A transport company is preparing its cost budgets for the coming year. It has been set both social objectives & cost targets by the government which it must achieve in order to receive a huge subsidy. Part of the subsidy is paid when acceptable budgets have been submitted to the government’s transport office and the balance is payable at the end of the year provided the company has achieved its social objectives and cost targets.The first draft of the cost budgets has been completed and submitted to the budget committee.
Explain to the Board of Directors how(i) feedforward control and (ii) feedback control should be used in the transport company. (You should use examples from the company’s budgeting system in your answer.)
Feedforward control systems are the comparison of draft plans with the objectives of the company. In this scenario the company has to produce budgets showing acceptable cost targets in order to receive the first payment of its subsidy. The first draft of the budget will need to be compared to the target costs that are acceptable to the government office to ensure that the company qualifies for the subsidy. This comparison process is the operation of a feedforward control system since the transport company will have this cost target as one of its objectives. It may be that the first draft of the budget does not achieve the required cost target. If this is the case then there will need to be revisions to the budget perhaps by changing the method of providing the transport service so that the cost target is achieved. Care must be taken however to ensure that the proposed budget changes do not cause the company to fail to meet its social objectives. Feedback control systems are the comparison of actual results against the budget that has been approved. Thus in the context of the transport company a comparison of the actual monthly costs can be made against the budgeted costs for that month. As with any budget and actual comparison there may be an adverse or favourable variance. If this is significant then further analysis may be required to determine its cause. This is particularly important in the context of the transport company because failure to achieve the cost target will result in not receiving the balance of the subsidy payment. If action is required to reverse an adverse variance this will need to be done as soon as possible before the size of the variance is too great to reverse before the end of the year. This comparison process is feedback control. Thus the difference between feedforward and feedback control systems is that feedforward occurs in the budget setting stage whereas feedback control occurs during the year.