagementAccountant, to work with the new Project Manager, Roger Pebble. He has asked you to reportback on the following, assuming all actions start from the beginning of week 10:

(i) To calculate the week number when the sports complex will be completed, assuming noadditional manpower or extra hours are worked on the project.

(ii) To calculate the forecast full cost of the project and the operating profit for the project,assuming no additional manpower or extra hours are worked on the project.

(iii) To calculate the additional costs for each of the above 3 proposals to provide additionalmanpower resources so as to deliver the project by week 50 of 2011, at the latest.

(iv) To calculate the revised operating profit for the project for each of the above 3 proposalsto provide additional manpower resources with, and without, the proposed bonus.

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Project management IT system

BZCSs Commercial Director of the Sports Facilities Division is concerned that BZCSs projectmanagement IT system, BZPM, has not been sufficiently effective at managing the Binnetproject. It appears that BZPM produced its usual monthly reports including warning reports andemails to the Project Manager who left the company at the start of February 2011. The system

also allowed the Project Manager to over-ride warnings and adjust the critical path for activitiesthat the Project Manager had considered had been undertaken, such as the lack of theplacement of the order for glass panels. BZPM currently shows that the order for the glasspanels was placed in January 2011, despite the fact that the order had not been placed.

Roger Pebble, as well as other BZCS Project Managers, has often complained about the lack ofconfidence Project Managers have with some of the data held in BZPM. Sometimes purchasesof materials or sub-contractors invoices are allocated against the incorrect project number orthe incorrect activity within a project. Some Project Managers are doubtful about the accuracy ofsome of the data in BZPM and keep their own records.

The Commercial Director of the Sports Facilities Division has asked you, as ManagementAccountant, to work with the new Project Manager, Roger Pebble, to report on how BZPM could

be improved.

Disposal of construction site waste

BZCS uses specialist sub-contractors to dispose of waste from its building sites in a safe andresponsible way. Across most European countries, BZCSs sub-contractor for site wastedisposal is Waste ZX. The rolling annual contract with Waste ZX was renewed in January 2011but the renewed contract now excludes the disposal of soil and plants. The ProcurementDirector appointed a new sub-contractor, Earth YT, in January 2011 which specialises in thedisposal of soil and plants at a lower cost than previously charged by Waste ZX.

Some environmental protesters have recently publicised significant damage to a lake near to thecity of Binnet as a result of the dumping of vast quantities of soil and plants which have blocked

the flow of water from the river leading into the lake. The environmental protesters are blamingEarth YT.

BZCSs Public Relations and Marketing Director has been involved in an internal investigationfollowing the adverse publicity. He has discovered that some of the dumped soil has originatedfrom BZCSs building sites, including the sports complex project in the city of Binnet. He isplanning to recommend to the BZCS Board that BZCS cancels its contract with Earth YTimmediately. He is also recommending to the BZCS Board that BZCS should refuse to acceptany responsibility for the clearing up of the river and lake.

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Appendix 5

Critical path analysis for the City of Binnet sports complex as at end week 9 2011

Note: All numbers shown above are the time taken, in weeks, to complete each activity.

End of unseen material

8 4 12 5 3

2 8

2

A C D E H I J

B F

K

G

16

3

3

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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 untilpayment 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 0.9092 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.8263 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.7514 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.6835 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.6216 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.5647 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.5138 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.4679 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 0.35012 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.31913 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.29014 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.26315 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.23916 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.21817 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.19818 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.18019 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.16420 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 0.6943 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.5794 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.4825 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.4026 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.3357 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.2798 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.2339 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 0.16211 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.13512 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.11213 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.09314 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.07815 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.06516 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.05417 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.04518 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.03819 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.03120 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

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Cumulative present value of 1.00 unit of currency per annum, Receivable or Payable at the end of

each year for nyears

+

r

r 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 0.9092 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.7363 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.4874 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.1705 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 4.3557 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.8688 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.3359 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 6.49512 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.81413 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.10314 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.36715 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 7.82417 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.02218 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.20119 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.36520 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 0.8332 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.5283 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.1064 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.5895 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 3.3267 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 3.8379 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.03110 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 4.32712 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.43913 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.53314 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.61115 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 4.73017 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.77518 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.81219 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.84320 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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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 isthe ex-div value:

P0 =

ek

d

(iii) Ordinary (Equity) share, paying an annual dividend, d, growing in perpetuity at a constantrate, 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, whereP0 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 nperiods, compounded at r% interest:

S = X[1 + r]n

(vi) Present value of 1 payable or receivable in nyears, discounted at r% per annum:

PV=n

r][1

1

+

(vii) Present value of an annuity of 1 per annum, receivable or payable for nyears,commencing in one year, discounted at r% per annum:

PV=

+

nrr ][1

11

1

(viii) Present value of 1 per annum, payable or receivable in perpetuity, commencing in oneyear, discounted at r% per annum:

PV=

r

1

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(ix) Present value of 1 per annum, receivable or payable, commencing in one year, growingin 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, andhaving a current ex-div price P0:

kpref=

0P

d

(ii) Cost of irredeemable debt capital, paying annual net interest, i(1 t), and having acurrent ex-interest price P0:

kdnet

=

0

][1

P

ti

(iii) Cost of ordinary (equity) share capital, paying an annual dividend, d, in perpetuity, andhaving 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 adividend, d0, with the dividend growing in perpetuity by a constant g% per annum:

ke = g

P

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]

(vi) Weighted average cost of capital, k0:

k0 = ke

++

+DE

D

d

D

E

VV

Vk

V

V

EV

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T4 Test of Professional

Competence - Part B Case StudyExamination

March 2011

T4_Mar11_fullpaper_240111

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