CSA Mock 2 - VYP

Requirement:

Question 1
You work as a management accountant. You are required to write a report to the Board of
VYP that prioritises, analyses and evaluates the issues facing VYP and makes appropriate
recommendations.
(Total marks for question 1 = 90 Marks)

Question 2
You have also been asked to prepare one slide for presentation to Ralph White on one of the
issues.
(Total marks for question 2 = 10 Marks)

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Since 2003, VYP have grown at a steady pace. Following two high-profile awards for
documentaries in 2007, VYP won a large volume of commissions in 2008/9 and 2009/10,
including the introduction of the drama genre into its production portfolio. During these years,
VYP completed a record number of programme hours with associated profits. 2010/11 is
forecast to be yet another profitable year, with some additional commissions already
identified for 2011/12.

At a recent Board meeting at the VYP head office in London, and pleased with the
acceleration in growth, especially within the difficult global economic climate, Steve Yoddil
and John Young proposed that VYP should offer a one-off salary bonus to all employees.
However, Ravi Patel disagreed and countered this proposal. He expressed his concern: “VYP
have grown too big too quickly, and will soon become a victim of its own success. This could
lead to irrevocable damage to VYP’s reputation unless something is done in response.”

Ravi Patel also stated his disappointed to hear of the number of increasing errors that are
being made in project costs and management. He believed that this is being caused by VYP’s
increasingly diverse portfolio. He continued: “Even though there is significant value to be
gained from international ventures, VYP, in its current form, can no longer afford to
concentrate on everything at once. Last year was a success, however resources were
stretched to nearly full capacity and were spread too thin across too many genres. There is a
risk that this will lead to a fall in quality of output. VYP’s future success lies in focus and
discipline.”

Ravi Patel has been an advisor to Steve Yoddil and John Young for the last 7 years. The joint
MD’s trust his guidance, and are looking to understand their strategic priorities during the
remainder of 2010/11 and the following years towards their 10th year anniversary since
being established. Steve Voddil and John Young have shared a vision that at this point in time,
they want VYP to be in a strong operational position to pursue a strategy towards becoming
AIM listed.

Steve Yoddil and John Young have tasked Janet Black and Sara Mills to immediately lead an
investigation to help them reflect on VYP’s strategic direction during the remainder of
2010/11 and beyond.

2011/12 Project Options

This week, VYP have been invited to submit their initial interest towards three potential
commissions for early 2011/12, as follows:

• Option 1 - two documentaries at a total £300,000 commission revenue per hour on behalf
of BBC; and/or

• Option 2 - one-off drama at a total £300,000 commission revenue per hour on behalf of the
ITV; and/or

• Option 3 - three scripted comedies at a total £300,000 commission revenue per hour on
behalf of Channel 4.

VYP will need to respond to the broadcast companies with their initial statement of interest
in the near future. Either Steve Yoddil or John Young will need to sign the letter(s) of interest
at the end of next week.

2009/10 Actuals

Whilst undertaking an analysis of 2010/11 actuals to date in order to understand mid-year
position, an error was noted in how the overheads were captured in 2009/10. A total of
£5.500m of central function overheads and general costs were allocated to genre based on an
incorrect assumption - the ‘number of different types of programmes’ was used (no costs
were allocated to International Sales). This was caused by an incorrect cell reference with a
spreadsheet.

The figure of £5.500m consisted of the following cost groupings that are not allocated
directly to programmes:

• £3.600m of general overheads (such as head office, property, HR and other support
functions);
• £0.400m of specific costs that were solely attributable to drama set-ups (typically £0.200m
for each new drama programme);
• £0.500m specific costs that were solely attributable to the international sales;
• £1.000m hire of specialist equipment generally used across all genre.

VYP should allocate general overheads on the basis of the ‘number of production days for
each programme’ (the same ratio of the ‘total number of programme hours’), and allocate
specific costs to the genre/activity in which they are incurred.

Janet Black is yet unaware of this issue. However, indications suggest this was simply caused
by human error. The Finance Department has been stretched and is currently under
resourced with some key staff currently off with stress related ill-health.

2010/11 Half-Year Position

[Mock note: depending upon when you read this Mock assume this section to be forecast to end Sept10 or actuals if it is after
this date.]

The following have been recorded as 2010/11 half year actuals [forecasts] by genre:

Revenue at half year:
• Documentaries £4.690m
• Drama Series £3.751m
• Scripted Comedy £5.517m
• General Entertainment £2.028m
• International sales £1.040m

Costs at half year:
• Documentaries £3.010m
• Drama Series £3.200m
• Scripted Comedy £4.650m
• General Entertainment £0.840m
• International sales £0.460m
• General overheads and central costs not allocated to genre £2.750m:
o Overhead costs in period (head office etc) £1.800m
o Drama series £0.200m
o International team costs £0.250
o Capital equipment hire £0.500

Total number of programme hours completed by genre at half year:
• Documentaries 25.5 hours
• Drama Series 8.8 hours
• Scripted Comedy 21.9 hours
• General Entertainment 16.5 hours

Full year forecast for number of programme hours to be completed at end of 2010/11:
• Documentaries 51 hours
• Drama Series 17 hours
• Scripted Comedy 44 hours
• General Entertainment 33 hours

The Finance costs at the end of 2010/11 will be £0.140m.

In 2009/10 VYP produced 121.3 programme hours. However, in order to produce this level
of output, VYP’s 60 resources were stretched to near full capacity and VYP exhausted a
significant proportion of its out-sourcing to small specialist companies (equivalent to 400
person years of work). VYP has no capacity internal or external to go beyond this without
incurring significant premium costs. The 2010/11 forecast states that VYP only has the
existing capacity to produce 125 programme hours.

Over recent months, VYP’s in-house resources have expressed their concern over
employment matters. In particular, over two issues:

• increasing use outsourcing and the lose of in-house skill development; and.
• existing resources are extremely busy and working long hours.

Employee Suggestion Scheme

Last month, VYP introduced an Employee Suggestion Scheme (ESS). Employees are
encouraged to submit ideas to the VYP senior management team for areas of improvement to
any of VYP’s operations, or other general ideas. These are then considered with a formal
response. The Scheme offers an award of £1,000 if the idea is subsequently implemented. So
far, five suggestions have been submitted by employees:

• “Employee more people - we are too busy!”
• “Let’s take over some small indie production companies.”
• “Free tea and coffee from the vending machine - 50p per drink is too expensive.”
• “VYP should diversify into local radio production. Opens up a new genre. Janet Black has
previously worked for a small music.”
• “There is more to the graphics department than just fancy images - we should use their
skills to produce internet games, or use this department to support more on-line
broadcasting opportunities.”

New Head Office

At the beginning of 2010, Tom Harrison was tasked to consider options for the location of a
new head office - with a planned move around mid-2011. To date Tom has made little
progress on this other than propose a short list of two possible locations, either central
London or Manchester in the North West (UK). He has focused more of his time considering a
second head office based in the US, arguing that this will help to support his strategy to
increase international sales.

International Sales

Tom Harrison joined VYP three years ago in order to investigate the potential for generating
international sales. This was deemed to be a successful strategy as last financial year this
returned sales of £1.3m (with a high profit margin). The 2010/11 forecast for international
sales will be close to £2.0m.

VYP is keen to break into the US market, and Tom Harrison has spent most of this financial
year in New York networking with major TV broadcast companies. He reports that he has now
established some strong relationships with three mainstream US companies with the
likelihood of some large sales in early 2011/12. His market research suggests that there is a
high demand for UK-made programmes, in particular documentaries and to some extent
dramas, and that this will establish a strong platform for VYP to sell either completed
programmes or programme formats to other international TV broadcast companies. However,
this would require further resource commitment during 2010/11 with a focused effort to
deliver the potential he has identified.

Tom Harrison’s contract of employment includes a performance related bonus of 5% of all
international sales revenues. Sara Mills has highlighted that these sales could generate a
single bonus for Tom Harrison in excess of her annual salary. She believes that her skills are
not being fully recognised and rewarded and has raised her concern of equal opportunity with
Steve Yoddil.

Charity work

Steve Voddil is keen to expand VYP’s charitable support and intends to double the 2009/10
donation to £250,000 at the end of 2010/11. He would like to use this money to set up a
charitable foundation to highlight and support the plight of child labour.

Initially against this proposal, John Young has recognised that this will lead to some
favourable press coverage for VYP and will help to bring a new ethical dimension to some of
its work; the foundation could act as a differentiating capability when tendering for
commissions.

New Junior Positions

John Young is concerned that there are few positions available in TV now for young people to
gain training or an insight in to how TV programmes are made. In early August 2010, VYP
introduced four new trainees as juniors into the company to help them with their career
development and to provide extra support to existing staff. These trainees were offered £240
per week and placed on six-month contracts, with the understanding that should vacancies
be available after this period, then the trainee would be employed full time.

This initiative worked well, which lead VYP to consider introducing six more trainees in the
immediate future. However, Ralph White has been made aware that two of the initial trainees
will be leaving at short notice. They have complained about exploitation of cheap labour,
working long hours and being paid less than the minimum wage. John Young is disappointed
in this, believing that the production business is a competitive industry and is looking to test
the best candidates for a future in TV production and will select those that show real
commitment.

Ralph White has highlighted that if the BBC become aware of this, then they may introduce
a spot audit on VYP if they believe that they are exploiting young people. These spot audits
can be undertaken in order to ensure that the BBC work with indies who are prepared to
follow an ethical employment policy. However, John Young is not concerned with this potential
threat, as even though the BBC issues a code of practice to indies, the BBC does not and
cannot specify rules on working hours or pay, rather it can only refer indies to health and
safety legislation. John Young has instructed Ralph White to employee the six new trainees on
the same terms and replace any that leave.

Availability of Skilled Resources

Even though Ralph White works closely with the programme directors to identify and hire
skilled freelance resources that are required to work on specific programmes, in recent
months, these resources are becoming more difficult to find; they are being offered premium
contracts to work for super-indies.

VYP is aware that it needs to expand the number of resources in order to alleviate existing
constraints imposed by its increasing number of commissions. To help resolve this, John
Young has suggested that VYP should offer higher salaries to attractive skilled resources to
work in and for VYP. In particular, he proposes that VYP should also offer generous sales
bonuses and to headhunt the best resources available.

Ralph White expressed a concern that VYP’s HR department is too small to offer this service
and that an agency could undertake this on behalf of VYP, but this too would come at a
premium cost.

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