Colin Drury, Management and Cost Accounting Moult Hall

Moult Hall
Adapted by Jayne Ducker, Antony Head, Brenda McDonnell (Sheffield Hallam University) and Susan Richardson (University of Bradford Management Centre)
This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791 3. The North West Trust for the Protection of Wildlife The North West Trust for the Protection of Wildlife is a charitable organisation which undertakes activities in Lancashire, the Wirral, South Cumbria and the northern tip of Cheshire. It is managed by a Committee of twelve members and was set up some years ago with the following aims: to encourage farming practices in the region which will not endanger local animal and plant life; to enable the region's residents to enjoy the local countryside; and to educate the region's young people on how to look after and enjoy the local countryside and wildlife.

The Committee members stand for re-election every three years even though, in practice, the composition of the Committee has remained virtually the same for the last twelve years. The Committee is elected by members and there has been a very low percentage of members who have exercised their power to vote in the past. The Committee interprets this to mean that the members are satisfied with the Committee's decisions and have therefore seen no need for innovation or a change in direction. Thus, the Committee has continued to work towards achieving the Trust's stated aims, which are awarded equal emphasis and share of resources. The Trust's geographical region is defined by its Articles of Association and within this locality the Trust attracts income through fund-raising activities. In recent years the total income raised by this means has been in the region of 800,000 per year, all of which is re-invested into activities within the region to stimulate the fulfillment of the Trust's three aims. The Trust can claim some moderate success in this. In the early years, the Trust relied solely on the vigorous efforts of its volunteer force. More recently it has employed three full-time staff to co-ordinate fund-raising activities, to plan and implement the projects invested in, to undertake administrative tasks and to harness and capitalise on the energies of the volunteer force. Moult Hall - The Bequest Doreen Barkwith was a founder member of the Trust and she had served on the Committee for the last twelve years. She was well-loved and respected by other Committee members and had always worked tirelessly, in any way that she could, to achieve the Trust's aims, to which she was totally committed. Sadly, Doreen died recently after a short illness. Doreen was a very wealthy lady with numerous valuable properties throughout England and, to the surprise of the members of the Trust, she most generously bequeathed to it a substantial residential property known as Moult Hall. Moult Hall is set in fifty acres of mature woodland in rural mid-Cheshire, a number of miles outside the Trust's geographical boundaries. It is an elegant country house with numerous bedrooms and reception rooms and retains many of its original decorative features. In addition, there is a substantial stable block to the rear of the house. Added to its physical attractions, Moult Hall's location is extremely desirable, in that it is close to important nesting sites for the first red kites recently re-introduced into England. This re-introduction followed the success of similar projects in Wales. The Trust supports the work of the national charity responsible for these projects, as the birds were common in this part of England one hundred years ago but by 1960 had been completely wiped out due to the development of modern farming methods, particularly the use of pesticides which killed small rodents (the main food source for red kites).

Colin Drury, Management and Cost Accounting Moult Hall

Doreen attached to the bequest a request that the Trust must comply with in order to become legal owners of the Hall. The request was that her nephew, Winston Barkwith, be appointed Chairman of the Trust, with full voting rights. The Committee was overwhelmed by Doreen's generosity and, unable to see any obstacle to the appointment, welcomed Winston into the fold. Of course, the Committee assumed that Winston had been well primed by his aunt to 'keep up the good work' and that he shared her values and goals. Three months have now passed since Doreen's death. Moult Hall is now the property of the Trust and Winston has been appointed as Chairman. A Committee meeting has been arranged for next week to discuss how to make best use of the property and Winston has put forward a proposal for consideration. Winston's Proposal for the development of Moult Hall The Committee members have been given details of Winston's proposals to consider before next week's meeting. Winston suggests that Moult Hall could be used as a cash generator and that this cash could then be used to further the aims of the Trust within its own area. His idea is that the Hall and its grounds be used to offer residential quad bike courses for stressed executives from the City and he believes this could be a big money-spinning venture. As a former financial analyst, with many contacts in the City, Winston is confident that the project would be a success. It is clear that he has considered the matter closely and he has intimated that he would be prepared to manage the venture. On this basis, he would offer a fixed income of 750,000 per year to the Trust for the use of the premises and would retain any surplus for himself. Some members asked what the 'quad bike course' involved and Winston explained that quad bikes are off-road four wheel cycles, powered by a petrol engine. They are extremely noisy, which is part of the attraction, and provide the rider with a very exhilarating buzz of excitement as they bounce along the uneven countryside. As many routes as possible would need to be provided within the grounds and Winston has suggested that several tracks be formed which go through the woodland of the estate. This would mean felling many mature trees, with a likely loss of habitat to many species of animal and plant life. Garaging facilities would be required and Winston feels that the stable block could be converted to serve this purpose, with a large fuel tank built alongside to ensure a ready supply for the bikes. Twelve quad bikes would be needed. Winston estimates that the stable conversion, the fuel tank and the track will have a useful life of 15 years, whilst the quad bikes will require replacing after 5 years. To support his proposal, Winston has provided the following quantitative information. Initial Capital Costs: Stable conversion Fuel tank Fuel tank installation: either: Track preparation Quad bike above ground below ground 1,500 12,000 8,000 3,500 (each) 60,000 7,000

On the basis of opening the Hall for 50 weeks per year, Winston has calculated the annual costs to run the venture (see below) and he is confident that he understands the potential customer base. He predicts that if the charge is 1,900 per person per week (all inclusive) then the Hall will attract 15 guests for 50 weeks each year. He also feels that the customer base is not price-sensitive and wonders whether the charge could be higher.

Colin Drury, Management and Cost Accounting Moult Hall

Annual Revenue Expenditure: Maintenance of track Safety-wear Food Alcohol Petrol Light and heat Staff salaries (2 full time staff) Other labour costs: Cleaning Laundry Kitchen Rose garden 22,000 8,000 38,000 15,000 5,000 4,000 41,250 48,750 11,250 10,000 15,000 (each)

Winston considers that very little conversion work would be necessary to the house itself, as the potential customer base would be attracted by the elitist ambience it currently possesses. The ten existing bedrooms could be let in this way. However, the standard of decor would have to be maintained at an annual cost of 18,000 for the ten bedrooms. Winston anticipates that 8,000 per year will also be required to maintain the Hall's reception rooms, which all guests will have use of. These costs would be in addition to the costs itemised above. All bedrooms are of equal size, occupying in total twice as much square footage as the reception rooms, but Winston expects to let five as single rooms (one occupant per room) and five as double rooms (two occupants per room), incurring no additional capital expenditure. Some Committee members are concerned by Winston's proposal and two of them, Jonathan and Ingrid, have decided to put forward an alternative one. They have very little time in which to prepare this before next week's meeting. Jonathan and Ingrid's Proposal for Moult Hall Their idea, which is still in its infancy, is to convert the Hall into a hostel where the disadvantaged of society, particularly young people, can visit and learn about the countryside. They are unsure, however, of the financial viability of the project. They are very aware that funding for these people will be difficult to obtain, but also know that Local Authority funding would be available for some disadvantaged youngsters. It would be necessary to keep costs down so that as many people as possible could benefit and the project would need to break even each year. Initially, Jonathan and Ingrid feel that a pilot run of 30 weeks would be useful to establish the long-term viability of the project, but in order to do this an initial capital outlay of 2,000 would be required to provide a minimum level of access to the Hall for disabled people. In order to establish the probable running costs for the project, Jonathan has contacted one of his close friends who is working at Johnstone House in Northumberland. This is a field study centre of about the same size as Moult Hall, where much of the day-to-day chores are undertaken by the guests. This friend willingly gave Jonathan details of the running costs of Johnstone House (see below) and Jonathan and Ingrid are of the opinion that similar costs would apply to Moult Hall, if it were run on a similar basis. Weekly Costs incurred by Johnstone House Food per guest 40

Colin Drury, Management and Cost Accounting Moult Hall

Electricity Domestic (laundry, cleaning expenses) Use of minibus

4 10 12

There are also other costs, such as the wages of course leaders and support staff. Jonathan and Ingrid think that they will be able to employ these additional staff on temporary contracts for 30 weeks, at a cost of 15,900 in total, and anticipate that contracts could be negotiated for a further period if the pilot scheme was a success. Johnstone House currently charges 145 per person per week and enquiries have revealed that providers of comparable courses in other regions do not charge more than 190 per person per week. However, Johnstone House does not have the same area of grounds to maintain and Jonathan and Ingrid are concerned that maintenance of these grounds might prove a heavy burden. They have established that the commercial charge for this would be 8,000 per year. However, Ingrid has approached the Local Authority to see if it can help. She has explained their idea for the future of the Hall and the Authority, which is keen to support the aims of the Trust, has shown interest in the project. It has offered to maintain the grounds for an annual charge of 2,000, provided that the Trust allocates one free place each week of opening, to be offered to a child in care within the Authority's area. Johnstone House also provides the facility of a minibus for its guests and considers this to be an essential service because of the house's isolated location. Since Moult Hall is similarly isolated, it would be necessary to provide a similar facility. The Trust currently owns a minibus which cost 16,000 when it was purchased 18 months ago. It is currently used only on Saturdays and Sundays to provide day trips into the countryside and these trips generate a surplus of revenue to the Trust of 20 per week. Of course, if the minibus was to be used by the Hall, these day trips would have to cease. Without any alterations to the fabric of the Hall, it is felt that a maximum of ten guests per week should be the target for the initial pilot project, for a duration of 30 weeks, at a rate of 150 per person per week. However, if the pilot project proves to be viable after the 30 weeks' operation, then Jonathan and Ingrid feel that the Trust should consider structural alterations to the building, in order to comply with fire regulations, so that the number of guests per week could be increased to thirty. These alterations, costing 20,000 would entail the Hall being closed to guests for four weeks after the completion of the pilot project. Question 1 You are an impartial full time employee of The North West Trust for the Protection of Wildlife and, because you are a qualified member of the Chartered Institute of Management Accountants, you have been asked by the members of the Committee to draw up financial statements to assist them in the evaluation of the rival proposals. Required: a) Prepare a statement which identifies the maximum financial benefits which Winston can expect to receive from the first year of operating the quad bike course. Your statement should be based upon Winston's own projections. b) Prepare a statement which identifies the financial implications for the Trust of running the pilot project proposed by Jonathan and Ingrid. Your statement should be based upon Jonathan and Ingrid's projections. c) Describe four criteria that can be used by the Committee as a basis for evaluating the two proposals.

Colin Drury, Management and Cost Accounting Moult Hall

Question 2 Winston has been canvassing amongst the members of the Trust for support for his project and Jonathan and Ingrid realise that if they are to succeed in winning over the members of the Committee to support their proposal at the meeting, then they must present a very strong case. The meeting is to take place tomorrow and Jonathan and Ingrid are seeking help to put together a winning presentation. You are a lifelong friend of Ingrid and a member of the Trust and, since you have accounting experience and support Jonathan and Ingrid's proposal, you have offered to help. Required: Prepare a set of notes which discusses the financial and other reasons why the Trust should accept Jonathan and Ingrid's proposal. These notes will form a handout for Jonathan and Ingrid to use as part of their presentation and should include financial projections for the future. Question 3 Discuss the financial and non-financial implications of Winston's proposal and its possible consequences in relation to the Trust fulfilling its stated aims. Question 4 The members of the Committee are concerned about how they will monitor the performance of Moult Hall, if Jonathan and Ingrid's proposal is adopted after the pilot project. a) Suggest measures that would be useful to the Committee in assessing the performance of Moult Hall and explain your reasons for choosing these measures. b) On the basis of your suggestion in (a) above, suggest appropriate sources for obtaining the information required for each measure.