1) Prepare a flexible budget for the snow plowing department. What does it tell you?

Mr. Donaldson had received the report shown in Exhibit 1 in mid-January. He reflected on its content: Some of my costs don't change, even if there's a change in the cubic miles of snow we plow. On the other hand, drivers, supplies, fuel, and maintenance vary almost directly with changes in cubic miles. Shouldn't my budget reflect this distinction? Also, my budget didn't include my October salary increasewas I sup- posed to refuse it to help keep my budget in balance? Finally, I think it's important to note that I had to pay overtime to the drivers because of some very heavy storms we had back in mid-December. Because of this, my average hourly rate for the whole three months was $21 instead of the $18 that was in my budget. In fact, and maybe this is a little picky, the aver- age number of minutes it took my drivers to plow a cubic mile of snow during the quarter actually dropped from 48, which was my budget target, to 47. Somehow, even though it's pretty small, I think this im- provement should be taken into consideration. Assignment 1. What is your assessment of the method the public works director used to construct the budget? 2. Prepare a flexible budget for the snow plowing department. What does it tell you? 3. Compute the appropriate variances for drivers. What do they tell you? 4. What plan should Mr. Donaldson present to the public works director for making cost reductions? TOWN OF BELLINGTON Exhibit 1. Performance Report -- Snow Removal Department October-December (Over) Under % (Over) Under Budget Budget Budget Actual Snow days (a) Cubic miles of snow (b) Costs 10 1,250 12 1,500 (2) (250) (20) (20) Drivers (c) Supplies (d) Fuel Maintenance (e) Supervisor's salary Allocated administrative costs (f) Equipment depreciation (g) $18,000 1,125 1,750 1,375 15,000 4,000 1,250 $24.675 1,875 2,500 2,200 18,000 5,000 1,250 $(6,675) (750) (750) (825) (3,000) (1,000) (37) (67) (43) (60) (20) (25) 0 Total $42,500 $55,500 $(13,000) (31) Notes: a. Days when there was at least one inch of snow. Less than that, and no snow plowing took place. b. Computed, for each storm, by multiplying the depth of snowfall (according to the official measure by the town clerk) by the miles of roadways to be plowed. c. Drivers were paid hourly, not by the mile. However, the number of hours needed to clear the roadways depended to a great extent on cubic miles of snow. For example, an inch of snow from a relatively light storm would take less time to plow, than six inches of snow from a moderate storm. The amount of time needed to clear the road- ways also depended on the length of the storm. For example, if a storm deposited six inches of snow in a few hours, the drivers would wait until the storm had ended, and then clear the roads with one pass of the plows. However, if a storm deposited six inches of snow over, say, a 24 hour period, two or more passes of the plows would be needed to keep the roads clear. When a driver worked more than 8 hours in a 24-hour period, he/she was paid a 50 percent overtime premium for the additional hours. d. Mainly sand and salt. Office and other administrative supplies were part of the administrative cost allocation. e. Was almost directly related to miles driven. Thus, a 24 hour storm, requiring several passes, would lead to more maintenance costs than a storm of only a few hours, even if the cubic miles of plowed snow were the same. f. Based on the town's full cost accounting system. The system used different allocation bases for different town services, such as custodial work, administrative salaries and supplies, and repairs and maintenance. g. Exclusively for the snow plows. The department had no other assets to be depreciated. Mr. Donaldson had received the report shown in Exhibit 1 in mid-January. He reflected on its content: Some of my costs don't change, even if there's a change in the cubic miles of snow we plow. On the other hand, drivers, supplies, fuel, and maintenance vary almost directly with changes in cubic miles. Shouldn't my budget reflect this distinction? Also, my budget didn't include my October salary increasewas I sup- posed to refuse it to help keep my budget in balance? Finally, I think it's important to note that I had to pay overtime to the drivers because of some very heavy storms we had back in mid-December. Because of this, my average hourly rate for the whole three months was $21 instead of the $18 that was in my budget. In fact, and maybe this is a little picky, the aver- age number of minutes it took my drivers to plow a cubic mile of snow during the quarter actually dropped from 48, which was my budget target, to 47. Somehow, even though it's pretty small, I think this im- provement should be taken into consideration. Assignment 1. What is your assessment of the method the public works director used to construct the budget? 2. Prepare a flexible budget for the snow plowing department. What does it tell you? 3. Compute the appropriate variances for drivers. What do they tell you? 4. What plan should Mr. Donaldson present to the public works director for making cost reductions? TOWN OF BELLINGTON Exhibit 1. Performance Report -- Snow Removal Department October-December (Over) Under % (Over) Under Budget Budget Budget Actual Snow days (a) Cubic miles of snow (b) Costs 10 1,250 12 1,500 (2) (250) (20) (20) Drivers (c) Supplies (d) Fuel Maintenance (e) Supervisor's salary Allocated administrative costs (f) Equipment depreciation (g) $18,000 1,125 1,750 1,375 15,000 4,000 1,250 $24.675 1,875 2,500 2,200 18,000 5,000 1,250 $(6,675) (750) (750) (825) (3,000) (1,000) (37) (67) (43) (60) (20) (25) 0 Total $42,500 $55,500 $(13,000) (31) Notes: a. Days when there was at least one inch of snow. Less than that, and no snow plowing took place. b. Computed, for each storm, by multiplying the depth of snowfall (according to the official measure by the town clerk) by the miles of roadways to be plowed. c. Drivers were paid hourly, not by the mile. However, the number of hours needed to clear the roadways depended to a great extent on cubic miles of snow. For example, an inch of snow from a relatively light storm would take less time to plow, than six inches of snow from a moderate storm. The amount of time needed to clear the road- ways also depended on the length of the storm. For example, if a storm deposited six inches of snow in a few hours, the drivers would wait until the storm had ended, and then clear the roads with one pass of the plows. However, if a storm deposited six inches of snow over, say, a 24 hour period, two or more passes of the plows would be needed to keep the roads clear. When a driver worked more than 8 hours in a 24-hour period, he/she was paid a 50 percent overtime premium for the additional hours. d. Mainly sand and salt. Office and other administrative supplies were part of the administrative cost allocation. e. Was almost directly related to miles driven. Thus, a 24 hour storm, requiring several passes, would lead to more maintenance costs than a storm of only a few hours, even if the cubic miles of plowed snow were the same. f. Based on the town's full cost accounting system. The system used different allocation bases for different town services, such as custodial work, administrative salaries and supplies, and repairs and maintenance. g. Exclusively for the snow plows. The department had no other assets to be depreciated