1. What is your assessment of the method the public works director used to construct the budget?
2. Create 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?
HBSP Product Number TCG 225 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Town of Bellington Sam Donaldson, supervisor of the snow removal department for the Town of Bellington, stared at the memo he had just received from the director of public works. The opening paragraphs were anything but reassuring: As you know, I have instituted a new responsibility accounting system. From now on you will receive of operating your department with your budget. The reports will highlight the differences (variances) so that you can easily zero in on any d ero in on any departures from your budget. Bas cally, responsibility accounting means you are to keep the costs in your department within your budget. The variances will help you identify those costs that are out of line, and the sizes of the varianc he most important cost items to address. Your first report accompanies this memo. [Exhibit 1] of the variances will indicate Sam, your report indicates that several of your costs are significantly above your quarterly budget. You need to pay particular attention to the salaries of your snowplow drivers. Please get back to me by the end of next week with a plan for making the needed reductions. Mr. Donaldson knew he needed a plan, yet midwinter was the busiest time of the year for snow removal, and a big storm had been predicted for the weekend. BACKGROUND The Town of Bellington was located in the north-central United States. Founded in the mid- 1800s by immigrants from northern Europe, it had grown slowly over the intervening years. The new director of public works, a business school graduate with prior experience in manufacturing and service companies in the private sector, had been hired stituted a new responsibility accounting system, which included a revised budgeting process and quarterly reports for his various department heads, such as snow pair, and traffic light maintenance. Previously, cost data had been pre uch as snow removal, street cleaning, road re- had been presented to department heads only infrequently, but the new director was certain that more frequent information would provide greater incentives for his department heads to keep their costs under control. The new director also had prepared a budget for each department for the current fiscal year, and had computed quarterly budgets as one-fourth of each department's annual budget. To prepare the budgets, he had analyzed the prior three years' costs, and, in so doing, had learned that almost all of them had increased each year, with more rapid increases in the last two years. His first thought had been to establish the bud items at an average of the prior three years' costs, hoping that such an approach would encourage his department heads to reduce their operating costs to this level. However, in view of the rapid cost increases during the past two years, he chose instead to base the current year's budget on the prior year's costs less 3 percent. For the snow removal de- partment, he also estimated the cubic miles of snow to be removed, which he set at an average of the past three years. content: Mr. Donaldson had received the report shown in Exhibit 1 in mid-January. He reflected on its 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 increase-was I sup- posed to refuse it to help keep my budget in balance? This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illus- 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 age number of minutes it took my drivers to plow a cubic n y budget. In fact, and maybe this is a little picky, the aver- from 48, which was my budget target, to 47. provement should be taken into consideration. target, to 47. Somehow, even though it's pretty small, I think this im- Assignment 1. What is your assessment of the method the public works director used to construct the budget? 3 Prepare a flex Compute the appropriate variances for di or the snow plowing department. What does s. 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 Budget Actual (Over) Under % (Over) Under Budget Budget Snow days (a) Cubic miles of snow (b) 10 Costs 1,250 1500 (2 (250) (20) (20) Drivers (c) $18,00 $24.675 Supplies (d 1,125 2875 $(6,675) (37) Fuel 1750 (750) (750) Maintenance (e) 2200 2,200 Supervisor's salary 15,000 18,000 (825) (3,000) Allocated administrative costs (f) 4.000 5.000 Equipment depreciation () 1.250 1.000) 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 so 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 if a storm deposited six inches of snow over, say, a 24 hour per 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 t 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. 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
