Boyne University offers an extensive continuing education programme in many cities throughout the country. For the convenience of its faculty and administrative staff and to save costs, the university employs a supervisor to operate a motor pool. The motor pool operated with 20 vehicles until February, when an additional car was acquired. The motor pool furnishes petrol, oil and other supplies for its cars. A mechanic carries out routine maintenance and minor repairs. Major repairs are done at a nearby commercial garage. Each year, the supervisor prepares an operating budget that informs the university administration of the funds needed for operating the motor pool. Depreciation (straight line) on the cars is recorded in the budget in order to determine the cost per mile of operating the vehicles. The following schedule presents the operating budget for the current year, which has been approved by the university. The schedule also shows actual operating costs for March of the current year compared to onetwelfth of the annual operating budget.

The annual operating budget was constructed based on the following assumptions:
1. Twenty cars in the motor pool.
2. Thirty thousand miles driven per year per car.
3. Fifteen miles per litre per car.
4. £1.05 per litre of petrol.
5. £0.006 cost per mile for oil, minor repairs and parts.
6. £135 cost per car per year for outside repairs.
7. £300 cost per car per year for insurance.

The supervisor of the motor pool is unhappy with the monthly report comparing budget and actual costs for March, claiming it presents an unfair picture of performance. A previous employer used flexible budgeting to compare actual costs to budgeted amounts.

Required
1. Prepare a new performance report for March showing budgeted costs, actual costs and variances. In preparing your report, use flexible budgeting techniques to compute the monthly budget figures.
2. What are the deficiencies in the performance report presented above? How does the report that you prepared in Requirement 1 above overcome these deficiencies?

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Petrol Oil, minor repairs, parts Outside repairs Insurance Salaries and benefits Depreciation of vehicles Total costs University Motor Pool budget report for March Annual operating budget £42,000 3,600 2,700 6,000 30,000 26,400 £110,700 600,000 £0.1845 Total miles Cost per mile Number of cars in use *Annual operating budget/12 months. 20 Monthly budget* £3,500 300 225 500 2,500 2,200 £9,225 50,000 £0.1845 20 March actual £4,300 380 50 525 2,500 2,310 £10,065 63,000 £0.1598 21 (Over-) under- budget £(800) (80) 175 (25) (110) £(840)