Case Study
We Build Ltd. is a private limited company set up in early 2020. We Build Ltd. operates in the
construction industry, specialising in loft conversions. Due to the nature of the business and the COVID-
19 pandemic striking right after its establishment, the turnover has been low, with revenue in the first
year of operation totalling a meagre £1.35 million, although revenue projections were estimated at £2.4
million.
Steve Wilson, the owner-manager of We Build Ltd., is significantly involved in the daily operations of
the business. Within the construction industry, a job budget is as important as tactical operational
1 The grade is provisional until confirmed by the relevant assessment board(s). Your work will be marked in grades
rather than percentages. This is considered to deliver the most accurate and fair outcomes for students. Each
assessment that you undertake will be assessed using the common grading system. Information about the grading
system can be found in your Student Handbook, Section 10.
The Grade Criteria can be found in Appendix C of your Student Handbook.
Assessment Brief: LSBM312 – 2021-22 Page 3
budgets. Fundamental to the successful implementation of a given project is the ability to meet goals
based on quality levels, schedule, and functional levels. Cost estimation of time, materials, schedules,
and incidentals is extremely important to the overall successful completion of each project. The risk
involved within the construction industry is great – anything can go wrong at any time – and often does.
Budget overruns can occur, and proficient cost control over materials, labour, and equipment is
essential to an operation’s success. For We Build Ltd., the risks and budget overrun problems are
exacerbated due to the pandemic. Project and operational budgeting, therefore, is an important method
to ensure continued operation and success. We Build Ltd. also utilises this method of budgeting analysis
and control.
A job budget is used to track each project and provides both decision management and management
control. Job budgets are prepared for each project consistently. Steve works closely with an estimator
to establish a budget for each new project. This budget communicates project expectations to the
Project Manager and authorises the Manager to use company resources up to the budgeted amount.
Control is maintained as Steve and the Project Manager review the Job Budget Report on a bi-weekly
basis. This process serves several purposes: the review provides a formal method of communication
that is necessary in a company with multiple projects occurring at the same time. The knowledge gained
during these reviews allows Steve to re-allocate company resources where they are best utilised. He
can also investigate the causes of behind-schedule projects and shift resources to ensure the customer
is satisfied and the company builds its reputation. This in turn will assist in maximising the company’s
overall value. Each Project Manager is responsible for several jobs and is evaluated and rewarded on
performance based on his ability to provide quality service and workmanship and stay within set
budgetary guidelines. A typical job budget is as follows:
Exhibit 1: Typical job budget at We Build Ltd.
Budget Actual Variance
Job revenue 50,000 52,000 2,000
Raw material costs 6,000 5,500 500
Labour costs 10,000 10,400 (400)
Fixed overhead allocation 5,000 5,000 –
Total expenses 21,000 20,900 100
Net profit 29,000 30,900 1,900
Fixed overheads are allocated to each job based on the number of labour hours spent on each job.
They cover what is perceived to be each job’s share of the administration expenses. Project Managers
often complain about the allocation of fixed overheads to the job budget as they claim that they should
not be held responsible for costs they have no control over.
Steve believes that a monthly operating budget would be beneficial for his business. However, he is not
entirely committed to the practice and has not consistently prepared budgets to control performance.
The uncertainty surrounding the lockdown restrictions has meant that making budgets has not always
been easy. This has resulted in significant variances being reported at the end of every month. To
counter the uncertainty, Steve resorted to preparing quarterly budgets as opposed to monthly budgets.
A typical quarterly operational budget is as follows:
Exhibit 2: Typical quarterly operational budget at We Build Ltd.
Q1 Budget Q1 Actual Variance
Jobs completed 12 5 (7)
Sales revenue 600,000 255,000 (345,000)
Raw material costs 36,000 12,000 24,000
Labour costs 120,000 53,000 67,000
Equipment costs 33,000 13,000 20,000
Fixed administration expenses* 18,000 15,000 3,000
Travel & subsistence 12,000 6,000 6,000
Depreciation* 25,000 25,000 –
Storage costs 16,000 10,000 6,000
Total expenses 260,000 134,000 126,000
Net profit 340,000 121,000 (219,000)
Assessment Brief: LSBM312 – 2021-22 Page 4
*Only fixed administration expenses and depreciation are treated as fixed costs for the
business.
Project and operational budgets are developed by the employment of a top-down approach within the
company. Little input is received in the budgeting process from employees whose performance is based
on adherence to said budgetary constraints. Steve believes that this scheme is necessary considering
the nature of the unskilled laborers working for We Build Ltd. and the specialised knowledge that is
needed to formulate a budget.
Recently, Steve has been finding the budgeting exercise time-consuming and feeling that he is unable
to control the variances despite having the figures to show for them as the variances are beyond his
control or the analysis is too outdated for corrective action to be taken. He is also concerned about the
quality of the work that is carried out by the project managers. A few clients have requested minute
adjustments following job completion, stating that the job specifications were not met. Steve wonders if
project managers compromise on quality to meet the budget expectations.
Task
Working on the premise that performance measurement is central to management control, you are
required to read the above scenario and, assuming a role of a financial controller, prepare a report for
Steve Wilson which deals with the following requirements:
1) Critically evaluate the current systems of performance measurement, management reporting and
budgeting at We Build Ltd. and highlight what you consider to be the problems of the system.
(40 marks)
2) Using the operational budget given in Exhibit 2 of the case study, create a flexible budget using actual
activity levels and analyse the variances.
(20 marks)
3) Describe in detail how you consider the systems might be improved considering the challenges the
company is facing.
