COST MANAGEMENT BASICS
Cost Controlling
Agenda
•
•
•
•
•
•
•
•
•
•
Cost Controlling Explanation
Decision Support
Data Required
Data Analysis
Requirements
Process Efficiency
Tools for Prioritization
Process Improvement
Dashboards
Control Budgeting
2
Cost Controlling Explanation
3
Cost Management
Leadership Driven Management
Cost Planning
– Operational managers
set cost targets and
efficiency goals
– Plan cost based on
outputs produced
Cost
Planning
Cost Management
After Action Review
– Commanders Lead:
1. How did you perform
relative to your
expectation?
2. What are you doing to
improve?
Cost
Accounting
Cost
Management
Process
Cost
Controlling
Full Cost Measurement
– Accurate, timely and relevant data
– Connecting operational output/performance
data to financial data
– Allocate Overhead, Unfunded Costs,
Indirect Support
Cost Analysis
– Variances
– Trends and forecasting
Cost
Analysis
– Product, service or activity
cost by expense (labor,
material, contracts, etc…)
– Understanding full costs of
organizations, operations,
products and services
FM = Financial Management
OM = Operational Management
4
Cost Controlling
• Cost Controlling means taking the “Best Value”
and/or “Best Practice” actions to realign an
organization to achieve the defined objectives
•
•
•
•
•
Act based on Analysis
Adjust Targets
Update Resources
Enhance Efficiency
Execution of Trade-off
Decisions
Cost
Accounting
Cost
Planning
Cost
Management
Process
Cost
Analysis
Cost
Controlling
5
Cost Controlling
• It is where the benefits of Cost Management
are realized
• The step where leaders and decision-makers
use the results of their cost analysis as decision
support, implement the changes and
enhancements that ultimately move us to a more
efficient Army
6
Looking to the Future
As the Cost Module of GFEBS matures, Army
leaders and decision-makers will have the
information which will best facilitate the optimal
use of scarce resources.
7
Decision Support
8
Decision Support: What is it?
• Enables decision makers to make informed
decisions that wisely and better utilize resources,
and improve program and operational effectiveness.
• Objective and systematic way of collecting,
examining, analyzing and reporting information to
support decision-making
• Conceptual way of thinking
• Applies to all aspects of managing programs,
finances, and operations
9
What It Means To YOU!
Today there are challenges in all areas of
the Department of the Army.
BUT!
There are also opportunities for those who
are prepared.
10
What’s Different Today?
The New Resource Environment
Focus on achieving and measuring results!
Organizations must demonstrate that they are
getting results when preparing budgets and
reporting performance results
Congress is more interested in seeing results from
public expenditures and meeting their
expectations
Greater scrutiny is being applied to DoD programs
as the defense budget continues to shrink
11
Focus Of Decision Making
Ask the Important Questions:
• What should/needs to be done?
• For whom?
• Why is it important – what is the desired /
expected impact?
• How should it be done?
• By whom?
• When?
• At what cost?
12
Leading to Performance Management
Decisions
Execute
Goal/Objective
Programs
 Outcomes – Results
 Customers
 Outputs – Products/Services
 Activities
 Inputs – Resources
 Budget
 Key questions:
 Is the resource being used having intended results/impact?
 Is the investment worth the results?
 How good is the management process?
13
How Is The Analysis Done?
A decision-maker should always know how
an analysis is done in order to:
• Know how solid it is (i.e. Analytical Rigor and
Completeness)
• Be comfortable with and be able to defend
any decision made based on the analysis
14
Utilizing Decision Support
To be effective, analysts must:
• Understand an organization’s business
• Understand how analytic “need” relates to the
business
• Apply sound, thorough analytical methods
specifically tied to the “need”
• Provide useful information to support
decision-making
15
Basic Guidelines For
Decision Support
•
•
•
•
•
•
Ask questions; be willing to wonder
Define the problem/concern/question/need
Examine the evidence (i.e. data)
Analyze assumptions and biases
Be objective; avoid emotional reasoning
Don’t use either/or thinking; don’t overgeneralize
• Consider other interpretations
• Accept that there will be uncertainty/questions
16
Define Questions
• Critical starting point
• Questions will drive the entire
analysis
• Analysis must focus in on users’
needs. Some critical questions are:
• The user’s business and their role
in it
• What the user needs/wants to
know and why
• How the results will be used for
decision-making
• Thoroughness requires asking 6 key
questions = what, where, when,
who, why, and how
17
Example: What Are The
Real Questions?
• How effective is the property accountability contract. . .
• Do resources used provide adequate accountability?
• Are millions of dollars in lost property going down?
• . . . at reducing FLIPL reports?
• Is the dollar value associated with the FLIPL reports
decreasing?
• Are there fewer incidents for FLIPL reports to be
filed?
• Is there less property missing?
FLIPL: Financial Liability Investigation of Property Loss
18
Data Required
19
Identify Data Required
• Key question = What data do you need to answer the
question?
• Data collected from:
• Primary sources = you collect
• Secondary sources = others collected
• Sources and quantity of data gathered depend on:
• The questions needed to be answered
• The availability of data
• The time allowed for the analysis
• If data does not exist, revisit your questions
20
The Data Quality Axiom
All decisions are data driven.
The quality of the decision can be no better than
the quality of the data supporting the decision!
21
Collect the Data
• Key questions in deciding how to collect data:
• Where and how are you going to get the
data?
• Will it enable you to answer the
questions?
• Common data sources:
• Records = cost reports, analyses
• People = within and outside the
organization
• Time available key to source and amount
• Verification important
22
Data Analysis
23
Analyze The Data
• Analytic method = steps taken to understand,
display, or interpret data
• Methodology dependent on question(s)
• Methods numerous and varied
• Important to know purpose and function of each and
when to use them
• Review results of analysis:
• Did it address question(s)?
• How sensitive is it to internal and external influences?
24
Analysis Axiom
The rigor of the analysis must reflect
the risk and significance of the
potential impact of the decision!
25
Determining The Type Of
Analysis
• Primary Data Analysis
• Collect, assemble, and analyze data
• Secondary Data Analysis
• Use data gathered and in some cases analyzed prior
to your own analysis
• Evaluation Synthesis
• Use the combined results from two or more previous
analysis
26
Report Analytic Results
• Important phase of process
• Impact decision-making; bring about change
• Reporting methods (written vs. oral vs. video) have
different advantages
• Goal = convince audience that the work done and the
results reported are reasonable, appropriate, and
actionable.
• Answering analytic objective, i.e. question, is the most
critical goal
• Remember what drove the analysis – customer’s need /
interest / role, and planned use of results
27
Revalidating Questions
• Regularly re-check and validate questions.
• Questions may need to be modified, dropped, redefined or
added.
Analysis Feedback Loop
Define
Questions
Identify
Data
Sources
Collect
Data
Conduct
Analysis
Report
Results
28
Requirements
29
Determining Requirements
Problem/
Opportunity
Statement
Critical
Customer
Requirements
& Efficiencies
Prioritize
Requirements
S.M.A.R.T.
Objective
S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound
30
Key Elements of a
Problem/Opportunity Statement
Problem/
Opportunity
Who?
Customer/
End Users
Expectations
What/Extent?
Output(s)
Products/Service
Performance
How, Where, and
When?
Process
• There is an inherent relationship between problem/opportunity
and customer, output, and processes.
• The objective is to meet customer expectations consistently
31
Determining Requirements
Problem/
Opportunity
Statement
Critical
Customer
Requirements
& Efficiencies
Prioritize
Requirements
S.M.A.R.T.
Objective
S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound
32
Defining “Who” is the Customer
• A primary customer is anyone who receives or
uses the outputs (product/service) from our work
activities (process)- the end user
– They define Critical Customer Requirement (CCR)
and measure characteristics (Quality, Speed, Cost)
• Internal customers are referred to as business
partners or “process partners/owners”
– They define the Voice of the Business (VOB)
requirements to meet CCRs
33
Sample Categories of Customer
Performance Metrics
Quality
Reliability, Availability, Effectiveness, Completeness,
Freedom from Rework or Defects
Cost
Resources, Repair Costs, Purchase Price, Sustainment
Cost, Training Cost, Doctrine Cost, Material Cost,
Facility Cost, Depreciation, Productivity
Speed
Lead Times, Delivery Times, Turnaround Times, Setup
Times, Cycle Times, Delays, Throughput
Service and
Safety
After-Purchase Reliability, Parts Availability, Service,
Warranties, Maintainability, Product/Service Safety
Stewardship
Business Risk Management, Regulatory and Legal
Compliance, Ethical Business Conduct
34
Process Efficiency
35
Purpose of Process Efficiency
• To identify inefficient steps and activities across
business processes
• To identify measures of efficiencies and cost drivers
across an enterprise
• To define types of inefficiencies/process waste (cost
drivers)
• Refine problem/opportunity statement
36
Definition of Efficient
Process Steps
•
•
•
An activity in a process that is essential to deliver a service/product to the
customer
– Must be performed to meet customer needs
– Adds form or feature to the services/product
Those tasks which the customer would be willing to pay for if he/she knew what
we’re doing
Tasks should be optimized
37
Determining Requirements
Problem/
Opportunity
Statement
Critical
Customer
Requirements
& Efficiencies
Prioritize
Requirements
S.M.A.R.T.
Objective
S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound
38
Common Tools to Prioritize
•
•
Once you have defined CCRs, TIMWOOD, and customer issues, then
various graphical tools can be used to prioritize the selection criteria and
solve problems and take advantage of opportunity, as follows:
– Kano Model: Are the issues related with performance/quality
requirements?
– Pay-off Matrix: What is the impact of CCR/TIMWOOD issues on the
organization’s requirements?
– Run Charts: Is the CCR/TIMWOOD issue showing significant step
changes over time or a steady performance?
– Pareto’s Law: Are 80% of the customer issues described by 20% of the
CCR/TIMWOOD?
– Histograms: Are customer issues showing significant variation?
– SIPOC Process Map: What is the extent of the problem?
These tools help characterize and quantify the extent of the
problem/opportunity in terms of magnitude (quantity) or trends (changes in
magnitude)
39
Pareto Chart
Defects
• A simple graphical display of problems (or other data), in
columns in descending order to show the relative size of each
category
• Used when you need to improve communication by presenting
data which is difficult to express in words or as raw data.
• Highlights and prioritizes multiple problems in a process.
• Identifies and quantifies the few vital priorities.
5
100.0
4
80.0
3
60.0
2
40.0
1
20.0
0
Step 6
Defects
4
Cumulative % 22.2
Step 7
4
44.4
Step 5
3
61.1
Step 2
2
72.2
Step 3
2
83.3
Step 4
2
94.4
Step 1
1
100.0
Step 8
0
100.0
0.0
40
S.M.A.R.T. Objectives
Problem/
Opportunity
Statement
Critical
Customer
Requirements
& Efficiencies
Prioritize
Requirements
S.M.A.R.T.
Objective
S.M.A.R.T. = Specific, Measurable, Achievable, Realistic, Time-bound
41
Define S.M.A.R.T. Objective
The objective of the effort is to improve, reduce, or increase
some aspect of a process, procedure, or program.
• S.M.A.R.T. objectives ensure that
there are measureable outcomes
• The objective should be evaluated
to ensure that it aligns with the
mission and strategic goals of the
organization
• When defining initiative goals, they
need to be verifiable through formal
measurement
42
Process Improvement
43
Process-What is it?
• A series of steps or actions that lead to a desired result or
output
• A set of common tasks that creates a product or service for a
customer
• Processes are largely affected by one or more of the following
factors:
a) people operating the process
b) materials used as inputs (Ex: information)
c) machines/equipment used
d) methods (Ex: documentation)
e) work environment
It is vital to understand how these factors
interact and affect processes
Step 1
Step 2
Step 3
44
Process Improvement
• A systematic approach to help organization’s
optimize their underlying processes through the
closing of process or system performance gap
• Streamlining and cycle time reduction
• Identification and elimination of causes below
specifications quality, process variation, and
non-value-adding activities.
45
Mathematical Foundation of Lean:
Little’s Law
The Number of “Things” in Process
The Avg Lead Time
=
of Any Process
The Avg Completion Rate
Example:
• The Procurement Department Processes (12) Orders per
Hour
• There is a Backlog of (89) unprocessed orders
Order
• A 90th order is put into the queue
• How long must the 90th order wait to be processed?
90 Orders in Process
7.5 Hours =
12 Orders per hour
Lean is a set of tools to reduce the number of “Things” in process without reducing the completion rate
46
Everything We Do Follows a
Process
• Everything that is involved with getting a product or
service to our customer is part of the overall process or
“value stream”
• Looking at the value stream, we determine what portions
of what we do “add value” for the customer and what
portions are non-value-added
• We need to look at the performance of the whole
system when getting services or products to the
customer, instead of focusing too much on optimizing
portions of the overall process
• Every process has some level of variation –
Variation is evil!
47
How Processes Work
The output (Y) is the direct result of the inputs (x1,
x2, …) and how they are processed
By improving process and inputs, the end product
will be improved
48
LSS Starts With the Voice of the
Customer
• Who are the customers?
• What are their needs?
• Do our services or products:
– Answer the Voice of the Customer?
– At a price he/she is willing to fund?
• And how do we know?!
It is common for organizations to ASSUME they know what their
customers want based on either “they always wanted it that
way” or “it’s the way I would want it.”
49
SIPOC
Computer Acquisition Process
S uppliers
I nputs
P rocess
O utputs
C ustomers
3
1
2
4
Input Metrics
Process Metrics
Output Metrics
Quality
Speed
Cost
50
Swim Lane
Client
Mgr
Client
HR
Green (CVA); Amber (NVA-R); Red (NVA)
Notify HR of
employee exit date
Places
information
into HR
database
Sends exit
date to IT,
telecom &
facilities
Avg.
Delay
2 days
Form
require
approval?
no
Re-verifies with manager
on employee’s exit status
Yes
Client IT
Contact
ITS NT
Admin
Admin
Email
Vendor
Secure
approval (s)
Sends Email
to NT Admin
Create ticket if
request coming
directly from client
Utilize e-mail vendor’s
web tool to submit delete
request to vendor
Avg.
Delay
1 day
Delete
account
Avg.
Delay
1 day
Avg.
Delay
4
days
Avg.
Delay
2 days
Avg.
Delay
2 days
Sends
Email to
Admin
Admin closes
ticket and
manager notified
Generates IT ticket
& forwards to NT
Admin
Mark request as
completed on
admin web site
115
Trend Chart
OSHA Rate
– Simple display of trends with observations over specified periods of time
– To monitor a process to see whether the long range average is changing
– To focus attention on truly vital changes in the process
– To identify meaningful trends or shifts in the average
5
4.5
4
3.5
3
2.5
2
1.5
Actual
Target
52
Control Chart
– Statistical technique for analyzing the variation of a process
– To determine whether process is in control
– To know when to adjust a process
– To know the difference between assignable and chance variation
I-MR Chart of Delivery Time
40
Indiv idual V alue
UC L=37.70
35
_
X=29.13
30
25
LC L=20.56
20
1
28
55
82
109
136
Observation
163
190
217
244
UC L=10.53
M ov ing Range
10.0
7.5
5.0
__
MR=3.22
2.5
0.0
LC L=0
1
28
55
82
109
136
Observation
163
190
217
244
Control limits are determined by the data
119
Process Capability
– Compares process performance against requirements
– Ability to measure how well the output from the process meets
requirements
Process Capability of Delivery Time
LSL
Target
USL
Within
Ov erall
P otential (Within) C apability
Cp
1.16
C PL
2.22
C PU
0.10
C pk
0.10
C C pk 1.16
O v erall C apability
Pp
PPL
PPU
P pk
C pm
1.24
2.37
0.11
0.11
0.35
P rocess Data
LS L
10
Target
20
USL
30
S ample M ean
29.1203
S ample N
266
S tDev (Within)
2.87033
S tDev (O v erall) 2.69154
12
16
20
O bserv ed P erformance
P P M < LS L
0.00
P P M > U S L 281954.89
P P M Total
281954.89
24
E xp.
PPM
PPM
PPM
28
32
Within P erformance
< LS L
0.00
> U S L 379619.67
Total
379619.67
36
E xp. O v erall P erformance
P P M < LS L
0.00
P P M > U S L 371895.18
P P M Total
371895.18
Specification limits are decided by the customer
54
Cause & Effect Diagram
Materials
3
Too much reliance
on Pallet jacks
Manual labor moving
around numerous
boxes
Lack of parallel
processing
Lack of multiple lanes
Limited
scanners
Delays in processing
Methods
1
Utilization of
experience
Number of printer stations
(Competing for
Same Space)
Location
Lack of
Controls for
FIFO / LIFO
Segregation
of pallets
Mother Nature
Unforeseen
Circumstances
Wrong
Location
Lack of Computers
Lack of Knowledge
“Dedicated” to
Task
2
Lack of single flow
Facilities &
Equipment
Manpower
Manual
movement of
parts
Lack of heat or
Air Conditioning
4
Multiple Processing tables
(Y) Effect:
CWT = 3 days
(too long)
Unplanned Deliveries
Multiple deliveries
showing up same
time
Measurements
Lack of single flow
measurement
Too Long (Time)
Time Based
upon
completing
entire pallet
55
Productivity
Productivity =
Units produced
Input used
▶ Measure of process improvement
▶ Represents output relative to input
▶ Only through productivity increases
can our standard of living improve
56
Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used
=
1,000
250
= 4 units/labor-hour
One resource input  single-factor productivity
57
Multi-Factor Productivity
Productivity =
Output
Labor + Material + Energy +
Capital + Miscellaneous
•
Also known as total factor productivity
•
Output and inputs are often expressed in
dollars
Multiple resource inputs  multi-factor productivity
58
The Measurement Problem
• Organizations by nature have many
– Elements and functions
– Diverse activities
– Varied resources
• There are a variety of opportunities for
–
–
–
–
Inefficiency
Ineffectiveness
Redundancy (overlaps)
Gaps in operations
59
Dashboards
60
Dashboards Definition
• “Dashboards” are a compilation of standardized performance
measures. These measurements are designed to:
– Facilitate achieving objectives
– Provide feedback
– Enable learning
• Dashboard measurements should accomplish each of the above at
all levels of the organization
• Dashboards should be clearly defined, simple to produce, and easily
understood by users
• Dashboards are the tactical tool used by lean implementations to
measure and track project performance
61
Dashboard – Example
Order Managm em ent Cycle Tim e
On-Time Delivery
OTD (%)
45
66%
65%
64%
63%
62%
61%
60%
59%
58%
57%
40
35
30
25
OM Cycle Time
OM CT Goal
20
Owner:
J.
Stubbs
15
10
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
5
0
OTD
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Oct
Nov
Dec
DSO
DSO (000s)
52
65%
60%
55%
50%
45%
50
48
46
44
42
Ja
n
Fe
b
M
ar
Ap
M r
ay
Ju
n
Ju
Au l
g
Se
p
O
ct
No
v
De
c
Ja
n
Fe
b
M
ar
Ap
r
M
ay
Ju
n
Ju
l
Au
g
Se
p
O
ct
No
v
De
c
Labor Productivity
Labor Prod Goal
DSO
Linear (Labor Productivity)
Gross Revenue
Rolled Throughput Yield
Revenue Goal
1
0
No
v
l
Se
p
Ju
M
ay
Linear (RTY)
ar
RTY Goal
Revenue
2
M
RTY
3
n
0%
4
Ja
50%
Millions of Dollars
5
100%
Ja
Fe n
Mb
a
Ar
M pr
ay
Ju
n
J
Auul
Seg
Op
c
N t
Deo v
c
RTY (%)
OLP (%)
Overhead Labor Productivity
(Applications Closed / Payroll
Hours)
Sep
137
Dashboards Support Corporate
Goals
• Minimal and balanced
• The objective in a dashboard is to use the smallest number of metrics
that still provides a balanced picture of process, site and/or
organizational performance.
• For example: just measuring and driving towards lower WIP may starve the
process and destroy productivity
• Objective – Metrics chosen for dashboards should be
objective, rather than subjective
• An objective metric is one that is well defined and yields the same value
regardless of who is conducting the measurement.
•
For example: mission effectiveness can be subjective unless a clearly
defined, quantifiable approach is used to measure it
63
Budgeting Controls
64
Budgeting for Control
•
•
•
Budgets are often used to assign responsibilities by allocating
resources to managers
Budgeted amounts can be used as goals to motivate
Budgeted amounts can be used as targets by which performance
is evaluated and rewarded
65
Participative Budgeting
•
Participative Budgeting is a concensus process
•
With Participative Budgeting the person ultimately being held
responsible for meeting the target makes the initial budget
forecast
Motivation to achieve the target is higher
•
66
How Budgeting Helps Resolve
Organizational Problems
Links knowledge with
responsibility to make
planning decisions
Measures and rewards
performance for
control
Budgeting
Systems
An administrative
device to resolve
organizational problems
Distributes
Responsibilities
67
Short-Term vs. Long-Term Budgets
Strategic Planning
Long-term Budgets
(more than one year)
Forecasts of
large asset
acquisitions
1. Selecting
overall
objectives
Financing plans
2. Choosing
Research markets
and development plans
3. Selecting products to produce
Short-term
Budgets
4. Determining
price/quality
mix
(1 year or less)
5. Choosing
technologies
Quantities to produce
Quantities to sell
Supplies acquisitions
68
Line-Item Budgets
• Budgets that authorize the manager to spend
only up to the specified amount on each line
item
• Managers cannot spend savings from one
line-item on another line-item
• The manager does not have the
responsibility to substitute resources among
line items as circumstances change
• Impose more control on Managers
• Prevalent in government organizations
69
Static versus Flexible Budgets
Static budgets do not vary with volume and
are used when a manager has control over
volume or the consequences thereof
Flexible budgets are adjusted for changes in
volume and are used mainly in manufacturing
where the manager does not have control over
volume
70
Incremental Budgets
• Rolling the Budget from a previous time frame to be the
Base of the next Budget (priori Budget or Actuals from
Prior Budget time frame as base)
• Incremental expenditures are then added to meet a new
objective
• Inefficient base budgets are not eliminated
• Incremental Budgets are most frequently used
• Easiest to generate
• Best when in a stable environment with little large scale
fluctuations in organizational objectives and outputs
71
Zero-Base Budgets
• Starting from Zero to develop the Budget each Budget
cycle
• ZBB motivates managers to maximize firm value by
identifying and eliminating those expenditures whose total
costs exceed total benefits
• Incremental expenditures are deleted when their costs
exceed their incremental benefits
• Inefficient base budgets are eliminated
• ZBB is used infrequently
• Most useful when new top-level management come from
outside a firm
• Costly to conduct
72
Performance-Based Budgets
• PBB links the programmatic Budget request to the
expected performance results
• Improves knowledge of agency operations
• Cuts waste and enhances cost savings
• Performance Plans required by GPRA 1993 to move
Government entities to be more output and outcome
focused; better stewards of the taxpayer's dollars
• Incorporation of the Planned output/Outcomes drives to
the Budget requested
• Requires an understanding of the conversion of inputs to
outputs (Cost Management)
• Difficult to do since more Government entities are not
Cost focused
73
Budget Method Comparison
Incremental
Budgets
 Base budget is the
previous budget
 Only incremental
changes from the
previous budget
are examined in
detail
Zero-Base Budgets
 Each line-item is
set at zero each
year
 Every line-item
must be justified
and renewed each
year
Performance - Base
Budgets
 Each line-item is
associated with a
Output/Outcome
 Every line-item
must be justified
and renewed each
year based on new
Performance
objective
74
Conclusion
75
CAPSTONE CASE
• FORSCOM INC is a four person company
finishing its first year of operations. The
company started with a good idea and the desire
to own the F150 Platinum edition.
• The company has one sales manager and three
hourly employees that provides ~10,000 service
actions/year.
• Travel is necessary for business development.
76
Plan & Actuals
Plan
Year 1 Actuals
Quantities
Cost
Quantities
Cost
Sales Manager
1
$ 100,000
1
$ 100,000
Hourly Personnel
3
$ 300,000
3
$ 360,000
Equipment
2
$ 110,000
1
$
80,000
Travel
10
$
12
$
21,000
20,000
Total
$ 530,000
$ 561,000
Units
10000
11000
• What are the variances? Are they good, bad,
ugly?
• What is the unit cost of service?
77
Plan
Year 1 Actuals
Quantities
Cost
Quantities
Cost
Manager
1
$ 100,000
1
$ 100,000
$
-
Hourly Personnel
3
$ 300,000
3
$ 360,000
$
60,000
Equipment
2
$ 110,000
1
$
80,000
$ (30,000)
Travel
10
$
12
$
21,000
$
1,000
$
31,000
20,000
Total
$ 530,000
$ 561,000
Units
10000
11000
$
$
Cost/unit
Variance
• Which costs are fixed and variable?
• Determine the target budget (should’ve been)
and new variances.
78
Plan
Year 1 Actuals
Qty
Cost
Qty
Manager
Hourly
Personnel
1
$ 100,000
3
Equipment
Travel
Qty
1
Variance
$
$ 100,000
-
1
$ 100,000 $
$ 300,000
3
$ 360,000 $ 60,000
3
$ 330,000 $ 30,000
2
$ 110,000
1
$ 80,000 $(30,000)
1
$ 110,000 $ (30,000)
10
$ 20,000
12
$ 21,000 $ 1,000
12
$
Total
$ 530,000
Units
10000
Cost
Flex Budget
$ 561,000 $ 31,000
11000
Cost
Variance
-
20,000 $
$ 560,000
1,000
$
1,000
11000
• Output is estimated to increase to 13,500 for
next year.
• Determine a new plan for the next two years.
79
Performance measures
• In order to further grow the business, the
company needs to mature its planning
processes.
• Determine your performance measures and
future targets.
– Sales price of each unit was $55.
– Orders are dependent upon business development
trips and sales price.
YEAR
TRAVEL
1
2
3
4
5
6
7
8
9
10
11
12
1700 1900 2100 2300 2000 1900 1700 1600 1500 1600 1400 1300
80