Question

You are the head of the engineering department in a certain company. your department has been allocated an annual budget of R2.6 million for this year. it is now towards the endof the financial year and your department has overspent by 25%. your senior manager wants you to justify why this is so. YOur task is to present a report showing all the expense of your department for the year and analyse them in a form of a Pareto analysis and a drill down analysis. in your analysis, ensure that you highlight the cause of your over expenditure, including the failure modes of the equipment. Justify ypur financial over spend with things that affect maintenance such as economic factors (macro and micro), poor workmanship from contractors, shift arrangements, poor quality spares, emergency work that had to be done

Answer 1

The budget being allocated = R2.6 Million

The department has overspent by 25% which is R.65 million more

Hence the total expenditure = 2.6+.65= R3.25 Million

The Expenditure overshot by 25% and hence the total expense went up.

This was caused due to :-

1. Change in the government policies making the older machineries redundant and which led to leasing new machines, which was not an estimated coat in the budget. The total extra cost for leasing the machines was R.30 Million. Hence this problem caused us .30/.65=46% of the over cost than the estimated.
2. On the maintenance and wear and tear of the lease machines the department spent R.10 million which 15% of the extra cost. However if this maintenance were not done then our lease would have been revoked and no production would have happened.
3. There was a strike of labor for a month in the previous financial year. Due to which the stalemate cost rose to R.15million which is 24% of the extra cost. There was a demand for higher wages and labor were not there for the work.
4. To satisfy the demands of the labor the company had to pay awage hike and which cost the department R.10 million accumulating to 15% of the total cost.

As per above analysis we see that 80% of the problems were caused by Machine changes and labor strike. Hence the over expenditure can be explained by these two reasons.