Objective 08: Plant Budget

Question 1

Are maintenance costs a significant component of ownership costs?

Answer 1

Yes, so they must be closely monitored.

Question 2

What are some methods used to monitor and evaluate maintenance costs?

Answer 2

1. Maintenance Budget which plans costs annually as part of the corporate budgeting process.
2. Evaluation and Analysis of Specific Equipment, often using a CMMS
3. Overall Analysis of maintenance costs in comparison with industry benchmarks or other data

Question 3

Which method is the most common approach to controlling maintenance costs?

Answer 3

Maintenance Budget

Question 4

What are the 2 categories of costs?

Answer 4

1. Capital

2. Operating

Question 5

Why is cost divided into capital costs and operating costs?

Answer 5

Accounting and tax purposes.

Question 6

What are Capital Items?

Answer 6

Assets that can be written off (depreciated) over time against income, while expenses are deducted directly from income as they are incurred.

Question 7

What category of costs do the majority of maintenance costs fall under?

Answer 7

Operating Budget

Question 8

What are some examples of maintenance costs that are included in the Operating Budget?

Answer 8

1. Labour costs
2. Spare parts and materials
3. External contracts
4. Travel expenses
5. Equipment rentals
6. Contract services

Question 9

What are some examples of what some companies consider Capital Maintenance Expenses?

Answer 9

1. Major tools and support equipment (e.g. over $1000)
2. Major equipment replacement (e.g. over $10 000)
3. Major equipment modifications (e.g. over $1000)
4. Major overhauls

Question 10

How are maintenance expenditures planned for?

Answer 10

Through the annual budget

Question 11

How are annual budgets devised?

Answer 11

Each department prepares an estimate (budget) of anticipated expenditures for the coming year for approval by management.

Question 12

What is the responsibility of the supervisors of each department vis-a-vis the annual budget?

Answer 12

Monitoring expenditures throughout the year and ensuring that budget limits are not exceeded.

Question 13

Why do budgets have to be planned carefully and their constraints understood by management, particularly when it comes to maintenance departments?

Answer 13

Maintenance departments deal with costs that are not always predictable.

Question 14

What 2 approaches are used for budgeting?

Answer 14

1. Zero-Based Budgeting

2. Historical Budgeting

Question 15

What is Zero-Based Budgeting?

Answer 15

Determining budget amounts by identifying and estimating all activities to be carried out.

Question 16

Which aspect of maintenance budget is well-suited to Zero-Based Budgeting?

Answer 16

Routine and major inspections.

Question 17

What is a drawback of Zero-Based Budgeting?

Answer 17

It takes a considerable amount of time to prepare.

Question 18

What is Historical Budgeting?

Answer 18

Costs are estimated based on past history with actual expenditures, usually those of the previous year.

Question 19

What is the benefit of Historical Budgeting?

Answer 19

It is the most efficient way to budget for:

1. Miscellaneous expenses
2. Minor Work
3. Unscheduled work due to failures

Question 20

What kind of adjustments may have to be factored into budgeting?

Answer 20

Expected increases, e.g. inflation and salary increases.

Question 21

What are the 2 most difficult elements to estimate in Maintenance Budgeting?

Answer 21

Unscheduled work and major failures

Question 22

How do some companies deal with unscheduled work and major failures vis-a-vis budgeting?

Answer 22

They provide only a moderate allowance for these situations and explain the variance between the budgeted amount and the actual expenditure as required.

Question 23

What can a company do if it has problems with budget variance for unscheduled maintenance?

Answer 23

They can budget a larger amount for unscheduled maintenance, even though it might not be entirely used up every year.

Question 24

Approximately what percentage of the total replacement value of equipment do yearly maintenance costs represent on average?

Answer 24

3% - 6%

Question 25

How are cost structures within companies represented?

Answer 25

A series of account codes to which costs are charged.

Question 26

How can maintenance costs be generally divided?

Answer 26

1. Internal Labour (regular time plus overtime)
2. Contract Labour
3. Spare parts and materials
4. Supplies, e.g. lubricants
5. External services
6. Company overhead charges

Question 27

How often are Cost Reports produced?

Answer 27

Monthly

Question 28

To whom are Cost Reports provided?

Answer 28

The appropriate supervisor for review.

Question 29

What information do Cost Reports show?

Answer 29

1. Costs by Account Code as monthly and year-to-date totals
2. Budget amount for each Account Code
3. Variance between budget and actual cost

Question 30

What are 2 types of Budgeting Variance?

Answer 30

1. Permanent Variances

2. Temporary Variances

Question 31

What are Permanent Variances caused by?

Answer 31

Unexpected differences, e.g. costs related to a major failure, that increase the total annual maintenance expenditure

Question 32

What are Temporary Variances caused by?

Answer 32

Timing differences, e.g. major inspection done earlier than planned and so an expense is incurred earlier than budgeted for.

Question 33

Do Temporary Variances increase the total annual maintenance expenditure?

Answer 33

No

Question 34

Why aren’t maintenance budgets an appropriate tool to analyze and understand the actual costs associated with specific equipment?

Answer 34

They’re based on costs associated with whole departments.

Question 35

How can the actual costs associated with specific equipment be evaluated?

Answer 35

Use the history contained in a CMMS

Question 36

How does equipment history on a CMMS illuminate actual costs?

Answer 36

The history is built from costs associated with work orders that apply directly to the equipment. Therefore, it’s possible to analyze maintenance information by looking at the actual costs incurred to maintain one type of equipment, e.g. pump, and compare individual costs against the average.