A Budgeting Novice General Sensor Company Alexander Jones was an experienced pro

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A Budgeting Novice General Sensor Company Alexander Jones was an experienced project manager of a Justin Jordan has been named Project Manager of the small machine shop. He had always had complete autho Geeral Sensor Company's new sensor manufacturing ity when working with the clients on specifications of the process project. Sensors are extremely price sensitive. projects as well as when working with the project team General has done a great deal of quantitative work to be on the schedule. His boss, however, did not feel comfort able to accurately forecast changes in sales volume rela- able letting Alex determine project budgets. The boss ive to changes in pricing always did that himself. The company president, Guy General, has faith in A client approached Alex about designing a piece of thsensitivity model that the company uses. He insists surgical equipment. Alex was excited about this project all projects affecting the manufacturing costs of sen- because his usual job was to design and make parts of fac sors be run against the sensitivity model to generate data tory equipment. He was delighted to have a chance to do o calculate the return on investment. The net result is something that might directly affect humankind. Alex h project managers, like Justin, are under a great deal knew what the surgical tool was intended to do and had of pressure to submit realistic budgets so go/no-go project figured out what had to be done to design and manufac sions can be made quickly. Guy has canceled several ture it. He had even estimated the labor-hour require poects that appeared marginal during their feasibility ment. He wanted to do all the planning discussions with taes and recently fired a project manager for overestimat- ing project costs on a new model sensor. The project was and six months latera competitor introduced a similar sensor that proved to be the client, including discussions on the budget. killed early in the design stages, Questions: What do you think Alex should show to his boss so that the boss would feel comfortable letting Alex determine and monitor the project's budget? What should Alex say to persuade the boss? more highly successful. Justin's dilemma is how to construct a budget that accurately reflects the costs of the proposed new process. Justin is an experienced executive and feels comfortable with his ability in estimating costs of projects. However, the recent firing of his colleague has made him a little e of the four-stage sensor manu- facturing process is being changed. Justin has detailed information about the majority of the process. Unfortunately the costs and tasks involved in the new modified process stage are unclear at this point. Justin also believes that the new modifications will cause some minor changes in the other three stages, but these poten- tial changes have not yet been clearly identified. The stage being addressed by the project represents almost 50 Stealth Electronics shy. Only one stag gun- Stealth Electronics manufactures secret electronic wea- pon systems. They have just engineered a new system. cost i They bid for and won a contract with DARPA (Defense Advanced Research Projects Agency). Stealth Electronics negotiated a cost plus contract for development of the prototype. The prototype project was approximately on time and on budget. They are about to submit a bid to produce the first 25 electronic weapon systems. The pro- duction contract will be a fixed fee. The CFO of Stealthpercent of the manufacturing cost. Electronics has examined the costs associated with build ing the prototype and thinks the proposed bid for produc- tion of the first 25 systems is significantly too low Questions: Under these circumstances, would Justin be wise to pursue a top-down or a bottom-up budget ing approa ch? Why? What factors are most relevant Question: What should the CFO do? ere

Explanation / Answer

General Sensor Company

Budgeting Approach for a project – The suggested budget approach here in this case is “Top-Down Budget Approach”, due to current scenerio in the organization.

Top –Down Budget Approach –

Here the top down budget approach means, the budget is made by the top management representative and then reviewed & accepted by the bottom manager. Hence the direction of decision flows is from “Top to Bottom level” in the organization, hence this approach is known as Top to Bottom Approach.

Why Top-Down Budget Approach –

1.      In this case the Top management do not have a strong faith in the bottom employees. The top management do not believes the working management. The top management has already fired a project manager some time back , due to inappropriateness in the project costing. The top management is not willing to review the budget and they assume the guilty of project manager and they can fire the project manager for such a small mistake / difference in opinion.

2.      The project manager is expert & has got sufficient experience for the current operations. But he is not very sure on the changes in cost for some of the operations. He is sure for 50 % of cost but not very sure for rest of 50% of operations, hence it is better to let top management decides the project cost, as it is critical scenario due to lack of faith in working employees by the top management.

3.      The environment ion the organization is not motivating the project manager to make the project costing, as he fears a lot due to recent incident of firing his co-project manager. Hence Top-Bottom approach will be better.

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