Maintenance budgeting and cost control

The profitability of industrial enterprises is strongly dependent on the quality maintenance of plants and equipment.

Maintenance engineering will always fulfil an essential function in any industry. However, effective maintenance is a function of a maintenance engineer understanding the mechanism of failure, its prevention and maintenance management.

They control there in all this is the maximisation of maintenance contributed to the organisation’s profits.
Effective maintenance management reduces downtime, cuts costs, improves customer satisfaction, and brightens the profit picture for the organisation.

The rapid technological changes every few years bring an expensive technological revolution. Rapid changes in technology and society’s increasing reliance further put pressure on the need for planning and budgeting. Any budgeting or cost control efforts require an organisation to identify maintenance expenses. Unfortunately, this is easier said than done. Only a few organisations can provide a reliable figure for their total maintenance spending.

Identify maintenance costs
The truth here is that most managers have surprisingly little information about the total annual expenditure on maintenance. It becomes more worrisome if it is even extended to expenditure on information technology.

First, the organisation must figure out what to include in such a number. Should they include technical support staff salaries, telephone network, specific jobs related to software (in a computerised environment)? This becomes more worrisome where each department buys its hardware or even maintains its network.

Even after identifying the maintenance costs, the organisation needs a benchmark against which to compare its costs. Because each organisation tracks maintenance differently, they are few reliable maintenance spending standards. Identifying industry norms may require many surveys of sizeable numbers of organisations. In doing that, there is the need to define what is included in maintenance. Then the survey on each organisation’s spending on maintenance. The availability of such standards will have provided a basis for comparing maintenance costs, especially in similar industries. However, our information management is still shrouded in secrecy in our environment.

Prevent a budgeting scramble
The essence of budgeting is to identify costs and match a funding stream to them. Unfortunately, technological revolutions result in unplanned maintenance expenditures that put the organisation into a budgeting scramble.

The combination of insufficient information and little planning causes the perception of runaway maintenance costs and technological sticker shock. Of course, we know that organisations are doing more with technology and doing it better. Nevertheless, rising demand and expectations for resources and services create an environment of constant catchup at many organisations.

Purpose of budgets
Budgets have several different purposes. “Budgets are designed to carry out a variety of functions; planning, evaluating performance, coordinating activities, implementing plans, communicating, motivating and authorising actions.”

The purpose of the budget might be to:
(a). Compel planning is probably the most crucial budgeting feature because planning forces management to look ahead, set targets, anticipate problems, and give the organisation purpose and duration.

(b). Communicate ideas and plans to everyone affected by them. A formal system is necessary to ensure that each person is aware of what he or she is supposed to be doing. Communication might be one way, i.e., managers passing instructions to subordinates or a two-way dialogue and exchange of ideas.

(c). Coordinate the activities of different departments or sub-units of the organization. This concept of coordination implies, for example, that the purchasing department should base its budget on production requirements. The production budget is a combination of material usage and maintenance cost, based on sales expectations.

(d). Establish a control system by having a plan against which actual results can be progressively compared.

(e). Motivate employees to improve their performance. The level of attainment usually incorporated in the budget is a realistic figure for the budget.

Two levels of attainment could be set

(i). a minimum expectation budget; and

(ii). a “desired standards” budget, which provides some challenge to employees.
Short-term budgeting and long-term planning

Budgeting is a planning exercise, usually conducted once every year, establishing targets and plans for one year. This one year is then broken down into control periods of one month or four weeks. It may be readily apparent that budgets do not concern themselves with;

(a). the long-term plans of the company, i.e., strategic planning or “long-range” planning.

(b). short term management control, as exercised by the front-line supervisor daily, i.e., operational control
Problems of budgeting

Even in the relatively short term, planning for an organisation’s future is bound to create numerous difficulties. For example

(a). The rate of inflation might be hard to predict, so budgeting for price levels will be largely guesswork.

(b). The number of breakdowns due to an increase in the volume of activity (production sales) cannot be foreseen with certainty so that a budget to produce or sell one thousand units of products might quickly be overtaken by events as sales demand either exceeds expectation or perhaps as unforeseen limiting factors arise to restrict output below budgeted levels.

(c). There will be organisational problems and attempting to coordinate different departments’ plans into an optimal master budget may be unsuccessful.

(d). There will be motivation problems, and where these exist, budgeted expenditure claims by cost center managers are likely to be excessive.
Cost control

Cost control is the regulation of the cost of operating a business and is concerned with keeping expenditure within acceptable limits. The prevailing assumptions in cost control are that cost control is satisfactory unless costs exceed budgeting standards by an excessive amount.

Cost control action ought to lead to a reduction in excessive spending. However, a cost reduction program can reduce expected costs, i.e., cutting costs to below current budgeted or standard levels – by purchasing new equipment, changing working methods, etc. Both budget and standards reflect current costs and conditions and not necessarily the cost and condition to minimize costs.

Standard costing and variance analysis is an effective means of cost control.

Standards may be set which are generous and incorporate a low standard of efficiency.

Budgets may include “contingency” allowances

Terotechnology
Terotechnology is the name given to a method of controlling and evaluating the overall capital cost plus equipment maintenance cost.

It is argued that equipment is often bought (or building sited) without proper consideration for maintenance and running costs incurred during its life. Terotechnology is an attempt to evaluate and control equipment cost by considering the following factors
(a) design and specifications
(b) procurements
(c) installation
(d). operation
(e). maintenance

By considering the technology of a piece of equipment and comparing it to the operations for which it is required, the investment decision should favour
(a). The most appropriate equipment
(b). The lowest life cycle costs.

Terotechnology is “life cycle” costing. Its practical application will probably be most effective at the project evaluating stage, i.e. when deciding to invest in capital equipment.

Bolutife Oluwadele, Ph.D., is a Chartered Accountant, author, and public policy Scholar based in Canada.