Management Accounting

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In case the scenario provided in May 2013’s T4 exam wasn’t dramatic enough, the following first act in a two-part reimagination of the BVS case – ‘High noon in the boardroom’ – should bring its key issues to life

T4 part B is designed as a final test of competence for aspiring management accountants. As such, it focuses on the skills of integration, judgement and logic. These higher-level skills can be difficult to pinpoint in CIMA’s model answers, since they are subsumed within a necessarily comprehensive report.

Here I will offer an alternative account of how the scenario in May 2013’s exam might have played out in a real boardroom, highlighting the need for candidates to show a clear sense of purpose in rationalising a complex set of issues into a cohesive action plan. This is the first of two articles focusing on the recent BVS case. Before reading it, you should review the case and the model answer, both of which can be found on the CIMA website at

Toby Baum called the top managers of BVS to order for their quarterly board meeting. “Progress has been good so far,” he said. “We can congratulate ourselves on the JAR FM buy-out and on getting the business on to a stable footing. But several issues remain and I suspect that the decisions we take today will have a significant impact on our ability to hit our 2015-16 flotation target. We must make these decisions with a coherent overall strategy in mind.”

With that, he handed over to his FD, Annika Larsen, to go through the figures. “Thank you, Toby. As you all know, we intend to float in 2015-16 to provide the agreed exit route for our venture capital partner,” she said, nodding at Jonas Kral, the non-executive director representing PIE, which had largely funded the equity part of the buy-out in 2010.

She continued: “We’re broadly on track with regard to growth and profit. But, as Toby has stressed, we have some urgent matters to address. Foremost is the need to re-tender for the government contract. In order to achieve our flotation plan, we must present a picture of stable growth to the market. We don’t wish to jeopardise that by losing the contract. I believe it’s paramount that we keep it – at any price, as long as we don’t make an absolute loss. I’m therefore proposing that we re-tender at minus 8 per cent of our present prices.”

There were gasps of disbelief around the table. Philip Beck, sales customer support manager, was first to respond.

“Wouldn’t that be admitting defeat too readily, Annika? Didn’t you mention the other day that other bids are coming in at about minus 6 per cent? We should just be matching those at the very least, given our record in providing a good service,” he said. “Even the government would be mad to go to any of our rivals.”

“The figure that you’re referring to is privileged information, so it would not be ethical for us to use that,” Larsen replied. (She had actually originally proposed minus 6 per cent to Baum, but was surprised when he strongly opposed that approach. Her present position reflected a necessary change of heart.)

“Maybe you don’t think so, but my house is at stake in this business. I’m working all hours to fund my kids’ private education,” Beck retorted. “Where will your ethics be if I have to pull them out just before their final exams?”

Larsen looked apprehensively around the table. Some people were nodding, but others were showing clear disdain for Beck’s views. Sensing a tricky situation, she tried to move things on by saying: “OK, let’s agree to differ on the ethics. If you’d prefer a good commercial reason, then that information may be wrong. It might even be intended as disinformation. What if everybody went in at the same price? That could result in an inquiry - and any hint of malpractice would scupper our flotation.”

Jan Grein, the IT manager, was in Beck’s camp. “Minus 8 per cent would still have a big impact on our bottom line just because the government has said: ‘We want a price reduction.’ What if this gets out and all our other customers want the same discount?” he asked Larsen.

“But what if we lose the government contract and even only a couple of our big customers find out? We would look really vulnerable then,” countered Leo Willems, the operations director.

Baum sat back and allowed people to let off steam for a few minutes. Finally he called for order and Larsen continued.

“Under my plan we would still make a useful contribution to our considerable fixed costs, we wouldn’t need to cut jobs and we wouldn’t have to pay subcontractors $1 an hour on the existing charge rates to compensate them for the reduced business volume,” she said. “And we do have other issues to tackle.”

“Number one being the tyre pressure checking project,” Beck said.

“No, you need to prevent your staff from stealing,” Kral said. “How can I tell PIE that this is a properly run firm when its workers are clearly out of control and helping themselves to vehicle parts when it suits them? We at PIE are taking a considerable risk with this project and some of the discussions you’re having about the use of privileged information worry me. We have other investments that depend on public-sector contracts and we cannot risk our good reputation.”

Carmen Kemp, the HR manager, said: “While the issue of staff using the work-shops to service their own cars needs addressing, it’s not as straightforward as it might seem, Jonas. It is standard practice in the trade and it occurs only when there is no other work, while their use of spares is restricted to washers and bolts, not commercial vehicle parts (which don’t fit their own cars). This way they’re kept busy and interested rather than idle and disengaged when there is no other work. I have plans to tackle the issue, but let’s all focus first on the more crucial issue of increasing our revenue.”

“And on that score customer profitability analysis is the crucial issue,” Willems argued. “The sales team is earning big bucks by giving business away while my staff are working all hours. If you ask me, we’re looking more like busy fools than a professional service organisation.”

“That’s unfair,” Beck snapped. “I did not set the prices or the bonus structure. The plan at the time of the buy-out was to win business, earn a reputation for quality and then increase our prices. We were specifically asked to target smaller clients so that we didn’t end up depending on a few big contracts. Given our problem with the government contract, it looks as though the plan was right. You ought to be thanking the sales team for building a mixed portfolio of business.”

Realising that Beck had mounted a fair defence, Willems was determined not to let Larsen off the hook. “But if we don’t know what the profitability of each type of customer is, we could be making very big mistakes, Annika. If we’re conceding that we don’t have those figures to hand, how on Earth can you sit there and recommend that we take an 8 per cent hit on the government contract? It’s one of our more difficult customers and maybe we’re already making a loss.”

Willems had often made his feelings clear that Larsen was enjoying a nice life dealing with financiers and the like while failing to look after the basics of management accounting. His criticism here was verging on the personal, but Baum knew he had a point: BVS had been pursuing growth, but perhaps at too great a cost. It was clear that customer profitability analysis should have been a higher priority. But Baum also needed to prevent his team from disintegrating, so he had to give Larsen his backing.

“OK,” he said. “Thanks, everyone, for being frank and discussing this in detail. It isn’t easy and some compromises will be needed. Let’s have a break and reconvene in 30 minutes. I’ve just remembered that I have to take an international call and I need Annika to join me.”

Larsen tried not to show that she had no idea what Baum was talking about. There was no such call as far as she was aware, but she knew that, on the basis of proceedings so far, she was about to have a “serious chat”. Things were not going well.

She looked dejected as she sat down with Baum in his office. “Chin up. No one is blaming you for this, although you are taking the flak for some of our growing pains just now,” he said. “What we need is a clear, confident steer. There are many ways in which we can slice and dice the problems we’re facing. You need to present a coherent view. Show them that you have sound judgement and ensure that your recommendations are logical, whatever they may be. The most important thing is that they represent an integrated solution.”

The concluding act will appear in the next issue.

Ian Herbert is a senior lecturer in accounting and financial management and deputy director of the Centre for Global Sourcing and Services at Loughborough University’s School of Business and Economics.





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