web viewmodule 3 • trend analysis. module 2 • performance measurement. module 4 •...

Budget Analysis Budget Analysis WorkshopWorkshop

Participant Guide, Version 5.0

BUDG8100-M

Graduate School USAWashington, DC 20024

(888) 744-GRADwww.graduateschool.edu

Copyright © 2003—2012 by FedTrain, Inc.

Portions of this manuscript, exclusive of public domain materials, are protected by an additional copyright. All rights reserved to those portions by FedTrain, Inc. 2451 Cumberland Pkwy, MS 3698, Atlanta, GA 30339. No portion of this manuscript may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system without the permission in writing from FedTrain, Inc. Said permission is conveyed, herein, exclusively to the Graduate School USA.

This manuscript has been reprinted by the Graduate School USA for use in BUDG8100D with permission of FedTrain, Inc.

Introduction

Table of Contents

Module 1Transition to New Duties

Module 2Performance Measurement

Module 3Trend and Variation Analysis

Module 4Data Relationship Analysis

Module 5Cost Analysis

Appendix ABlank Worksheets

Appendix BGAO Glossary of Terms September 2005

Appendix COMB Circular A-11: Part 6

Preparation and Submission of Strategic Plans, Annual Performance Plans and Annual Program Performance Reports (July 2010)

Appendix DOMB Memo M-08-13 (2008)

© Graduate School USA 1 Budget Analysis Workshop© 2012, FedTrain, Inc.

Introduction

Welcome

Graduate School USA would like to congratulate you for being selected to attend this very meaningful, informative, and useful program of instruction. We sincerely hope you will be able to improve your analysis of diverse aspects of your professional career, and personal endeavors as well. As you will see in this course, all of the techniques you will be taught can be used in untold opportunities both professionally and privately. For example, the course incorporates a case study of a fictitious organization and you will be assigned various analytical tasks to accomplish. To prepare you for many of those tasks, the course will ask you to complete the analysis of a typical nongovernment situation. For example, in Module 5 you will be asked to decide whether you would personally pay cash, lease, or finance a new car, or keep your old clunker. It is our hope that, by using analytical techniques that one might encounter in a private setting, the participant can overcome learning obstacles and allow focus on the real benefits and uses of the particular technique being employed.

You will also learn that all analysis is not exclusively about the bottom line numbers. One need only tune to a business news program on cable TV and observe experts commenting, and even prognosticating, on the future of a particular stock or of the market in general to realize this truth. Two presumably competent analysts can conduct independent analyses of data on the same company and emerge with entirely different conclusions and recommendations. One says, “Buy!” while the other urges, “Sell!” Which advice should one rely upon in making a decision? Some would say to trust the analyst with the highest credibility. Others would focus on the presentation, leaning toward the analyst who made the best case. Still others would reject both and seek their own path. Thus, analysis is far more than just the numbers. In many cases, a person’s tendencies, experience, intuition, and even feelings play a major part in a decision. This course will help to illustrate this point.

Budget Analysis Workshop 2 © Graduate School USA© 2012, FedTrain, Inc.

Introduction

The course was designed as an integrated case study. The participant will note that each of the six modules can stand alone, although they are incorporated into a scenario that will enable the participant to role-play his or her involvement in the exercise. No single analytical technique is given more or less weight than others. However, the participant will find that certain analytical techniques tend to be used more frequently than others, both in the fictional case and in the practical applications in the workplace. This four-day course combines lecture, small group exercises, individual work, and class discussions. Each module will begin with a lecture by the instructor focusing on the learning objectives, the background, and the key points of the subject matter. The participant will then be required to read the case-study exercise assignment for that module. Generally, there will be a practice exercise to prepare the participant for the assignment. The instructor will assist the participants through the practice exercise, if used, to ensure that the participants are acquiring the required skills and knowledge. At times, the participant will work individually. But, frequently, the final assignment will be a group effort.

Finally, a comment should be made on math skills. Some participants in the past have enrolled in this class unprepared. The published prerequisites for the class should be observed if at all possible. Having said this, Graduate School USA recognizes that some attendees will need additional tutoring in certain mathematical techniques to enable them to complete the exercises. The instructor therefore will take time to assist participants in these techniques as the course proceeds. Participants requiring such assistance should not hesitate to ask for it. Participants who do not need the assistance are requested to be patient as we equip all participants to participate successfully in this very important learning opportunity.


Introduction

Course Overview

A synopsis of each module is included below, so that you may familiarize yourself with the material before diving in.

Module 1: Transition to New Duties (The Case Study)This module introduces the participants to the hypothetical organization that will be featured throughout the course, the Federal Service Center. It discusses the structure, mission, funding, and relationships within the organization. This module will teach the participants how to transition quickly to a new set of duties, whether they are in a completely new assignment or just temporarily picking up tasks in a vacant position.

Module 2: Performance MeasurementIn this module, the participants will use the Government Performance and Results Act (GPRA) of 1993 as it was enacted, implemented to focus on one of the most important components of the act: performance measurement. Students will focus on how effective performance measurement is a valuable tool for analysis of program accomplishments. The participants will learn how to identify key program-measurement indicators and related financial data to enable correlation of diverse data to enhance the analysis. The participants will learn how to use the performance measurement tools to better develop GPRA performance measurement indicators and to analyze performance against those indicators.

Module 3: Trend and Variation AnalysisTrend analysis is the most widely used form of analysis in the world today. The participant will learn the various types of trend analysis, how to detect patterns in data population, and how to display the data in a manner that enhances decision-making. In the context of a case study, the participants will conduct a trend analysis of data. The participants will prepare recommendations for adjustments to the current year budget execution and forecast requirements for next year’s budget.

Variation analysis is a close second to trend analysis in popularity with today’s professional analysts. In Module 2 the participants learned how to relate performance objectives to resource consumption. The second part of Module 3 focuses on analysis of the data as it relates to expectations. For example, a manager projects to accomplish 200 workload units. At the conclusion of the period he produced only 185 units. What was the variance? What factors contribute to a variance, favorable and unfavorable? How significant are they? What does the variance say about future performance? The participants will learn to use variation analysis as a tool for analyzing results and making predictions for future outcomes.


Introduction

Module 4: Data Relationship AnalysisInformation overload contributes to faulty analysis. Additionally, too much intertwined but disconnected data inhibits analysis. In this module the participants will be taught how to recognize the key data elements. In the context of a case study, this module will ask the participants to analyze various budgetary information and performance data, and provide estimates regarding the creation of a new organizational unit. This module will demonstrate how these sources of related data can be assimilated and used to make effective analysis and projections for the future.

Module 5: Cost AnalysisModule 5 introduces the participants to the complexities of cost analysis. It discusses the terms and techniques used in a simple cost analysis. The participants will be required to answer the question, “Is it better to purchase, lease, or lease-to-own a new piece of equipment; or to keep the old machine?” The participant will learn how present value analysis can have a significant impact on the decision.


Introduction

AgendaDay 1

Welcome and IntroductionsModule 1: Transition to New DutiesLunchModule 2: Performance Measurement

Day 2Module 2: Performance Measurement (cont.)LunchModule 3: Trend AnalysisModule 3: Variation Analysis

Day 3Module 3: Variation AnalysisModule 4: Data Relationship AnalysisLunchModule 4: Data Relationships (cont.)

Day 4Module 4: Data Relationship Analysis (cont.)Module 5: Cost AnalysisLunchModule 5: Cost Analysis (cont.)Wrap-up and Dismissal

Each class day consists of 7 hours of instruction, an hour for lunch with appropriate morning and afternoon breaks as determined by the instructor. A class-day is credited as 8 hours for Continuing Professional Education (CPE) purposes. The last half-hour each day will be set aside for the students to complete assignments for the next day. The student will be free to complete the outside assignment in the classroom following dismissal or at a time and place of their choosing that evening. The following table outlines the outside assignments:

What Book Pages Complete by

Practice Exercise 2-1 Workbook 14 Start—Day 2

Practice Exercise 3-1 Workbook 20 Start—Day 3

Module 4, Read Participant Guide 4-1 to 4-7 Noon—Day 3

Module 4, Quiz Workbook 28 Noon—Day 3

Module 5, Exercises 5-1 to 5-5 Participant Guide 5-6 to 5-10 Start—Day 4


Module 1Module 1

Transition to New Duties

7

Module 1 • Transition to New Duties

Module Objectives

At the successful completion of this module, you will be prepared to quickly analyze the past and present status of an account, program, project, organization, or activity.

Objective 1: How to recognize and collect relevant data for the new environment.

Objective 2: How to recognize critical data elements.

Objective 3: How to recognize relationships between data elements and organization/mission objectives.

Objective 4: How to format data to make the analysis easier, more accurate, and comprehensive.

Case Study: To Do Today!

This case study centers on the imaginary Federal Service Center (FSC), of the Federal Management Agency (FMA).

General Situation

Mission: The FSC is a field-operating agency of the FMA, both fictitious organizations. It is located in a General Services Administration (GSA) office building in Long Branch, Arkansas. It has a national mission of providing three broad support services to various non-military agencies of the U.S. Government.

The agencies are required by Presidential Executive Order and Office of Management and Budget (OMB) circular to acquire their services from one of the five FSC regional offices. In all, the FSC supports nearly 830,000 federal civilian employees in the United States.

© Graduate School USA 1 - 1 Budget Analysis Workshop© 2012, FedTrain, Inc.


These services are grouped by the following major categories:

Human Resources Management: These services include official personnel record keeping; position management, including job descriptions, classification, and grading of positions; personnel recruitment; and training.

Logistical support: These services include procurement and supply actions, facilities management, and administrative vehicle support.

Financial management: These services include broad comptroller functions, including accounting, disbursing, reporting, and payroll processing housed in five finance centers. In addition, the FSC headquarters provides a variety of management services, which are available to the customers on a non-reimbursable basis. They include management analysis, manpower analysis and internal review and audit.

Background: The FSC was formed seven years ago to fill an emerging need caused by the broad downsizing of the federal government. Hundreds of relatively small federal agencies found that they could not continue to provide their own stand-alone support services. Consequently, they were directed to transfer some of their functions and a limited number of full-time equivalent (FTE) authorizations to the newly created FSC.

There are five regional offices reporting directly to the FSC. Each region has a number of satellite offices, which are located in areas where there are large concentrations of supported activities. There are twenty-four satellites throughout the U.S.

The FSC is funded in two ways:

Appropriated funds: The FSC headquarters receives annual funding for salaries and operating expenses. These funds are provided through annual Congressional appropriations acts.

Reimbursable funds: The regions and their satellites are wholly dependent on reimbursable funds for their existence. Each supported activity reimburses for the support services provided by the regions and their satellite activities.

Budget Analysis Workshop 1 - 2 © Graduate School USA© 2012, FedTrain, Inc.


Specific Situation—Your Role

You are a budget analyst in the Budget Division, Chief Financial Officer Directorate, FSC HQ. You were recently promoted to this Budget Analyst position. You have almost five years experience in budgeting, most of which was at the region level. Formerly, you worked as a Budget Assistant in the Tulsa region office. At Tulsa, most of your time was spent reconciling accounting reports and following up on errors. You did not do in-depth analysis of the programs. This new job will require you to analyze budgets at higher levels using more sophisticated techniques than you previously experienced. Your supervisor is the Budget Director, Mr. Jim Johnson, who is also new to the organization, having preceded you by only four months.

For the next few months, Mr. Johnson has assigned you to be the primary budget analyst for the Management Analysis Teams (MATs), which are in the management analysis division. It’s part of the Chief financial Officer (CFO) Directorate. Mr. Johnson wants you to focus on just one account to help you learn about the headquarters and the internal administrative procedures. You know you will be assigned additional accounts in the near future.

Before you arrived, the CFO announced that the current year’s funding levels were cut substantially and this year’s execution will be very difficult, both in the appropriated and reimbursable funds. First, look at the appropriated funds for the HQ. The appropriated funding levels continue to decline but the general workload has not declined commensurately. More work, fewer people. In addition, the general downsizing of the federal government continues to eliminate organizations either through outright closings or through consolidations. The effect is that, as the customer population declines, so do the reimbursables. Most remaining customers are facing serious funding cuts as well. So, the funds they have available to purchase goods and services from the FSC are declining. Cutbacks will be necessary. Without these funds, the regions are in jeopardy of over expending the revolving fund. You expect to be assigned at least one of the functional budget accounts in the revolving fund in the future in addition to the appropriated funds in one of the headquarters accounts.



Before We BeginBefore beginning, a word or two (and more) should be said about numerical analysis.

A quest for exactness is best left to the accountants.

The process of data analysis includes the following:

– Gathering– Organizing– Validating– Analyzing

Inferences

Expectations or predictions

Comparing results

Analyzing variations from expectations or predictions

Probabilities

Presentation: words, numbers, and pictures

Mr. Johnson has a sign in his office entitled the:

Seven Crippling Pitfalls of a Poor Analyst

1. Failure to prepare

2. Resistance to change

3. Intuition vs. analysis

4. Relying on personal bias

5. Lack of training

6. Isolation

7. Poor communication choices



At the conclusion of this discussion, your instructor will lead the participants through a review of information in the Workbook. The table teams should be prepared to answer the following questions at the conclusion of the review. Based on the five-year actual data (Chart 5, Page 6):

1. Have the grand-total funding levels in appropriated funds been increasing from year to year?

2. What is the largest single object-classification expenditure?

3. Last year, after excluding labor costs (object classification code [OCC] 10) and travel (OCC 21) what percent of the appropriated funds remain? In which direction has this been trending in the past?

4. Have FTE levels trended in the same direction as the labor dollars?

5. What are the implications of these relationships?

6. These totals are for the headquarters as a whole. What would you want to know about your area of responsibility, the MATs?

7. If these patterns continue, what expectations and assumptions would you have about MAT programs in the future?

With the preceding review and discussion finished, please turn to Module 2 and begin to learn about the importance of performance measurement. In doing so, see how much more you can learn about the MATs, such as the way they do business, what their cost drivers are and what they think is important to accomplish their priorities.


Module 2Module 2

Performance Measurement

7

Module 2 • Performance Measurement

Module Objectives

At the successful completion of this module, you will be able to do the following:

Objective 1: Analyze historical data to help in the examination of the goals and objectives of the new organization.

Objective 2: Develop measurement indicators to evaluate accomplishment of performance objectives of programs, project or activities.

Objective 3: Use historical data to discover relevant measurement criteria.

Objective 4: Uncover data drivers.

Objective 5: Use analytical techniques to measure program accomplishment and resource consumption.

Objective 6: Use basic mathematical operations, such as rate of change, necessary to complete the analyses in this and future exercises.

An Example of a Statement Typifying Performance Measurement

“The objective of delivering 115.6 million doses of influenza vaccine by October 1st was achieved costing $ 386 million.”



Performance Measurement

E-mail Message 001Subj: Performance Measurement RequirementsDate: CY-O1-11From: [email protected]: A [email protected]

The FSC is required to develop a preliminary annual performance plan in support of our strategic plan. We are to provide information regarding the budget.Each budget analyst in this division is being requested to analyze their assigned budget area. You are assigned to the MATs, Management Analysis Division. The MATs are responsible for conducting studies to analyze workload data and determine resource levels to ensure our supported agencies are operating at optimum efficiency and effectiveness. Last November, FMA HQ in Washington, DC assigned the MATS the following two objectives:

Objective 1: Increase the operating efficiency and economy of the organizations studied each year. To do this they will document a 3 to 5% savings of FTEs1 in those agencies included in the annual study program. (External)Objective 2: Improve the efficiency and effectiveness of internal MAT operations. To do this, they will reduce study obligations by 3% per year over a six-year period. (Internal)

I would like each budget analyst to follow the same general procedures. They are as follows:1. Review Part 6, OMB Circular A-11. (A copy is in the Participant Guide at

Appendix C.)2. Analyze their assigned objectives and develop measurement indicators that

can be used to monitor them. Prepare a list of measurement indicators. Indicate the source for the data to support the indicators (i.e., does the data already exist or will it have to be created?).

3. Prepare an analysis of how well the MATs have performed based on the above, assuming the data are available for the past four prior years. In other words, if the MATs had been using their new objectives over the past five years, would they have been successful?

1 The term F.T.E. relates to “Full-Time Equivalents”. It represents the equivalent of one person working (compensated) for each day in a federal work year. This is either 260, 261, or 262 days. At 8 hours a day it results in 2,080, 2,088, or 2,096 hours. Thus, five temporary workers each working 415 hours a year would equate to nearly one F.T.E.



Well, Mr. Johnson doesn’t believe in giving someone a chance to catch their breath! You have never done this kind of work before and don’t know where to begin. You spoke with a fellow analyst who was in training with you last week. She said that she saw something in the newspaper about national goals and objectives to eliminate the national debt and hold down government spending. She thought the article might be useful to you in practicing your skills at performance measurement. She gave you the paper and you found the article. There was a lot of data in it but it was poorly displayed; more for narrative purposes than analysis. You knew you would have to format the data if it was to be useful. You looked for objectives and found some that prominent economists said would be good for the country to achieve. They were:

Keep federal spending at or below 18% of the gross domestic product. (Meaning 82% of our nation’s output would come from sources other than the federal government.)

Keep the national debt to less than 50% of the annual gross domestic product. (Meaning that our annual output would be twice the size of our entire debt.)

Your coworker was suggesting that you reformat the data and analyze just how well we were doing at meeting those objectives. (Not good, you suspect, given the political raucous in the news lately.)



Practice ExerciseThis exercise is designed to introduce some of the techniques we will be using in various exercises throughout the course.

1. Determining the rate of change (%) from one period (or value) to another.[ x = (N2 – N1)/N1 ]

2. Determining the relationship, expressed as a percentage, between two data elements. [ x = (P/T) ]

3. Determining the value of a third data element based on values of other elements.

The instructor will illustrate the use of these techniques on the screen.

Please turn to the Workbook (page 14) and complete Exercise 2-1 “Practice Exercise: Analyzing U.S. Gross Domestic Product, Federal Outlays, Federal Debt, Employment, and Crude Oil Prices.” Specifically, how well is the U.S. doing in GDP growth, spending and debt? Are we achieving the objectives stated in the previous page? If not, what would be more reasonable expectations?



Okay, that was interesting and good practice. Perhaps now you are ready to tackle Mr. Johnson’s project. Following the review of the GPRA introduction materials, you decided to contact the management analysis division. You knew you would need some performance data. You spoke with their project officer who was handling GPRA as an additional duty. He said he was expecting a call from the budget office. He was frustrated with GPRA requirements. It seems he could assemble the performance data but didn’t have a clue how to relate it to dollars. He hoped you could help. You said you would try. He agreed to send as much of the performance data he had. He sent you printouts of data for each study conducted so far this year, plus summaries from the past four years. You then combined it with the budget-execution data on file in the budget office. The resulting spreadsheet is in the Workbook (Exercise 2-2, pages 16-17).

Your tasks are now as follows:

1. Review the spreadsheet contents with the instructor.

2. Complete the analysis of data by computing lines 14 through 19 (page 17) for the current year (CY) estimate column.

3. Analyze the data for the five years and answer the following questions:a. Which measurement indicator (Lines 14 and 15) best reflects the MATs

results compared to their external objective (Objective 1) to save 3 to 5% of FTEs studied.

b. Which measurement indicator (Lines 16 though 19) best reflects the MATs results compared to their accomplishment of their internal objective (Objective 2) to cut study costs by 3% per year?

c. Based on your analysis, have the MATs been accomplishing their objectives? If not, based on the data presented, what would be a more meaningful objective statement for each objective?



To prepare you to complete the analysis, the instructor will discuss these key points (refer to the presentation slides on the screen):

Essential Characteristics of Performance Measurement1. Measurable Performance Objectives.

2. Relevant Measurement Criteria.

3. Reliable Workload and resource consumption data.

4. Documented results.

For a Measurement Indicator to be Meaningful1. The measurement indicator should be relevant.

2. The indicator should be expressed in the same terms as the objective.

3. The indicator should be fair, achievable and representative of effort.

4. The indicator can be aided by linking variables.

The instructor will lecture on the solution using slides on the screen. All solutions will be provided to you in a separate Solutions Guide upon completion of the course.

At the conclusion, use this space to record your response to the following question:

How can I improve analysis of my programs, projects, or accounts through performance measurement techniques? (Try to list at least three different ways.)

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________


Module 3Module 3

Trend and Variation Analysis

7

Module 3 • Trend and Variation Analysis

Module Objectives

At the successful completion of this module, you will understand the following:

Objective 1: The importance of Trend Analysis in budgetary and financial management.

Objective 2: How to use the key components of Trend Analysis to analyze obligation and performance data. (Data gathering, refining data, analysis, projections and updating data).

Objective 3: How to conduct a Trend Analysis of data in the case study organization. Analyzing data changes due to cost growth and/or program growth. This includes:

– Arraying data to assist in analysis.– Relating data unto each other.– Linking variables in data to assist forecasting and analysis.

Objective 4: How to conduct a Variation Analysis designed to test the validity of the Trend Analysis completed as a part of Objective 3.

An Example of a Statement Typifying Trend Analysis

“Over the past four years the number of persons in the department has declined 23.7 percent from 885 to now there are only 675.”



Trend Analysis

Well that went pretty well. You briefed your performance measurement analysis and recommendations to Mr. Johnson in a meeting with most of the other analysts who likewise briefed their accounts. Mr. Johnson approved your recommendations. He asked you to get with the MAT Division point of contact (POC) to let him know which indicators you settled on. You are to also establish a mechanism for them to feed performance data to the Budget Office on a monthly basis. That having been done, you return to your workstation anxious to get settled into a normal routine. You turn to your computer and find another e-mail from Mr. Johnson.

E-mail Message 002Subj: Trend Analysis ProjectDate: CY-O1-13From: [email protected]: [email protected] you know, the CY appropriated fund budget is not looking good. We may have to do some cutting of programs unless we can find some excess money. Therefore I am asking all analysts in the budget division to reexamine the budget.I would like for you to focus on the travel budget for the MATs. They are very expensive, so I want to be certain we are funding only what they need. Pull together the last four or five year’s data for the MATs. Analyze the trends. Exactly what is happening in this account? MAT staffing levels dropped a couple of years back but funding levels continue to go up. Note that the projected increasing mission next year will add more costs. I’m just not satisfied we have a good handle on their requirements. While you are at it, make a projection of next year’s budget.Be ready to brief me tomorrow morning on the following:

1. What are the trends in scheduled studies v. accomplishments, onsite study days, and obligations?

2. The validity of the current year budget based on your analysis of the above trends. Make any recommendations on changes to the budget.

3. Forecast the requirement for next year’s budget. Assume the teams and staffing levels do not change from this year’s level. The POC in MAT division will give you the number of planned studies based on guidance from OMB.



ExerciseYou have done very little detailed analytical work before. You need to practice. So another analyst gave you some examples of work that was done previously. Try completing Practice Exercise 3-1 in the Workbook (page 20).

The answers to the following questions will help you complete the exercise.

Each participant should attempt to answer the following questions with respect to the period fiscal year (FY) 1 through FY 4. (Use your personal knowledge and experience.) Do so first individually, and then as a table group. Be prepared to offer your table’s comments to the rest of the class if called upon by the instructor.

1. What is the overall trend in total civilian pay obligations? Up or down? How much?

2. Is the incremental change from year to year in total obligations reasonable? How much (what percent) would you expect your total obligations to climb from one year to another if staffing levels, grades, etc. remain unchanged?

3. Do the incremental changes in salary obligations mirror the total? Why? Is this reasonable? What kind of events in civilian pay would cause salaries to increase or decrease?

4. Do the incremental changes in benefits obligations mirror the total? Why? Is this reasonable? What kinds of events in benefits would prompt an abnormal change from one year to another?

5. What could be the cause of the abnormal FY 4 data? What questions emerge that require answers?

Await further guidance from the instructor before attempting to complete FY 5.

Okay, now you’ve got the idea. You’re ready to tackle Mr. Johnson’s project. You decide to pull up all the relevant data. See pages 22-23 in the Workbook. Before you start Exercise 3-2, summarize Mr. Johnson’s instructions for this project:

This exercise will illustrate the following techniques for conducting a trend analysis:

Selecting a format for data analysis and presentation

Selecting data groups for analysis; detecting dominant and inferior data groups

Recognizing data anomalies, such as spikes, and using methods to adjust

Discerning linking variables in data to assist analysis and forecasting



Task Assignment Recap1. Analyze the Prior Year (PY) execution data.

2. Validate the Current Year (CY) estimate. Propose any dollar adjustments you determine proper.

3. Forecast next year’s Budget year (BY) requirements. Assumptions are 36 planned studies and staffing levels unchanged.

Refer to the Workbook data on the Trend Analysis Exercise 3-2 (pages 22-23).

The organization of the MATs is as follows. Recall information on the MAT organization Chart 3 in the Workbook for an illustration.

1. There are four MATs supported by a supervisor and two administrative personnel.

2. A MAT typically spends most of its time on the road conducting the actual study. The rest of its time is spent at the home office researching information for past and future studies, responding to inquiries regarding studies conducted, and preparing for future studies.

The workload for the MATs is as follows:

1. Planned studies: The MAT has little to say about how many studies or which ones will be conducted. This requirement is directed by OMB through the FMA HQ to the FSC. Congress passed a law requiring all federal agencies with 25,000 or more FTEs be studied at least once every seven years. There are 210 such organizations in the mission area of the FSC meeting that criterion.

2. Accomplished studies: This section represents the actual number of studies accomplished that year. Usually the MATs do not complete the entire study program. The reasons vary: OMB may grant a waiver or delay for a given agency after the study year begins or weather problems and emergency conditions may prevent conducting the study. (For example, huge forest fires prevented conducting the study of the Forest Service as planned. The study could not be rescheduled that year. In such cases, the study is rescheduled for the following year.) The MATs are almost never responsible for a study not being accomplished. This is an important point to remember—the variation in the number of studies conducted is an uncontrollable variable by the MATs.

Staffing data is also provided. The data shown reflects the number of actual FTEs accumulated in the study process, the number of MATs conducting the studies and the average number of persons on each MAT.



The following table is used to explain how the FTEs are computed:

There are 2,080, 2,088 or 2,096 compensable hours in a federal work year. Deducting for leave, holidays, training and non-productive endeavors, a federal productive work year is approximately 1,640 hours. (This figure may vary somewhat due to local circumstances.) Thus a worker who spends 165 hours on a task or function will have performed .08 percent of a FTE. The following table describes how those hours are computed to establish how many FTEs are consumed by one person on a team of seven persons in a typical study.

A 7-person team spends 1 day traveling to a study site

7 person × 8 hours 56 hours 8 hours for 1 person

A team spends an average of 18 working days on site (weekends and holidays are not included in this computation)

7 persons × 18 workdays × 8 hours per day

1,008 hours 144 hours for 1 person

The team spends 1 day returning to FSC headquarters

7 persons × 8 hours 56 hours 8 hours for 1 person

Team members spend an average of 35 hours (collectively) wrapping up the final report

35 hours wrap-up 35 hours 5 hours for 1 person

Total hours for a typical study 56 + 1,008 + 56 + 35 1,155 hours 165 hours for 1 person

Computed FTEs accumulated working on a typical study

1,155 hours divided by 2,088 hours in one FTE

0.55 FTEsfor all 7 team members

0.08 FTEs accumulated for 1 person per study

Therefore, 35 MAT studies would accumulate 19.25 FTEs (35 x .55).

3. Trip Data: Represents the number of days directly related to the travel budget (i.e. travel to and from the site studied and the actual days onsite in a travel or per diem status.

4. Obligation Data: Amounts represent the total direct obligations reported in OCC 21.0, Travel and Transportation of Persons. Other obligations, such as supplies consumed, transportation of equipment to and from the site, communications charges, reproduction charges, etc., are recorded in other object classification codes in the budget.

Using Exercise 3-2 in the Workbook and, following the directions of the instructor, complete Exercise 3-2 (pages 22-23).



Variation Analysis

You briefed Mr. Johnson on your findings. He complimented you on your work, but said he was unconvinced the projections were as accurate as they could be. He said that, when doing a trend analysis on a year-to-year basis, you could misinterpret the data if you don’t look at the activity occurring within the year. For example, it is common for analysts of retail businesses to analyze changes from one quarter in one year to the same quarter between years. For example many retail businesses are cyclical. Some may experience as much as 60% of their yearly sales in the fourth calendar quarter, the holiday quarter. It would be useful to analyze the trends in the fourth quarter from year to year. It might also be useful to analyze changes in other quarters over the same periods to detect possible changes in the trends. Thus, Mr. Johnson asked you to get performance and obligation data by quarter for the MATs. Analyze the data. Do another projection for this year and next. See if you still agree with your first projection.

The MAT Division Chief provided performance data by quarters. You combined it with obligation data and developed the Variation Analysis Exercise 3-2 spreadsheet (Workbook, pages 24-25).

The instructor will demonstrate on the screen the analytical techniques necessary to complete Variation Analysis Exercise 3-2. The students will be required to repeat certain calculations at the instructor’s direction and upon being assigned the task to complete the analysis.


How can I use trend analysis and variation analysis to assist me to better analyze information I use on the job? (Try to list at least three different ways.)

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________


Module 4Module 4

Data Relationship Analysis

7

Module 4 • Data Relationship Analysis

Module Objectives


Objective 1: Recognize how to use data relationships in budgeting and financial analysis.

Objective 2: Understand how to identify the sources of data and to tie them together to improve data analysis and projections.

Objective 3: Estimate the resource requirements using baseline techniques and data relationships.

Examples of Statements Typifying Data Relationship Analysis

“With respect to the cost for security, the Spokane Area Office is much more economical than the Memphis Area Office.”

“The cost per square foot for rent is lowest in the Wheeling, WV office.”

Analyzing Data Relationships

You gave Mr. Johnson your trend analysis of the MATs. He was very impressed and complimented you highly. He said, “You are really picking this up quickly. I knew when I selected you that I was making the best choice.” You thanked him and, as gracefully and tactfully as possible, attempted to back out of the office. (You resisted the impulse to bolt from the room just so you could get back to your desk and get organized.)

Just when you thought you had made it, he looked up and said, “Oh, my gosh! I almost forgot. I need you to work on a special project. Sam Clemments normally handles these things, but he called in sick today. I wonder if you could handle it. Oh, I know you can.”

He handed you a stack of papers, saying, “Sam left these in a file on his desk when he went home last night. It’s a memo from the inspector general’s office, along with some raw data that Sam, apparently, pulled together but didn’t get a chance to analyze.”

Just glancing at Sam’s notes, it looked suspiciously like Sam knew he would be sick today. Mr. Johnson interrupted your thoughts, “Look, it is quite simple. Just work up an estimate of how much money we’ll need to add to the budget for half of this year and all of next year. This is some kind of pilot program that Congress and OMB might kick off governmentwide and we’re one of the guinea pigs. Give it your best shot. Don’t try to be too exact and for goodness sake, if you have to, guess high. We won’t be able to go back and get more money later.”



Just when does this have to be completed, you wondered? Eerily, Mr. Johnson then said, “It has to be finished by 3 P.M. today. If you take a short lunch break you can knock it right out. Good luck. If you have any questions, you might try to call Sam at home. His number is in the directory.”

The top page of the stack of papers was the memorandum from the administrative officer in the Office of the Inspector General (OIG).

MemorandumDate: February 1, CYFor: Mr. Jim Johnson, budget directorFrom: Ms. Joan O. Arck, administrative officer, OIGSubject: Government Purchase Card Audit Teams (GPCAT)We have been advised by FMA headquarters that, as a result of growing congressional concerns over the possibilities for fraud, waste, and abuse in the government purchase card program, OMB will direct a pilot program to audit selected agencies and activities. This organization will be one of the participants in the pilot program. DoD is also going to conduct a pilot audit program. OMB has indicated they will be providing additional budget authority for six months of this year and all of next year. These are the details:

1. We must submit our proposed budget requirements to FMA by 4 P.M. tomorrow.

2. According to OMB, budget amounts for the pilot programs will be approximately $250,000 this year and $325,000 next year—not more than $575,000 for the 18 months. These figures exclude labor estimates. We suspect that OMB’s estimate is low, but we may have to stay within those numbers. The amount between years may vary.

3. We will hire 22 people for this project. The hire plan is on the following page. We expect to complete the hire plan as scheduled with the audit staff trained and on the road in accordance with the plan. I am also providing some assumptions that you might find helpful in making your estimate.

If I can provide any additional information, please contact me. However, you now know as much about this project as I.Please provide me with a copy of your final estimate when you send it to FMA and OMB.



GPCAT Hire Plan

Chart 10

Month

End of Pay

PeriodOn

Rolls GS-8 GS-7 GS-6 GS-5April 7 0 0 0 0 0April 8 7 1 3 2 1May 9 7May 10 10 2 1May 11 10June 12 14 4June 13 14July 14 14July 15 18 4August 16 18August 17 20 2September 18 22 2September 19 22October 1st Onboard 22 1 5 15 1

AssumptionsThe following are assumptions that might be helpful in this analysis.

Facilities, Furniture and EquipmentAdditional GSA rental space will be required for the team. We will have to lease it from GSA for 18 months starting on April 1st this year to accommodate the following:

1. Workstations: Modular furniture (the desk, files, and chair); a laptop computer, telephone, and ordinary expendable supplies. Nonrecurring (or one-time) obligations are to be incurred in this FY.

2. Common-area space for file cabinets, copier equipment, and a 15x40 foot conference room: Total space required for common area is estimated to be 800 square feet.

Workstation furniture, computers, telephones and supplies will arrive on the first workday of the month of the entry on rolls for the employee.

Conference room furniture (2 large tables and 10 office chairs) is available in storage so do not budget for those items. All other equipment will have to be acquired as there are no surplus stocks available.



CommunicationsEach workstation will have a telephone, but not a separate, dedicated line. Due to the nature of the work and the expected high volume of phone calls that will be incoming and outgoing, we estimate the GPCAT will need 15% more phone lines than other elements of the FSC.

The telephone will arrive on the first workday of the month of the entry on rolls for each employee. All telephone lines will be active on April 1st.

Each Team Leader will be issued a cell phone when away on temporary duty travel. There will be no budget impact.

Training TravelExcept for the GS-5 employee, all new employees will go to Washington, D.C. to attend training offered by the Graduate School USA. Tuition for the 10-day course is $2,000 and must be paid (obligated) four weeks before the participant arrives for the training. As an alternative to the baseline, in lieu of tuition fees, the Graduate School USA will conduct the training here at a cost of $16,000 per session. The charge covers all materials, travel, and per diem costs for the instructors. The course is not suitable for video teleconference training applications.

The 10-day training involves 12 consecutive calendar days of travel status (including the weekend).

The employee will report for training at noon on the first Monday of the second full pay period following entrance on the rolls. (For example, an employee starts employment in pay period 16. He or she will then report for training on the first Monday in pay period 18.) Employee returns home on the second Friday of the training session and is available for operational travel as a team member the following week.

GPCAT TravelGPCAT travel is generically called operational travel elsewhere in the headquarters. The audits will be conducted using teams. Eventually there will be five teams, each with four permanent members, one of whom is a team leader, GS-7. Each pay period, the team chief (GS-8) joins one of the teams and becomes an auditor for the four days. The GS-5 employee does not travel.

Plan for each team to travel a total of four days per pay period (actual trip duration will vary).

In the first year of operation, the employee will join his or her team and commence audit travel immediately following completion of training.

In the second year (first full year) of the pilot, plan that the teams and the supervisor will be on the road an average of four days per pay period for 17 of the 26 pay periods.



GPCAT BaselineThe OMB required GPCAT Baseline Schedules A and B are in the Workbook.

All figures on the Baseline Schedule should be in whole dollars. Thus, $12,280.16 should omit the pennies.

End of the Memo from Mrs. Arck

Sam’s NotesThese are the handwritten notes from Sam. They were stapled to the memo from Ms. Arck.

1. A travel day is one day for one person in an operational-travel status. Audit travel is the same as operational travel (a generic term) for other elements of the FSC. An operational travel day includes travel and transportation costs, lodging, meals and incidental expenses, local transportation reimbursements, and so on. It excludes costs for other types of travel (i.e., training travel, conferences, employee relocation costs, medical travel, etc.), which make up 15% of the OCC 21.0 travel obligations.

2. A workstation is a dedicated location at which an individual employee works within his or her worksite. Not all FSC regular employees have a dedicated workstation. (Some who don’t include persons working in supply rooms, libraries, copy centers, maintenance areas and file rooms). All workstations are to be purchased and installed in April as required by the baseline guidance from OMB. In the alternative solution, leasing of workstations may be considered. If so, phasing the leases may be economical. However, the vendor charges $270 for each additional trip in which he installs one or more leased workstations. Further, all leased workstations are to be installed on the first day of the month in which the lease is effective.

3. Operating supplies make up approximately 20% of the OCC 26.0 obligations. Supplies are to be delivered on the first day of the hire month.

4. Common areas include such places as restrooms, cafeterias and break rooms, lobbies, file rooms, and utility rooms for heating and air conditioning, ventilation, electrical, and mechanical systems.



5. Assume inflation will be the same percentage rate from this year to next year (FYCY to FYBY) as it was from last year to this year (FYPY to FYCY). I also assume there will be no personnel turnover in the 18-month pilot program.

6. OMB usually estimates budget values on the low side. So, I doubt we can do the mission for $575K as budgeted by OMB. Mr. Johnson said the analyst should estimate the actual requirement as stated by Ms. Arck and also provide alternatives to stay within the OMB budget guidance. Do not assume unrealistic, prohibited options, such as stretching out the hire plan or cutting back on the travel plan. Such alternatives would only serve to curtail the mission—a situation which will not be approved by either FMA or OMB. However, leasing equipment, instead of purchasing, might be an alternative worth considering. There may be other options as well that would not involve curtailing the mission.

7. Mr. Johnson said there were certain rules the analyst must observe. The following can’t be changed:a. The GPCAT travel plan.b. The Training dates.c. The hire plan.

8. So, in summary, I am to use the Workbook to complete following:a. The Module 4 Quiz (pages 28–31),b. The Data Drivers Computations (page 40),c. The baseline requirement calculations using Schedule A; brief Mr.

Johnson by 3 P.M. tomorrow, and (page 41), d. Using Schedule B, itemize any proposed changes from the baseline that

would save money and enable us to stay within the OMB budget target (page 42),

e. The Data Drivers Computation Worksheets, Exercise 4-1 (Workbook pages 34–39) will assist you in completing the above data requirements.



Notes to Studentsa. Completion of this exercise will require information from this Participant

Manual, specifically the memo from Mrs. Arck and the attachment thereto. (pages 4-2 through 4-6)

b. In addition, analysis of information in the Workbook will be necessary. (pages 30–39)

c. To expedite this process, you should complete the Module 4 Study Quiz in the Workbook before attempting to complete the assignment. (pages 28–31)

d. Table teams will prepare a briefing using Schedule B to reflect the team’s solution to the exercise. Each team will be allowed 5 minutes to present and defend their answers. Accordingly, each team should designate a recorder and a presenter at the outset of team analytical activities. It should be emphasized that while there is no precise ‘best answer’ there are opportunities to accomplish the 18-month pilot program at budget levels substantially lower than the OMB target of $575,000.

Afterwards, the instructor will lecture on the course solution to the exercise. All exercise solutions will be distributed to the student in the post-course Solution Guide.

e. Your instructor is available at all times to assist.


How can I use data-relationship analysis to assist me to better analyze information I use on the job? (Try to list at least three different ways.)

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________


Module 5Module 5

Cost Analysis

Module 5 • Cost Analysis

Module Objectives


Objective 1: Understand the purposes and benefits of cost analysis in budgeting.

Objective 2: Understand the terms related to cost analysis.

Objective 3: Complete a sample exercise using cost analysis techniques. Perform a present value analysis.

Objective 4: Analyze cost-effectiveness alternatives and recommend purchase, lease, or lease to own options.

An Example of a Statement Typifying Cost Analysis Is

“The net present value of the automobile financing plan over five years is $16,250.”

Cost Analysis

You gave Mr. Johnson the results of your relationship analysis on the GPCAT. He approved your final recommendation. He instructed you to establish a special cost code to capture the costs of the GPCAT and to analyze execution of the funds on a monthly basis starting in May of this year.

“Oh, I think I hear my phone ringing,” you said, hoping to extract yourself from Mr. Johnson’s office before you picked up another project. To no avail. Before you could spin on your heel and exit, he said, “Oh, let it ring, it will just roll over to your voice mail. You can get to it later. I’ve got something much more important that I’m sure is just right for you. Its a very good opportunity to show the other staff sections that we can be a real asset in providing analytical expertise that will help them do their jobs better. And you are developing into quite an analyst. Don’t you agree?”



You wondered just what it referred to. Mr. Johnson handed you a memorandum from the chief of the Finance Operations Division, FSC. It seems they wanted to obtain a new piece of mailroom equipment that was supposed to save time and increase efficiency. But, they couldn’t decide whether it would be better to buy it or to lease it. He said for you to read it over and then prepare a cost analysis. Be sure to document all your considerations. You told Mr. Johnson that you had never done any cost analysis work before and were uncertain you could do it. He went to the files and pulled out some briefing charts and materials that he said he got from a class he took several years ago. He said to read up on it, and if you have any questions, drop by and he would point you in the right direction. But, you’ll be ab1e to get most of it from these materials.

“I promised them we would have the analysis done by noon,” he said and then rose from his desk and announced that he had a meeting to attend and would be back around 11:30.

You returned to your workstation with the materials from Mr. Johnson and began reviewing the materials. You studied several slides and handout materials. You found the following definitions. Your instructor will briefly lecture on several of the more important topics necessary for you to complete the Module 5 exercises.

Upon completion of the lecture, turn to homework Exercises 5-1 to 5-5. The instructor will review with the solutions to the exercise.

Cost Benefit Analysis (CBA)CBA is a data collection process that uses the following steps:Calculate the costsCalculate the benefitsCompare the results

CBA considers the cost of something and compares it with the benefits. Then, divide the benefits by the costs and the result is your determination.

Cost Effectiveness Analysis (CEA)CBA supports CEA. CEA suggests how to do the following:Choose among several alternativesAssess the most cost efficient method of accomplishing the outcomeDetermine whether or not to continue a projectCompare all alternativesAssess the alternative of doing nothing (retaining the status quo)

The following is a list of terms and their definitions that will be helpful in doing a CBA or CEA.



Term Definitionaverage costs The total costs of a program or project divided by its outputbenefit cost analysis A systematic quantitative method which compares the benefits of

a program or project with its cost and is used to assist program and project implementation decisions and evaluations

benefit-cost ratio The ratio of a program’s or project’s present value to its initial investment, found by dividing the total benefits by the costs

constant (real) dollar value Dollar value measured in terms of identical, or constant, purchasing dollar value power over time

cost-effectiveness analysis A systematic quantitative method for comparing the costs and benefits analysis of alternate means to achieve the same end

cost growth The additional cost of operations associated with higher prices or unit costs generally attributable to inflation and other factors not associated with increased tempo of operations or production. See program growth for more discussion.

direct costs Costs which are specifically attributable to a program or projectdiscount factor The present value of $1 received at a stated future date; the

discount factor is equal to 1 / (1+ l)t where l is the interest rate and t is the number of years from the date of initiation until the given future year

discount rate The rate used to calculate the present value of cash flows; also a term used in banking to describe the interest rate the Federal Reserve banks charge on the loans they make to member depository institutions

external benefits Benefits that result from a program or project in addition to the planned, specific benefits which the program or project was designed to achieve

fixed costs Expenditures or expenses which do not vary with volume of activity or output of a program or project

future value The value of a present amount of money at a specified future date found by applying a specific interest rate over the specified period of time

indirect costs The necessary additional costs of production not readily associated with the production of goods or services. Also known as overhead costs.

intangible benefits Non-measurable benefits accrued from a program or projectinternal benefits Benefits accrued directly to the program or projectinternal rate of return The discount rate that equates the net present value of a stream of

cash outflows and inflows to zeroinvestment costs The costs of a program or project from inception to

implementation



Term Definitionlife-cycle cost The overall estimated cost for a program or project over its

lifetime, including all direct and indirect, initial, periodic operating, maintenance, and disposition costs

marginal costs The incremental costs or differential costs of producing one more unit of output

net present value The difference between the discounted present value of the benefits and the discounted present value of the costs of a program or project at a specified discount rate

nominal interest rate The rate of interest expressed in dollars of current value, not adjusted for inflation (market interest rates are usually nominal interest rates)

objectives Specific, measurable outcomes to be achieved by a program or project

operating costs The costs incurred for operation and maintenance of a program or project over time from the initial date of implementation

opportunity costs The present value of the income or cost that could be earned or saved from using an asset in its best alternative use rather than the one being considered

pecuniary benefits Monetary benefits or savings attributable to a specific program or project

performance measures Quantitative measures which describe the effectiveness of a program measures or project

present value The value today, or at some specific date, of an amount to be paid or received in the future, discounted at a specific interest or discount rate

primary benefits The primary results to be achieved by a particular program or project

principal An amount of money on which interest is charged or earned; face amount of a loan

program growth The additional costs of a program attributed to increased production, activity, or mission accomplishment; when evaluating costs of a program, one would discern between cost growth and program growth to gain a more accurate assessment of the cost elements of the program

real interest rate The rate of interest expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the rate of inflation

relative price A price ratio between two goods, such as the ratio of the price of energy to the price of equipment

resources Monetary and non-monetary assets, such as people, money, machinery, time, etc.



Term Definitionsecondary benefits Benefits derived from implementation of a program or project in

addition to the primary or stated benefits to be achievedsunk costs Costs incurred in the past that cannot be recouped and therefore

cannot be affected by current or future decisions; they are therefore irrelevant when determining the worth of a new investment

tangible benefits Real, physical benefits accrued from implementation of a program or project

variable costs Costs that increase or decrease as activity (productivity) levels or output levels increase or decrease

Workload measures Indicators of effort through measurement of the amount of work actually performed, or to be performed, within a specified period of time at a given site or level of a program or project



Exercise 5-1—The Cost of Driving to Work in the Old ClunkerYou presently own your six-year-old car. Last year you drove 19,800 total miles (commuting and personal). You use the car to drive 18 miles each way to work every workday. (Rarely, you take the bus to work at $1.50 each way. You prefer to drive.) There are approximately 220 days per year that you drive to work, excluding days when you are on leave, off for holidays, out of town travel, etc. You want to know what it is really costing you to commute to work because you might buy a new car and you want to compare the operating costs. You pulled together last year’s costs of operating the clunker you now have. You’re thinking about selling it because you had to pay $1,600 in December to replace the transmission. What will need to be replaced next? But, the car is paid for. You can sell it to an in-law today for $3,200. In five years it will be worth $1,000.

Following are the out of pocket expenses for last year.

Repairs $1,812 ($1,200 annually thereafter)Fuel and oil 1,188Insurance 965Maintenance 240Auto tags and taxes 110Subtotal $4,315Commuter parking 288Annual Cost $4,603

1. What percent of the total miles are commuting miles?

_______________________________________________________________________

2. How much of the annual cost can be attributed to commuting?

_______________________________________________________________________

3. What is the total cost per commuting mile?

_______________________________________________________________________

4. What would be next year’s commuting costs?

_______________________________________________________________________



Exercise 5-2—Drive to Work in a New Car with a Five-Year WarrantyYou really want to get your money’s worth out of that new transmission, but are afraid another major repair is just around the corner. You shopped around for a new car (or a good preowned car). Regardless of what you end up buying, it must have a good warranty. But, everything costs money. Maybe you should look at the numbers to see what the difference would be. You did some research on the new car you want to buy and here are the annual numbers (mileage remains unchanged at 19,800 miles):

Repairs $100(Warranty covers most)

Fuel and oil 850Insurance 1,095Maintenance 200Auto tags and taxes 218Subtotal $2,463Commuter parking 288Annual Cost $2,751

1. What percent of the total miles are commuting miles?

_______________________________________________________________________

2. How much of the annual cost is attributable to commuting?

_______________________________________________________________________

3. What is the total cost per commuting mile?

_______________________________________________________________________

Just comparing the operating costs, it is clear that the new car will be significantly less expensive. But is that all there is to consider? Let’s look at some of the other factors that will have a bearing on your decision.



Exercise 5-3—Factor in the Variables Associated with Acquisition of Exercise: the New Car

You have three alternative choices in how to pay for a new car:

1. Purchase the car outright in cash from investments that are realizing an average annual return of 6.0% per year for the past 5 years.

2. Finance the car for 5 years at an interest rate of 4.5%.

3. Lease it.

The following are the particulars on the new car.

Purchase (Cash or Financing)

The car, with a five-year manufacturer’s warranty, will sell for $18,500. The lender requires a 10% down payment at the time of financing ($1,850). Financing costs ($18,500 - $1,850 at 4.5% for 60 months) equal $2,010.

Five Year Lease Option

The total of the lease payments is $16,690. Excess mileage charge of $0.15 per mile over 60,000 equals $5,850 (paid at

lease end). The trade-in (residual) value at the end of the five years is: $8,200.

Answer the following questions:

1. Which option do you personally prefer?

_______________________________________________________________________

2. Which option is the most cost effective? (It’s hard to tell right now. Further analysis is needed.)

_______________________________________________________________________

3. How much do the acquisition results add to the cost of Exercise 5-2? (Don’t consider any tax implications.)

_______________________________________________________________________

4. Does the present value of money impact on any of the considerations?

_______________________________________________________________________



Exercise 5-4—Offer to Buy, Lump Sum Balloon Payment in the FutureSuppose you owned some land. Your cousin offered to buy it and made an offer of $7,000 today or $10,000 in five years. Which would you take? Why? Would the present value of money have a bearing on a decision based on financial considerations? Assume you believe inflation will average about 3% over the next five years. Now, which financial decision would be indicated? (Hint: Go to the 3% Chart 16, Table A in the Workbook page 44. Multiply the $10,000 single payment by the factor in Project Year 5.)


1. What will the $10,000 payment be worth five years from now, in today’s terms?

_______________________________________________________________________

2. Would you be better off taking the $7,000 today or waiting for the $10,000?

_______________________________________________________________________

3. If you believe you can earn 8% on the $7,000, might you decide differently?

_______________________________________________________________________

Exercise 5-5—The CounterofferTell your cousin you’ll take $12,000 cash today.

Your cousin made a counteroffer. He proposed: Pay $10,000 cash today or make annual payments of $2,400 for five years.


1. What is the sum of the payments?

_______________________________________________________________________

2. What is that sum worth over the five years expressed in today’s dollars? Hint: Use the 3% Table B on Chart 17 in the Workbook, page 44. Multiply the annual payment amount by the factor in Project Year 5.

_______________________________________________________________________

Note: If your cousin had proposed to pay you $200 per month, which is more likely, you would have to use a different table. The table in the handout is for annual amounts. There are computer-generated tables for monthly, weekly, and even daily amounts. You would select the table appropriate for the analysis. For now, we’ll use the annual table.



3. Assume the annual inflation rate will average 3% over the 5 years. Which offer would be the most advantageous to you (analytically speaking, of course)?

_______________________________________________________________________

4. If you believe you can earn 8% with the $10,000 cash over the five-year period, would you decide differently?

_______________________________________________________________________

Refer to Chart 18 in the Workbook. The instructor will demonstrate how you can use Table A (Chart 16) to calculate present values of various amounts deposited in the savings account and how the balance varies depending on which option is selected.

To Discount or Not to Discount, That’s the Question

Use this decision table every time you post a number to the analysis worksheet to determine whether the amount is in present or future terms and, if future, which discount table to use.

1. Is the amount being posted occurring today or sometime in the future?

If today, then don’t discount the number. It is already in present value.

If in the future, then go to the next question.

2. Is the future amount a one-time occurrence or is it a level, recurring amount over the period?

If it is one-time, then use Discount Table A.

If it is recurring, then use Discount Table B.

The participant should turn to the Workbook and complete the clunker exercise 5-1 on page 48.



This is a recap of the numbers. Keep it handy.

1. Annual total miles driven for all purposes 19,800

2. Maximum lease miles allowed in 5-year lease 60,000

3. Excess miles at end of the lease period 39,000

4. Annual inflation rate (per OMB Cir A-76) 3.0%

5. New car: Purchase price $18,500

6. New car: Down payment required $1,850

7. New car: Annual car payments (Finance option) $3,734

8. New car: Annual lease payments $3,338

9. New car: Residual (trade-in) value at the end of 5 years $8,200

10. New car: Annual operating expenses $2,751

11. New car: Excess mileage charge at the end of the lease $5,850

12. Clunker: Sales price $3,200

13. Clunker: Residual (trade-in) value at the end of 5 years $1,000

14. Clunker: Annual operating expenses $3,991

15. Discounted interest earned on $18,500 retained in your investment account at 6% $5,712

16. Discounted interest earned on $1,350 deposited in your investment account at 6% $416

17. Discounted interest earned on $3,200 deposited in your investment account at 6% $988

Note: Lines 15, 16, and 17 reflect the discounted amounts for the entire 5 years. See the corresponding page 45 in the Workbook for the calculations.



You hope you are now ready to take on Mr. Johnson’s task. The memo states that the finance directorate wants to buy a high-speed electronic mail-processing machine.

The new machine, called Maxi-Mail, will tie into the computer network and interface with the software running the administrative and finance operations. When a payment is approved in the system and a check is to be printed, the check and any supporting documentation is printed by Maxi-Mail. The accompanying documents are then collated and measured, an envelope is selected and addressed, materials are inserted in the envelope and weighed, postage is affixed, and the mail is sealed, sorted by zip code, and bundled for postal dispatch. The entire day’s input can be programmed to run in the early morning hours of the next day. This machine is used commercially in many bulk-mail distribution centers throughout the world.

Maxi-Mail is also capable of processing outgoing mail of administrative-type documents other than finance directorate-related materials. It can perform all the above functions for any document that can be sent digitally to the Maxi-Mail e-mail address. Maxi-Mail will automatically execute the instructions contained in a specially formatted e-mail message.

The finance directorate wants maximum operational flexibility as their first priority. Money is second. They want to lease it because of the following:

1. If it doesn’t work out, we can just terminate the lease, return the equipment to the vendor, and go back to doing things the way we always have.

2. The big outlay all at once is probably a budget buster, and technology might make the whole thing obsolete in the 5-year period, leaving us with an outdated albatross.

3. The option for a straight lease includes free maintenance.



Following are the particulars for this decision:

1. Cash price (additional costs required for a maintenance contract) $276,000

2. Annual amount for lease to ownership (60 months) option (maintenance contract extra) 64,000

3. Annual amount for a straight lease (60 months, maintenance included) 110,400

4. Annual amount for a maintenance contract (60 months) 36,000

5. Residual value at the end of the 5-year period 41,000

Projected savings by eliminating present methods6. Annual personnel savings (eliminate four FTE at $22,400 each

per year) 89,600

7. Annual equipment and materials savings 3,050

8. Cost avoidance savings (annual supervisor and support savings—not relevant to this analysis) 10,640

9. Reduced backlog in mail processing (from 3.2 days backlog to 1 day) NA

You note that the management analysis division has verified the savings. You decide to use the present value tables for 3.0% for this analysis (per OMB Cir A-76 type).

Task AssignmentIndividuals: Refer to the Workbook and complete the spreadsheet analysis for the Maxi-Mail machine.

Table assignment: Upon completion of your individual computations, discuss the options and gain a consensus as to what your response would be to the following questions from Mr. Johnson:

1. Which option is the most cost beneficial?

2. Which option is the most cost effective?

3. Which option is should he recommend to the chief of the finance directorate?

4. Why?

5. What issues arise when evaluating the assumptions?


Appendix AAppendix A

Blank Worksheets

15

Appendix A • Blank Worksheets

Analysis Worksheet

A B C D E

© Graduate School USA A - 1 Budget Analysis Workshop© 2012, FedTrain, Inc.


Analysis Worksheet

A B C D E


Appendix BAppendix B

GAO Glossary of TermsSeptember 2005

Appendix CAppendix C

OMB Circular A-11: Part 6Preparation and Submission of Strategic Plans, Annual Performance Plans and Annual Program Performance Reports (July 2010)

Appendix DAppendix D

OMB Memo M-08-13 (2008)

web viewmodule 3 • trend analysis. module 2 • performance measurement. module 4 •...

Documents