Review a Factory Capital Project After Installation

Installation is the start of the benefits review

A new packing line can pass its acceptance checks and still miss its investment case. It may start late, process fewer garments than planned, or save time without reducing any cash payment. The installation report answers whether the equipment was delivered and accepted. A capital project review asks what the factory gained from the money it spent.

That review needs two views of the project. One looks back at the approved cost, timing and benefits. The other looks forward at the decisions that remain open. An old cost overrun should not become an excuse for more spending. Nor should a new forecast hide a weak original estimate.

ACCA's discussion of post-completion audits calls for a review of project income, costs and timing. Compare them with the original budget and later changes. It also stresses learning for future projects. A factory can apply that approach with a review sized to the investment and the decisions still at stake.

The worked case below is fictional. Currency units are written as CU. Its numbers teach the review method; they are not performance claims for any equipment brand or packing technology.

Keep the original approval and the current forecast

The original approval should remain readable after the project changes. Keep the scope, equipment specification and cost estimate. Save the assumed start date, expected output and cash-benefit calculation too. The record should show which risks and dependencies the decision-makers accepted.

Alongside it, keep the latest authorised forecast. A change may have been sensible, but it still needs a reason, date and approval. For example, adding a conveyor extension can increase cost while preventing a handling bottleneck. The review should show the extra cost and the evidence for its benefit, rather than quietly replacing the old budget.

The US Government Accountability Office's cost-estimating guide sets out how to build reliable estimates. Define the scope and technical baseline, record assumptions, assess risk and update estimates with actual costs. A factory can use these steps, though the guide does not impose a reporting rule on private apparel firms.

Give each benefit a measure that someone can reproduce. “Improve productivity” is too broad for a cash claim. “Reduce paid packing overtime for a defined order mix” can be checked against hours, pay rates and output. Record the person who owns the operating change and the finance record that will confirm its cash effect.

Keep the review date explicit. A report at the end of commissioning cannot prove a full year's savings. An early review can check readiness and risks, while a later review uses actual operating periods. Neither should pretend that the other question has already been answered.

Define what was bought and when it became usable

In the fictional case, a factory approved a finishing-transfer and packing line. The project aimed to reduce paid overtime, outside packing work and wasted packing materials. It did not claim extra sales. The approved first operating year began on 1 January, with 600,000 accepted garments expected over twelve months.

The line became usable on 1 April. It then handled 360,000 accepted garments in nine months. For this example, output is evenly spread within each operating period, and the approved product mix remains unchanged. These simplifying assumptions make the timing and volume effects separate and visible.

To establish that date, the factory checks when the line passed commissioning and acceptance. It also checks the first production records. A delivery note alone is not enough. Equipment on site may still lack utilities, approved settings or trained users. Low demand after a line is ready is a separate issue from an installation delay.

The review records any unfinished work. Missing manuals or unresolved defects may change future costs. A temporary operating arrangement may also cast doubt on the claimed savings. An open item should have an owner and a due date, with its financial effect shown where it can be estimated.

All amounts in this example are pre-tax project cash amounts at unchanged prices. Assume all relevant costs were paid in the periods shown. There are no working-capital differences, financing flows or other project cash effects. A real review must add those items when they matter.

Reconcile the project cash cost before judging value

The project budget covered more than the machine invoice. It included installation work and staff training, because both required funding to put the change into operation.

The CU 18,000 increase is 12% of the approved CU 150,000. It needs a cost explanation, not just an overall percentage. The equipment difference might come from a scope change, a price change or an invoice error. Each possibility leads to a different action.

Use purchase orders, accepted changes, invoices and payment records to reconcile the total. The forecast must include unpaid retention and committed follow-up work. These costs matter even before cash is paid. The case assumes none remains; that assumption should be tested in a real factory.

Do not confuse this project cash total with the amount recorded as a fixed asset. IAS 16 defines which costs form part of equipment cost and distinguishes costs outside that amount. Its examples address staff training and initial operating losses. Accounting classification does not remove a payment from the project's funding history.

For instance, the CU 14,000 training payment remains in this project's cash review even where it is expensed in the accounts. Depreciation helps explain accounting profit. It is not another cash payment to add after counting the equipment purchase.

Establish a credible no-project comparison

Savings usually compare the actual result with what would have happened without the investment. This year's bank statement cannot supply that second amount on its own. The comparison needs supporting evidence.

The Magenta Book's evaluation guidance explains this counterfactual question: what would have happened without the change? It calls for suitable baseline or comparison data. A factory must investigate other causes before crediting the whole result to a new machine.

A reduction in packing overtime could reflect fewer orders. Material waste could fall because the buyer approved a simpler pack. Outside work might stop because an unrelated department gained capacity. Each change may improve results. None alone proves that the investment caused the claimed benefit.

In this teaching case, assume the no-project cost rates are supported by comparable orders and records. They apply to the actual volume, product mix and price basis. The review has also checked that other changes do not explain the measured differences. The calculations depend on those checks. Matching volume alone would not prove cause and effect in a real study.

The approved plan expected each accepted garment to avoid CU 0.06 of overtime, CU 0.05 of outside packing cost and CU 0.03 of wasted material. Total planned gross benefit was CU 0.14 per garment. Planned added maintenance was CU 1,000 per operating month.

At the approved 600,000 garments, gross benefit was CU 84,000. After CU 12,000 of maintenance, the first-year net operating cash benefit was CU 72,000.

Separate a lower bill from a supported saving

The nine-month review uses the actual 360,000 accepted garments. The following rates show the evidence assumed for the example. “No project” is the supported comparison cost for the same work. The other two columns distinguish the approved expectation from observed costs with the new line.

Overtime savings are 360,000 garments × CU 0.054 per garment = CU 19,440. Outside-work savings are CU 16,200, and material savings are CU 10,800. The supported gross benefit is CU 46,440.

The comparison can be reconciled another way. No-project costs would have been 360,000 garments × CU 0.170 per garment = CU 61,200. Observed costs are 360,000 garments × CU 0.041 per garment = CU 14,760. Their difference is the same CU 46,440.

Actual added maintenance for the nine months was CU 12,000. Net operating benefit is therefore CU 34,440. This estimates the extra cash benefit against the supported comparison. There is no separate bank receipt called “savings”.

The underlying evidence still matters. Paid overtime must trace to payroll and approved hours. Outside work must trace to work actually avoided and the remaining subcontract invoices. Material waste must trace to consumption and scrap records. Reconcile opening and closing stock as well. Otherwise, a delayed purchase could look like lower use.

The material row excludes labour and outside packing charges. That prevents the same rework event from appearing in several benefit lines. If a useful measure lacks a reliable comparison, treat the finding as provisional. State what remains uncertain.

When the old baseline is incomplete

A team may discover that the approval file contains only a sales presentation and a monthly cost total. It should not invent detailed historical rates to complete the review table. Find the records that could reconstruct the work. Then state which assumptions remain uncertain.

Payroll may establish paid hours but lack a department code. Production records may identify garment quantities but omit the pack type. Contractor invoices may include transport as well as packing. Each gap affects whether the old and new costs are comparable. Explain how the revised estimate handles those differences, and keep the records that support it.

There may be no sound single estimate. Use a range that the evidence supports, or leave the benefit unquantified until there is more evidence. Do not turn a manager's recollection into a verified baseline merely because the project review needs a number. Still report the approved estimate. That was the promise on which management based its decision.

New measurements may improve the next decision. They cannot recreate every condition from before installation. If the old method can no longer be observed, explain that limit. The review can still improve control of the remaining benefit. It may also show what baseline data the next investment needs.

Explain the gap in a fixed order

The approved CU 72,000 benefit and the supported CU 34,440 result differ by CU 37,560. A bridge explains that gap without assigning all of it to machine performance.

Start with the three-month delay. Under the case assumptions, only nine months of planned production and maintenance occurred. Planned gross benefit falls from CU 84,000 to CU 63,000, while planned maintenance falls from CU 12,000 to CU 9,000. Net benefit falls by CU 18,000 to CU 54,000.

Nine months at the planned pace would have produced 450,000 garments. Actual output was 360,000, a difference of 90,000. At the planned CU 0.14 saving per garment, that volume gap reduces benefit by CU 12,600. The maintenance baseline stays CU 9,000 because it is fixed per operating month in this case.

Next, apply the observed saving rates to actual output. Planned gross benefit on 360,000 garments was CU 50,400, compared with CU 46,440 supported at review. That is a CU 3,960 performance gap. Finally, actual maintenance exceeded the nine-month baseline by CU 3,000.

The sequence is part of the method. Timing is changed first, volume second, and unit savings third. The effects interact, so a different order can move amounts between bridge labels. Use a consistent order and keep the full reconciliation.

A price effect also needs its own explanation when rates change. For example, 200 paid overtime hours cost CU 2,000 at CU 10 an hour and CU 2,200 at CU 11. The CU 200 increase reflects the wage rate while hours remain unchanged. It should not be presented as evidence that the new line needs more labour. Conversely, lower hours do not guarantee a lower payment if the applicable pay rate rises enough. Keep the quantity and price records together, then extend the bridge when the effect is material. The central case assumes unchanged prices so that it contains no separate price variance.

Calling CU 37,560 a “machine shortfall” would mislead the reader. Operations can investigate the smaller unit-saving gap. The late start and volume assumptions need their own causes and owners.

Identify useful capacity without inventing cash savings

Suppose observations also show that regular staff spend fewer hours moving cartons. If their paid hours and wages remain unchanged, the released hours are a capacity benefit. Multiplying them by a wage rate does not automatically create a cash saving.

The review should say what happens to that time. Staff may support another process, reduce overtime elsewhere, or enable more saleable output. Each route needs separate evidence. If the time remains idle, record it as available capacity rather than treating a possible future use as an achieved benefit.

Extra output also needs a destination. Goods left in stock do not create the same cash effect as collected sales. A later proposal might use the released capacity for more orders. Estimate the extra contribution and working capital it would need. Do not add full sales revenue to the existing cost savings.

The case deliberately excludes extra sales so its cost bridge stays clear. It also avoids counting regular wages as saved. Its overtime row concerns reduced payments, and its outside-work row concerns a different cost. That boundary is what allows their benefits to be added.

Keep evidence of better access, less handling or fewer complaints, even when there is no sound cash value. An investment review can report several types of value without forcing each one into an invented currency figure.

Reforecast the remaining life without erasing year one

The actual first-year position includes both the cost overrun and the smaller operating benefit. Approved project cash less benefit was CU 150,000 − CU 72,000 = CU 78,000 still unrecovered. The actual equivalent is CU 168,000 − CU 34,440 = CU 133,560.

The CU 55,560 difference reconciles to CU 18,000 of extra project spending plus CU 37,560 of missed first-year benefit. This is a cumulative cash comparison at the review date. It is not a net present value calculation, and it does not prove what the asset is worth.

A simple continuation forecast can start from the observed monthly pace. At 40,000 garments per month, twelve months would produce 480,000. If the observed saving of CU 0.129 per garment continues, annual gross benefit would be CU 61,920. Extending the observed maintenance rate of CU 12,000 over nine months gives CU 16,000 per year. Net annual benefit would be CU 45,920.

That forecast is conditional. It assumes steady volume, mix, prices, saving rates and maintenance costs. A major service due next year or a seasonal output pattern would require a different profile. Multiplying a short good period by twelve can hide those effects.

At CU 45,920 per year, recovering the remaining CU 133,560 would take about 2.91 further years. This simple payback assumes evenly earned benefits and does not discount them. It is not the original payback promise. The approved steady annual calculation was CU 150,000 ÷ CU 72,000, or about 2.08 years. Keep the first-year history visible beside the new estimate.

To reassess the whole investment, update its remaining dated cash flows and risks. Include tax, working capital and any disposal proceeds. The ApparelDiary capacity-investment decision-tree guide shows how to compare demand outcomes. This helps test a forecast that relies on favourable volume.

Judge corrective spending from today

The review may uncover a worthwhile repair or process adjustment. That new choice should use the cash it changes from now on. The original CU 168,000 remains part of the project's history, but spending it does not make every further payment sensible.

ACCA's investment-appraisal guidance focuses on future cash flows that change with the decision. Sunk costs and allocated costs are separate. Keep past spending in the review so that managers can account for it. Exclude that sunk spending when comparing the extra cash from two future actions.

Suppose a proposed adjustment costs CU 6,000 now. It is expected to restore the planned overtime and outside-work rates for the forecast 480,000 garments a year. Recovering CU 0.006 of overtime saving and CU 0.005 of outside-work saving would add CU 5,280 per year. Assume the benefit lasts two years and arrives at each year-end. There is no extra maintenance, residual value, tax or working-capital effect.

At a hypothetical 10% annual discount rate, its incremental net present value is:

NPV = −6,000 + 5,280 ÷ 1.10 + 5,280 ÷ 1.10² = CU 3,163.64.

If only half the expected benefit occurs, the annual amount is CU 2,640 and NPV becomes −CU 1,418.18. The proposal needs evidence that it can restore those rates. Missing the original target is not, by itself, a reason to approve more spending.

The adjustment may require a trial, a changed work method or further acceptance checks. Its expected benefits stay outside the realised-benefit column until supported. The review should state who will test the result and what would cause the proposal to be stopped or revised.

Make the next review useful to the next project

The Government Project Delivery benefits-management guidance assigns an owner to each benefit. It also explains why monitoring may continue after project closure. A factory can name the operating manager who owns each open benefit and a finance reviewer to check its calculation.

For this case, the review has different tasks to assign. The project sponsor needs an explanation for the April start and scope changes. Planning needs to test why the volume forecast exceeded demand or available work. Operations needs to investigate the saving-rate gap, and maintenance needs to explain the added cost. One general instruction to “improve performance” would leave all four unresolved.

The review should also change the next estimate. A documented installation delay may justify a more realistic readiness plan. Unexpected maintenance may change future service-cost assumptions. If volume forecasts remain too optimistic, review the evidence behind them. Useful measures appear in forecast accuracy with MAE, WAPE and signed bias.

Close actions when evidence supports closure, and retain items whose benefits still depend on future work. Keep the approved case and actual history in the final record. Explain the differences and record current decisions. The factory can then learn from the investment long after the equipment has joined daily production.

References

• ACCA: Advanced Financial Management sample answers, September/December 2021, post-completion audits.

• US GAO: Cost Estimating and Assessment Guide, GAO-20-195G.

• IFRS Foundation: IAS 16, Property, Plant and Equipment.

• HM Treasury: Magenta Book, Central Government guidance on evaluation.

• ACCA: Advanced investment appraisal.

• Government Project Delivery: The Teal Book, Chapter 19, Benefits management.