You have recently started work as a management accountant at Zilber Hotels, reporting to the financial...
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You have recently started work as a management accountant at Zilber Hotels, reporting to the financial controller. Draft management accounts have been prepared for the year just finished, and the financial controller has told you that one of your first jobs will be helping her to analyse the results in order to produce the board report. However, she has warned you to expect a wide variety of tasks, because the year end is always a very busy time. The financial controller has given you some information to help you familiarise yourself with the company and the issues it is facing (Exhibits 1-3) and you have also collected some further information yourself (Exhibits 4 and 5): Exhibit 1: Company overview, prepared by the financial controller Exhibit 2: Summary management accounts Exhibit 3: Email from Chief Executive Officer (CEO), showing company Exhibit 4: Notes from meeting with the Head of Internal Audit Exhibit 5: Internal memo from the Head of Internal Audit a potential strategic opportunity for the Exhibit 1: Company overview Zilber Co operates a chain of 35 hotels across the country of Teeland. The hotels are all of a similar size, and on average each hotel has 90 rooms. The majority of Zilber's hotels are located in major cities, and the company's target market has primarily been business customers. In recent years, however, demand from business customers has started to decline, due to tough economic conditions. The company's policy is to set standard prices for the rooms in each hotel, with that price reflecting the hotel's location and taking account of competitors' prices. However, hotel managers have the authority to offer discounts selectively in order to obtain bookings - for example, by reducing the room rate for regular customers, or lowering prices at times when occupancy rates are expected to be low. Each hotel manager has the authority to offer a discount of up to 25% off the standard room rate. The average standard price per night (across all 35 hotels) was $150 in 20X7, compared to $145 in 20X6. All of Zilber's hotels are open 365 days per year. All the hotel rooms have the same facilities and specification, so that business customers staying in any Zilber hotel across the country will know in advance what to expect from their stay. Hotels in Teeland are rated on a 'star' system, with 5* hotels being the most luxurious. Zilber's hotels all have 4* ratings. In addition to room bookings, the hotels also generate revenue from additional activities, such as restaurants and bars. No discounts are offered on any of these additional revenue streams. At the end of their stay, all customers are invited to complete a short survey identifying the reasons they chose to stay in a Zilber hotel and how satisfied they were with their stay. Feedback from these surveys shows that the comfort of Zilber's rooms, the convenience of the hotels' locations, and the quality and efficiency of customer service are key factors in customers' choice of hotel. The quality of the guest's experience, and their level of satisfaction, influences not only the likelihood of them making repeat bookings but also the likelihood of them recommending Zilber Hotels to friends or colleagues. As such, the board have identified customer satisfaction scores as a key performance indicator. Other key indicators the board monitor are occupancy rates (% of rooms occupied) and operating profit margin. Exhibit 2: Summary management accounts Year ended 30 June 20X7 Actual Year ended 30 June 20X7 Budget Year ended 30 June 20X6 Actual $'000 $1000 $'000 Revenue rooms at standard 131,072 129,347 121,701 price per night Room discounts or rate (24,904) (19,402) (18,255) reductions Other revenue (food, drink) 34,079 33,630 32,251 Total revenue 140,247 143,575 135,697 Operating costs (117,964) (115,764) (111,965) Operating profit 22,283 27,811 23,732 Other performance information 20X7 - Actual 20X7 - Budget 20X6-Actual Operating profit % 15.9% 19.4% 17.5% Capital employed $52.1m $54.7m $49.1m Return on capital employed (*) 42.8% 50.8% 48.3% Occupancy rates 76% 75% 73% Customer satisfaction scores (**) 8.5 n/a 8.9 Notes *: Capital employed is calculated using the depreciated cost of non-current assets at all of the hotels. **: Customer satisfaction scores are graded on a scale of 1-10, where '10' represents 'Excellent'. On average, in any given location, the top 10% of hotels earn scores of 9 or above. The top 25% of hotels earn scores of 8.5 or above. Three themes have become increasingly frequent in the comments customers give alongside their scores: Customers resent having to wait to check in to their rooms, and several have asked whether Zilber could implement an automated check-in process. Customers who have stayed in Zilber Hotels before have commented that the standard of service in recent visits has not been as good as in earlier visits. The rooms would benefit from re-decorating, and some of the fixtures and fittings need replacing (for example, the beds would benefit from new mattresses to improve the level of comfort they provide to guests). Zilber had originally planned a two-year refurbishment programme beginning in 20X7, in which all of its hotel rooms would be refurbished. However, this programme has been delayed, due to the current economic conditions and the need to reduce expenditure. Exhibit 3: Email from CEO From: CEO To: Directors of Zilber Re: Potential acquisition Dear All, Our strategic review earlier this year identified 'profitable expansion' as one of Zilber's key objectives, and our shareholders are becoming increasingly vocal about their desire for the business to grow. To date, Zilber has grown organically, and we have identified a list of desirable locations where we would like to open new hotels, but there are currently no suitable properties available in those locations. However, I have learned that a small privately owned chain of hotels - Havis Co - is coming up for sale, because the majority owners are looking to retire. Havis owns ten hotels. Four of these are in-town, while the other six are rural hotels. Havis' hotels all have 4* ratings, like Zilber's own hotels. The majority of Havis' guests are leisure travellers, and many of them choose to say in Havis hotels because they have a charm and character which is not found in more contemporary hotel designs. However, due to a lack of capital expenditure from the current owners, some of the hotels are in relatively poor condition internally and externally. I would be keen to get your thoughts about this potential acquisition. Exhibit 4: Notes from meeting with the Head of Internal Audit Zilber - Risk management policy Overview of Zilber's internal controls and risk management system The company's internal controls and risk management system are designed to help us achieve our business objectives and protect our business. This relates not only to ensuring the safety and security of physical assets, people, systems and processes, but also to Zilber's brand, reputation and business model more generally, and our ability to respond effectively to changes in the market place. Key risks It is vitally important that Zilber provides a safe and secure environment for all of our guests as well as our staff working in our hotels. As such, we need to maintain high standards of health and safety across all of our hotels, and to ensure we have appropriate information and systems in place to identify and address any health and safety concerns. We regularly consult with our hotel managers to ensure that risks are identified, and prioritised, and improvement actions are identified as necessary. Risk register We summarise the key risks facing our business in our risk register. The register describes the key risks we face, and identifies the controls in place to mitigate them. I can let you have a look at the register in detail later if you want, but the risk areas covered in the register are: Guest safety Security Staff safety Staff retention Technology Information security There is a constant need to protect the safety and security of our hotels, our guests staying in them. This underpins our whole risk management programme. Includes the physical security of the hotel buildings overall, as well as the individual rooms. Safety doesn't only relate to guests. We also need to ensure the health and safety of our staff working in them. As a service business, we need to recruit and retain the right people to ensure we can deliver the quality of service our customers expect. Failure to do this is likely to damage our financial performance and our longer-term growth. Technology has increased the information available to customers (for example through comparison websites and social media reviews) as well as changing booking channels (with online bookings). Booking is an important part of the guest experience so we need to ensure that our booking processes are as efficient as possible. A number of our smaller competitors in the Teeland hotel sector have very recently started to accept cryptocurrency payments for accommodation bookings made via their online booking systems. Zilber does not currently operate the IT infrastructure necessary to accept cryptocurrency payments. The need to continue to invest in our IT systems is crucial. We need to ensure that information - particularly about customers' details and payment cards is held securely. Exhibit 5: Note on internal control issue A fraud has recently been discovered in one of our hotels. The hotel manager had been encouraging customers to pay in cash by offering them small discounts of around 5% to 10% for doing so. However, he was then recording the discount at the maximum 25% and retaining the difference for himself. The manager's wife worked on the front desk of the hotel, and so received the money from the customers and she provided false invoices to them. The and his wife have both been dismissed now, although we have not yet worked out how much they stole. More importantly, though, we will be reviewing our internal controls to try to prevent similar frauds happening again. You have recently started work as a management accountant at Zilber Hotels, reporting to the financial controller. Draft management accounts have been prepared for the year just finished, and the financial controller has told you that one of your first jobs will be helping her to analyse the results in order to produce the board report. However, she has warned you to expect a wide variety of tasks, because the year end is always a very busy time. The financial controller has given you some information to help you familiarise yourself with the company and the issues it is facing (Exhibits 1-3) and you have also collected some further information yourself (Exhibits 4 and 5): Exhibit 1: Company overview, prepared by the financial controller Exhibit 2: Summary management accounts Exhibit 3: Email from Chief Executive Officer (CEO), showing company Exhibit 4: Notes from meeting with the Head of Internal Audit Exhibit 5: Internal memo from the Head of Internal Audit a potential strategic opportunity for the Exhibit 1: Company overview Zilber Co operates a chain of 35 hotels across the country of Teeland. The hotels are all of a similar size, and on average each hotel has 90 rooms. The majority of Zilber's hotels are located in major cities, and the company's target market has primarily been business customers. In recent years, however, demand from business customers has started to decline, due to tough economic conditions. The company's policy is to set standard prices for the rooms in each hotel, with that price reflecting the hotel's location and taking account of competitors' prices. However, hotel managers have the authority to offer discounts selectively in order to obtain bookings - for example, by reducing the room rate for regular customers, or lowering prices at times when occupancy rates are expected to be low. Each hotel manager has the authority to offer a discount of up to 25% off the standard room rate. The average standard price per night (across all 35 hotels) was $150 in 20X7, compared to $145 in 20X6. All of Zilber's hotels are open 365 days per year. All the hotel rooms have the same facilities and specification, so that business customers staying in any Zilber hotel across the country will know in advance what to expect from their stay. Hotels in Teeland are rated on a 'star' system, with 5* hotels being the most luxurious. Zilber's hotels all have 4* ratings. In addition to room bookings, the hotels also generate revenue from additional activities, such as restaurants and bars. No discounts are offered on any of these additional revenue streams. At the end of their stay, all customers are invited to complete a short survey identifying the reasons they chose to stay in a Zilber hotel and how satisfied they were with their stay. Feedback from these surveys shows that the comfort of Zilber's rooms, the convenience of the hotels' locations, and the quality and efficiency of customer service are key factors in customers' choice of hotel. The quality of the guest's experience, and their level of satisfaction, influences not only the likelihood of them making repeat bookings but also the likelihood of them recommending Zilber Hotels to friends or colleagues. As such, the board have identified customer satisfaction scores as a key performance indicator. Other key indicators the board monitor are occupancy rates (% of rooms occupied) and operating profit margin. Exhibit 2: Summary management accounts Year ended 30 June 20X7 Actual Year ended 30 June 20X7 Budget Year ended 30 June 20X6 Actual $'000 $1000 $'000 Revenue rooms at standard 131,072 129,347 121,701 price per night Room discounts or rate (24,904) (19,402) (18,255) reductions Other revenue (food, drink) 34,079 33,630 32,251 Total revenue 140,247 143,575 135,697 Operating costs (117,964) (115,764) (111,965) Operating profit 22,283 27,811 23,732 Other performance information 20X7 - Actual 20X7 - Budget 20X6-Actual Operating profit % 15.9% 19.4% 17.5% Capital employed $52.1m $54.7m $49.1m Return on capital employed (*) 42.8% 50.8% 48.3% Occupancy rates 76% 75% 73% Customer satisfaction scores (**) 8.5 n/a 8.9 Notes *: Capital employed is calculated using the depreciated cost of non-current assets at all of the hotels. **: Customer satisfaction scores are graded on a scale of 1-10, where '10' represents 'Excellent'. On average, in any given location, the top 10% of hotels earn scores of 9 or above. The top 25% of hotels earn scores of 8.5 or above. Three themes have become increasingly frequent in the comments customers give alongside their scores: Customers resent having to wait to check in to their rooms, and several have asked whether Zilber could implement an automated check-in process. Customers who have stayed in Zilber Hotels before have commented that the standard of service in recent visits has not been as good as in earlier visits. The rooms would benefit from re-decorating, and some of the fixtures and fittings need replacing (for example, the beds would benefit from new mattresses to improve the level of comfort they provide to guests). Zilber had originally planned a two-year refurbishment programme beginning in 20X7, in which all of its hotel rooms would be refurbished. However, this programme has been delayed, due to the current economic conditions and the need to reduce expenditure. Exhibit 3: Email from CEO From: CEO To: Directors of Zilber Re: Potential acquisition Dear All, Our strategic review earlier this year identified 'profitable expansion' as one of Zilber's key objectives, and our shareholders are becoming increasingly vocal about their desire for the business to grow. To date, Zilber has grown organically, and we have identified a list of desirable locations where we would like to open new hotels, but there are currently no suitable properties available in those locations. However, I have learned that a small privately owned chain of hotels - Havis Co - is coming up for sale, because the majority owners are looking to retire. Havis owns ten hotels. Four of these are in-town, while the other six are rural hotels. Havis' hotels all have 4* ratings, like Zilber's own hotels. The majority of Havis' guests are leisure travellers, and many of them choose to say in Havis hotels because they have a charm and character which is not found in more contemporary hotel designs. However, due to a lack of capital expenditure from the current owners, some of the hotels are in relatively poor condition internally and externally. I would be keen to get your thoughts about this potential acquisition. Exhibit 4: Notes from meeting with the Head of Internal Audit Zilber - Risk management policy Overview of Zilber's internal controls and risk management system The company's internal controls and risk management system are designed to help us achieve our business objectives and protect our business. This relates not only to ensuring the safety and security of physical assets, people, systems and processes, but also to Zilber's brand, reputation and business model more generally, and our ability to respond effectively to changes in the market place. Key risks It is vitally important that Zilber provides a safe and secure environment for all of our guests as well as our staff working in our hotels. As such, we need to maintain high standards of health and safety across all of our hotels, and to ensure we have appropriate information and systems in place to identify and address any health and safety concerns. We regularly consult with our hotel managers to ensure that risks are identified, and prioritised, and improvement actions are identified as necessary. Risk register We summarise the key risks facing our business in our risk register. The register describes the key risks we face, and identifies the controls in place to mitigate them. I can let you have a look at the register in detail later if you want, but the risk areas covered in the register are: Guest safety Security Staff safety Staff retention Technology Information security There is a constant need to protect the safety and security of our hotels, our guests staying in them. This underpins our whole risk management programme. Includes the physical security of the hotel buildings overall, as well as the individual rooms. Safety doesn't only relate to guests. We also need to ensure the health and safety of our staff working in them. As a service business, we need to recruit and retain the right people to ensure we can deliver the quality of service our customers expect. Failure to do this is likely to damage our financial performance and our longer-term growth. Technology has increased the information available to customers (for example through comparison websites and social media reviews) as well as changing booking channels (with online bookings). Booking is an important part of the guest experience so we need to ensure that our booking processes are as efficient as possible. A number of our smaller competitors in the Teeland hotel sector have very recently started to accept cryptocurrency payments for accommodation bookings made via their online booking systems. Zilber does not currently operate the IT infrastructure necessary to accept cryptocurrency payments. The need to continue to invest in our IT systems is crucial. We need to ensure that information - particularly about customers' details and payment cards is held securely. Exhibit 5: Note on internal control issue A fraud has recently been discovered in one of our hotels. The hotel manager had been encouraging customers to pay in cash by offering them small discounts of around 5% to 10% for doing so. However, he was then recording the discount at the maximum 25% and retaining the difference for himself. The manager's wife worked on the front desk of the hotel, and so received the money from the customers and she provided false invoices to them. The and his wife have both been dismissed now, although we have not yet worked out how much they stole. More importantly, though, we will be reviewing our internal controls to try to prevent similar frauds happening again.
Expert Answer:
Answer rating: 100% (QA)
1 Financial Performance Analysis Revenues have increased from 1357 million in 20X6 to 1402 million in 20X7 though this was below the 20X7 budget of 14... View the full answer
Related Book For
Accounting for Governmental and Nonprofit Entities
ISBN: 978-1259917059
18th edition
Authors: Jacqueline L. Reck, James E. Rooks, Suzanne Lowensohn, Daniel Neely
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