L4M2 Leak Questions

Explanation

The difference between the actual spend and budgeted spend is known as variance. The formula for variance is:

Variance = Actual spend - Budgeted spend

Variances can be adverse/unfavourable or favourable ie they can be positive or negative.

Be very careful with these terms. A positive or a negative variance may be favourable or it may be adverse/ unfavourable.

Adverse variances

Adverse variances are those variances that are unfavourable to the firm. Examples would be sales below plan; costs above budget, cash receipts lower than expected, and overtime payment more than forecast.

Favourable variances

Favourable variances are those variances that are beneficial to the business. Examples would be sales ahead of plan, costs below budget, and wages below forecast.

Positive variance

A positive variance occurs where 'actual' exceeds 'planned' or 'budgeted' value. Examples might be actual sales are ahead of the budget.

Negative variance

A negative variance occurs where 'actual' is less than 'planned' or 'budgeted' value. Examples would be when the raw materials cost less than expected, sales were less than predicted, and labour costs were below the budgeted figure.

When the operators create saving, it means that the Actual spend is less than Budgeted spend. Therefore the variance is negative.

Detailed Explanation:A strong business case includes a clear assessment of costs, the expected benefits, and the viable options available. These criteria ensure a structured approach to decision-making and alignment with strategic goals. Reference: CIPS Level 4, Business Case Development.

Explanation

Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.

Basically, the following criteria can be applied to the assessment of a business case:

1. Objectives

This part describes why you are doing the project. The business objective answers the following questions:

- What is your goal?

- What is needed to overcome the problem?

- How will the project support the business strategy?

2. Option identification and selection

Identify the potential solutions to the problem and describe them in enough detail for the reader to understand.

For instance, if the business case and proposed solution makes use of technology, make sure to explain how the technology is used and define the terms used in a glossary. Since most problems have multiple solutions an option appraisal is often needed. This will explore the potential solutions and recommend the best option.

When writing the initial business case the option appraisal is likely to contain a long list of options and will cover many possibilities. As the project continues a number of options will be rejected. The final business case may contain three to five options ― the short list ― that includes a do nothing or benchmark option.

3. Benefits and limitations

The benefits and limitations section describes the financial and non-financial benefits in turn. The purpose is to explain why you need a project.

For instance, to:

- Improve quality

- Save costs through efficiencies

- Reduce working capital

- Generate revenue

- Remain competitive

- Improve customer service

- Align to corporate strategy

The business case should also include any limitations since these present potential risk to the pro-ject.

4. Risk management

The risk assessment summarizes the significant project risks and opportunities and how they are managed. The risks included should cover those that could arise from your project or the organiza-tion’s ability to deliver change.

This section answers the following questions:

- What risks are involved?

- What are the consequences of a risk happening?

- What opportunities may emerge?

- What plans are in place to deal with the risks?

- Every project should include a risk log.

When writing a business case, make sure this is included as it explains how risk and opportunity are managed.

5. Implementation plan

The outline plan provides a summary of the main activities and overall timescale ― project schedule ― for the project.

Ideally, the project should be divided into stages with key decisions preceding each stage. Use this section to answer the following questions:

- What is required?

- How is it done?

- Who does what?

- When will things happen?

This outline plan lists the major deliverables and includes a brief project description plus accountabilities for each activity.

In the scenario, the CPO has set out objective, generated options, cost and benefit of each option and implementation plan. In order to make the business case more compelling, he should reinforce it with risk management.