Section A – BOTH questions are compulsory and MUST be attempted Lincoln & Lincoln Advertising (LLA) is an advertising agency based in Veeland, which is a large well-developed country considered to be one of the wealthiest in the world. LLA operates out of three regional offices (North, East and West) with its head office functions based in the East offices. The business offers a wide range of advertising services: Strategic: Advising on an overall advertising campaign (mix of advertising channels and overall themes); Buying: Advising and buying advertising space (on television, radio, websites and in newspapers and magazines); and Creative: Designing and producing specific adverts for the customers’ use. The company is one of the three largest agencies in Veeland with many years of experience and many awards won. Competition in advertising is fierce, as advertising spending by businesses has suffered recently during a general economic downturn. Most new business is won in tender competitions between different advertising agencies. Veeland is a large country with considerable diversity of markets, economic conditions and fashions across its regions. As a result, the regional offices have developed with a considerable amount of decision-making autonomy. This also reflects the temperament of the key creative employees of the firm who have a strong attachment to their campaign ideas and take great personal pride in their success. The individualism of the key employees also comes from the way that LLA has grown. The business has been built through acquisition of small, local businesses in each of the three regions. Each of these acquisitions has been consolidated into the appropriate regional office. You have been recruited in to LLA in order to take up the newly created post of senior management accountant. Your recruitment caused some concern amongst the board but was championed by the chief executive officer (CEO) as ‘necessary to stay ahead of the game’. The board have asked that you prove yourself and also give a fresh perspective on LLA by providing them with a report. Initially, you have been asked to provide an assessment of the current financial position of the three regional offices. The most recent management accounts are in Appendix 1. The basic assessment calculations have already been accurately completed by one of the junior staff and the results are in Appendix 2. As part of the briefing for this exercise, you attended part of a recent board meeting where you were told that the board want your views on the choice of net income as the performance measure for each of the regional offices. They want you to suggest other measures and why they are appropriate for each office. The CEO has advised you that you may want to use different key measures for each office, rather than have a ‘one-size fits all policy’. During the board’s discussion, issues around controllability and responsibility accounting appear to be the main concerns of the board. The CEO also stated that the board would not be interested in a long list of which numbers have gone up and which have gone down. They will want to be given a coherent picture of what is going on at each of the regional offices. Finally, the CEO said, ‘Well, if you are not completely tired out at the end of this little project then I’d also like you to comment on our remuneration policy at the regional offices including ideas based on your assessment of performance measures.’ Later, the CEO gave you a note (see Appendix 3) describing these policies at LLA. Required: Write the report to the board of LLA to: (i) Assess the recent performance of the three regional offices by interpreting the data given in Appendices 1 and 2. (10 marks) (ii) Evaluate the choice of net income as the performance measure for the regional offices and suggest other measures and why they are appropriate for each office. (10 marks) (iii) Using the information provided, evaluate LLA’s remuneration policy suggesting changes as appropriate. (10 marks) Professional marks will be awarded in question 1 for the format, style, structure and clarity of the discussion of your answer. (4 marks) Note: the Appendices follow on the next two pages. Appendix 1: LLA financial data The figures are drawn from the regional offices’ management accounts for year to September 2012. Notes: 1. East office data is for the regional office only. It excludes any costs of the head office function based there other than the allocated costs listed. 2. Notional cost of capital at LLA is 9%. 3. Current assets contains only accounts receivable for each office. Appendix 2: Basic calculations [These can be assumed to be calculated correctly.] Notes 1. Other costs and allocated head office costs are fixed. 2. Margins are calculated as a percentage of revenue. Appendix 3: Note on remuneration from the CEO: There are broadly five grades of staff at each regional office. The following is an outline of their remuneration packages. (The head office staff are treated separately and are not part of this exercise.) Senior management All staff at this level are paid a basic fixed salary, which reflects industry norms over the last few years, plus a bonus dependent on the net income of their office. Creative staff The ‘creatives’ are on individual packages which reflect the market rates in order to recruit them at the time that they were recruited. Some are fixed salary and some have a fixed element plus a bonus based on their office’s revenues. Buying staff The buyers are paid a fixed salary plus a bonus based on the prices for advertising space that they negotiate compared to the budgeted cost of space. The budget is set by the finance team at head office based on previous years’ experience and their forecast for supply and demand in the year in question. Account management staff Account management handles relationships with clients and also develops new clients. They are paid a fixed marketbased salary. Administration staff These staff are paid the market rate for their jobs as a fixed salary based on hours worked.