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This report outlines a budget information problem based in Metroline Travel engineering and logistical function. The report also presents a discussion and analysis of a budget information problem with reference to the problem solving frame work.
The project also includes the 4 P’s within the marketing mix, limitations of incremental budgeting, 10 criteria which are proposed for good-quality information and a financial analysis of the logistical function overtime cost.
These analyses are necessary for competent decision-making. In addition, the report concludes with an investigative examination of these problems and plausible recommendations to address the company’s deficiencies. Also noteworthy, advantages and disadvantages using the SMART framework with recommendations and implications will also be outlined.
Assignment 02 1
A budget information problem within the logistical function 1
B629/BZX629 Managing 2: Marketing and Finance 1
Report Prepared by: Kelemn Wyllie 1
Senior Material Support Manager 1
Metroline Travel 1
Mr. Jay Naik 1
Date of the Report: 25-08-2010 1
TMA Part 1 5
Stakeholder Analysis 6
Problem Statement 7
Figure 4 Internal Engineering Value Chain Analysis 7
Figure 12 recommendations within the budget control loop 16
TMA Part 2: TMA Activities 38
Activity 1: Week 6 Table 6.1 Three new tasks you could do at work 38
Activity 2: Week 6 Table 6.2 Costs & Rewards associated with the proposed 3 new work 39
Activity 3: Week 6 Table 6.3 Communicating your proposed idea to peers in the organisation 40
Activity 4: Week 7 Table 7.1 How I currently deliver the service and how it could be improved 41
Activity 5: Week 8 Table 8.1 Focus group research on a marketing problem 42
Activity 6: Week 9 – Table 9.1 Investigate marketing planning in my own organisation 43
Activity 7: Week 9 Table 9.2 The Marketing Plan 44
Activity 8: Week 10 Part A – What financial information do you deal with at home and at work? 45
Activity 8: Week 10 Part B – Share with other students what you hope to achieve by studying finance 46
Activity 9: Week 10 Table 10.1 – Stakeholders’ financial information needs 47
Activity 10: Week 10 Table 10.2 – Financial information requirements 48
Activity 11: Week 11 A completed version of Table 11.1 Garden Furnishings: solving the problem 49
Activity 12: Week 12 A Word Document noting your/your line manager’s budgetary information requirements 50
Activity 13: Week 12 Part A – A completed version of Table 12.2 Template for cash budget 51
Activity 13: Week 12 Part B – A Word document discussing practical application of master and cash budget information to problems of Garden Furnishings 52
Activity 14: Week 12 Resolving a budget information problem 53
TMA Part 1
As senior material manager in a public bus company called Metroline Travel. A subsidiary company owned by the Singapore based ComfortDelGro Corporation. See Appendix for profit and loss account and other related financial information as of 31st march 2010. The world’s second largest listed land transport company. The senior material manager supervises a team of 15 material support managers across London. These personnel are the logistical team and their core responsibilities are the supply, storage and procurement of parts to engineering (core activity). The logistical hierarchy is illustrated in figure 1.
Figure 1 Metroline Organisational Structure (Logistical Department)
Stakeholder analysis is a useful technique used to identify the key people within the logistical function framework. These key personnel are very important to the organizational structure because they have tremendous power and influence which affects the performance and future resource planning allocated from senior management. “Managers should consider the organisation’s responsibilities and commitment to all its stakeholders”. (Understanding marketing and financial information, P. 196) According to Mendelow’s matrix these can be grouped into to 4 categories which are illustrated figure 2 in Metroline Travel below:
Figure 2 Mendelow’s matrix
C- Keep Satisfied
D- Key Players
A- Minimal Effort
Level of Interest
B- Operation, Suppliers
C- Finance department
D- Engineering (Core Activity)
To make the problem more bounded:
Material managers have complete autonomy over their overtime
Material manager received invoices on a Friday in May, June and July
Budgets are formed outside the control of the logistical function
Cost can be divided in to fixed and variable cost
The material manager’s are constraint to 19 hours per week overtime (limiting factor) in line with the EU working time directive
Budgets are used for detailed planning in the allocation of resources in a business. This information is important to management and stakeholders alike in assessing the activities and performance of an organisation, illustrated in Figure 3. The logistical function overtime budget is based on an incremental budgeting principle with an absorption costing approach for allocating cost per material managers.
The incremental budgeting principle is based on 9% of their base salary plus current inflation. However, the material manger’s overtime for May, June and July allowance were over budgeted which would affect workers’ long term motivational level working on a weekend. This over-budget affects the controlling, planning and decision-making of its activities. This overtime process is very important in maintaining a reliable service to engineering.
Figure 3 Information direction
Senior material support manager
The value chain consists of a series of activities that create and builds significance in maintaining a bus. “An organisation can consider the activities in its value chain and assess if they are value added activities or non-value added activities”. (Understanding marketing and financial information, P. 190) This is illustrated in figure 4.
Figure 4 Internal Engineering Value Chain Analysis
As their line manager; I was tasked by the head of purchasing and logistics to investigate and place corrective actions to bring this over budgeting back under control. This over- budget is illustrated in figure 5.
Figure 5. Material Managers Overtime budget as of the 31 July 2010
Material manager 1
Material manager 2
Material manager 3
Material manager 4
Material manager 5
Material manager 6
Material manager 7
Material manager 8
Material manager 9
Material manager 10
Material manager 11
Material manager 12
Material manager 13
Material manager 14
Material manager 15
Total Budget- £48,000
Monthly allowance £4,000
Daily rate- £12.60
Weekend rate- £20.23
Market segmentation is an important marketing task described by Bonomo and Shapiro (1983), cited by Sargeant (2009). It has a number of advantages which can be used to identify existing and potential customers. By placing customers into different groups by successful targeting their needs and managing their expectations.
Figure 5. Organisational market segmentation criteria (Operating variables)
Engineering (core activity) Heavy user
Suppliers Medium user
After speaking with the material managers and investigating their overtime sheets for the months for May, June and July submitted to payrolls. “The investigation using; the problem solving framework” (The Manager’s Good Study Guide, PG 69). I found that the material managers were working more on a weekend to incur the over budget this is illustrated in figure 6 in appendix, which the daily rate is £12.60 while the weekend rate is £20.23 “The budgeting system can seriously influence the level of motivation and culture of an organisation, because budgets play a central role in” (Understanding marketing and financial information, P. 155).
This was because of an increase of activity; 40 plus financial invoices received from the finance department over May, June and July were received on a Friday and could not be completed that day because of day to day activities. These invoices needed to be resolved as soon as possible and took some time to process on the data base system for payment for the following week from finance illustrated in figure 7 . In addition, the limitation of the incremental budgeting, this budgeting type has inefficiencies and imperfections which were not noticed, until the increase of activity.
Figure 7 total financial invoice hours to completion
Using the 4 P’s-
Price- Was the increase in the usage of overtime to complete the receipt of engineering invoices which will affect the material manager’s long term motivation coming into work “allocating resources and imposing constraints on activity” (Understanding marketing and financial information, P. 155).
Product- Was the volumes and frequency of the engineering invoices given on a Friday “identifying those areas that require corrective action” (Understanding marketing and financial information, P. 155).
Promotion- The finance manager; a senior manager requesting this activity be completed as soon as possible “assessing how well managers have carried out their responsibilities” (Understanding marketing and financial information, P. 155).
Place- Is material manager’s working location “assessing how well managers have carried out their responsibilities” (Understanding marketing and financial information, P. 155).
Budgeting is needed to provide managers at different levels with useful information to keep on the right road. This is illustrated in 11.2 the pyramid of purpose. This information is received for decision making.
Corporate level- Provide a bus service to Transport for London
Material manager overtime
Provide a bus service to Transport for London
Provide parts and technical information
Business level- Support engineering
Operational level-Provide parts and technical information
Operating Level-Material manager daily overtime
Analysis of information criteria not being met
There are 10 criteria which are proposed for good-quality information for decision-making; this is illustrated in figure 8. However the material manager’s overtime sheets were being sent directly to payroll, which added to the budget information problem.
1 Relevant- Their line manager had no knowledge of Material manager’s overtime
7 Timely- No Knowledge of Material managers overtime being over budget until at the end of the month
8 Communicated to the right person- Overtime sheets were sent directly to payrolls
Figure 8 10 criteria which are propose for good-quality information for decision-making
Less costly than the value of the benefits it provides
9 Communicated via the right channel
8 Communicated to the right person
Good-quality information for decision-making
Analysis of the absorption costing approach
From the cost analysis, the logistical function has a total budget figure of £48,000. This is calculated by applying the normal budgeted hourly rate of £12.60 which is the budgeted man (direct labour) hours per manager according to normal capacity illustrated in figure 9, by the using the incremental budgeting principle.
Figure 9 cost assignment is both
Indirect cost- variable
Overtime brought on by finance invoices
Direct cost- fixed
Weekly overtime to provide parts and technical information to engineering
The indirect and direct costs are equally distributed illustrated in figure 10, using the absorption costing approach which all cost is allocated to the main budget. This prevents monitoring of actual hours against the actual spend within the budget. The resulting variances should have enabled the logistical function to monitor the productivity and efficiency of all the managers.
Hopefully, you can then see if there is a pattern or a reason for persistent adverse variance. The analysis will provide you with some clues about incentivize or modify such behaviour via the budget building process.
Figure 10 Relationship between costs
Overtime brought on by finance invoices £20.23
Weekly overtime to technical information to engineering £12.60
Break-even analysis identifies the level of activity and risk at which an organisation can generates no surplus or deficit. In the case of an over-budgeting issue; it relates to the point where the logistical function is in budget and will not be penalized for being over spent illustrated in figure 11.
Over BudgetNet Total = £26,854
Total Budget-£ 48,000
Monthly allowance £4,000
= £48000-£26,854 = £21,146
21,146(Fixed cost)/ 6 months = £3,524 per month in overtime remaining
£3,524/ 15 material managers= £234.93 per manager
Direct cost £234.93/ £12.60 = 18.64(Contribution) weekly hours per month
Indirect cost £234.93/ £20.23 = 11.61(Contribution) weekend hours per month
Figure 11 Break-even analysis
From the analysis, there is a clear budget information problem within the logistical function; the problem solving frame work has identified several problem areas. By Using the 4 P’s to illustrate Material managers working more on a weekend which has a higher premium rate than daily working. The limitations of the incremental budgeting; as an effective forecasting tool. 10 criteria; which are essential for good-quality information for decision-making. In which 3 criteria are not being met. In addition, not identifying true cost drivers within the budget. In which material managers that are working more on a weekend are not identified. These factors combined have affected the logistical function staying within their overtime budget.
Budgeting is part of the control process in organisations: the “control loop” (Understanding marketing and financial information, P. 134). The setting objectives, planning and implementing tasks, monitoring progress, reviewing results and adjusting tasks are crucial in staying and planning budgets illustrated in figure 12. Based on the investigative examination and analysis of the problems; these recommendations should improve the over- budget situation and return productivity.
Figure 12 recommendations within the budget control loop
Check against overtime sheets past weeks
If not working- restart from the begin of the loop
Provide parts and technical information
Use recommendation outlined in action plan to control material manger overtime budget- budget building process
Using the “SMART” framework from (Understanding marketing and financial information, Pg 122) the action plan will be outlined as the following
Material manager weekly overtime sheets sent to senior material manager
1 week to start
Giving back control to the line manager by improving the Relevant, Communicated to the right person and Timely elements of information
Increase of Senior material manager workload
To start a new process, which can be adapted throughout the company and monitor usage for next year budget review
Material managers might feel disempowered which might affect there motivation
Weekend overtime needs pre-approval
1 week to start
Giving back control to line manager by improving the control element of the budgeting loop. In addition the material having to work on a weekend might increase their morale
Increase of Senior material manager workload
To start a new process, which can be adapted throughout the company and monitor usage for efficiency of material mangers
Identification of cost drivers
Control of weekend working (indirect labour)
Material managers might feel disempowered which might affect their motivation
(Product) + Promotion
Finance manager giving the invoices on a Monday instead of a Friday
2 weeks to start
Spread the work load of the material manager
Direct labour cost
Increase of material managers weekly workload
Weekend overtime can be used to complete other essential engineering task
Build up of daily work that carried over from day to day
Next financial year
Flexibility is built into the budgeting system to deal with any changes arising from day to day activities
Updated much more frequently increasing work load
It encourage a high level of learning and flexibility
Rolling budget can be expensive in terms of management and administrating time. Which might affect management morale and less time to manage
Activity based costing
Next financial year
Understand what and where is driving costs
Very time consuming, checking each material managers overtime sheet for cost drivers
Understand of cost drivers before an informed decision can be reached
If inappropriate drivers are selected. then it could lead to incorrect decisions resulting in loss of efficiency, de-motivation of staff and eventual failure of the business
Work shredding to engineering administration clerks
Reduce in material manager weekend overtime- It asserts, on quite strong evidence, that 80% of our results are generally produced by 20% of our effort – and that the remaining 80% of our effort is swallowed up in achieving that last 20% of our results
Training have to be provided- cost
Training and development
Increase in errors by new users. Responsibility still remains with material manager
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