CG 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, starod 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 necounting system. From now on you will receive quarterly reports that compare the costs of operating your department with your budget. The reports will highlight the differences (variances) so that you can easily zero in on any departures from your budget. Basi- 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 variances will indicate the most important cost items to address. Your first report accompanies this temo. (Exhibit 1] Sam, your report indicates that several of your costs are significantly above your quarterly budget. 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 last year. He had almost immediately in stituted a new responsibility accounting system, which included a revised budgeting process and quarterly reports for his various department heads, such as snow removal, street cleaning, road re- pair, and traffic light maintenance. Previously, cost data 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 cach department's annual budget. To prepare the budgets, he had analyzed the prior three years' costs, and, in so doing, had leamed 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 budgeted line 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 temoved, which he set at an average of the past three years 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 increase-wal sup poned to refuse it to help keep ty budget in balance! This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illa- teate either effective or ineffective bandling of an administrative situation Copyright 2012 by The Crimson Group, Inc. Te gode sometimes document, man Poally, I think it's important to note that I had to pay overtime to the drivers because of some very beavy stones we had back in mid-December. Because of this my average hourly rate for the whole three months was $21mstead of the S18 that was in any budget. In fact, and maybe this is a mintie picky, the avere from 48, which was my beadget target, to 47. Somehow, even though it's pretty small, I think this in perusher of minutes it took my drivers to plow a cubic mile of snow during the quarter actually dropped provement should be taken into consideration Assignment 1. What is your assessment of the method the public wedis director used to construct the budget? 2. Prepare a fexible budget for the sow 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 Budget Actual (Over) Under % (Over) Under Budget Budget (2) (250) Snow days (m) Cubic miles of snow ) Costs 10 1.250 12 1.500 (20) (37) Drivers le $18,000 $24,675 $(6,675) Supplies (d) 1,125 1875 (750) Fuel 1.750 2.500 (750) Maintenance le 1,375 2.200 (825) Supervisor's salary 15.000 18 000 (3.000) Allocated adernistrative costs 4.000 5.000 (1,000) Equipment depreciation 1,250 1.250 Total $42.500 SSS SOO $(13.000) Notes: 2. Days when there was a lot one inch of snow. Less than that, and do now plowing took place. b. Computed for eact storm, by multiplying the depth of nowfall according to the official measure by the town cleck) by the miles of roadways to be plowed. 88 6688888 weld be coded to nep the mids clear. Who dever wore than 8 h 24-buar period, he/she c. Delvers were paid belyset by the mile. However, the sube af os needed to clear the mood ways depraded bogat extent ce cubic miles of now. Per exemple anch of cow from a relatively lightstorm would take less time to plow, than six inches of snow from a moderne stem. The amount of Eme needed to clear the road ways so depended as the length of the storm. For example, ita som deposited six inches of snow in a few Souns, the drivers would wait till the storm bad de cand then clear the rocks with one pass of the plows. , 1.34 or was paid a 50 percent over hoe procium for the additional houn & Mainly sand and salt Office and the administrative supplies were part of the administrative cost allocation. a Was almost directly related to miles duiven. Thus, a 24 borson, seguiting several pusses, would lead to our maintenance costs than a como toly a few hours, even if the cube made of plowed now were the same t. Based on the town't full cost conting system. The system used different allocutiom buses for different towa services, such as custodial work, administrative salaries and supplies, and repairs and maintenance. Exclusively for the new plows. The department had no other asset to be depreciated. Tow of Beington. Just 2012 2 of 2 CG 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, starod 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 necounting system. From now on you will receive quarterly reports that compare the costs of operating your department with your budget. The reports will highlight the differences (variances) so that you can easily zero in on any departures from your budget. Basi- 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 variances will indicate the most important cost items to address. Your first report accompanies this temo. (Exhibit 1] Sam, your report indicates that several of your costs are significantly above your quarterly budget. 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 last year. He had almost immediately in stituted a new responsibility accounting system, which included a revised budgeting process and quarterly reports for his various department heads, such as snow removal, street cleaning, road re- pair, and traffic light maintenance. Previously, cost data 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 cach department's annual budget. To prepare the budgets, he had analyzed the prior three years' costs, and, in so doing, had leamed 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 budgeted line 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 temoved, which he set at an average of the past three years 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 increase-wal sup poned to refuse it to help keep ty budget in balance! This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illa- teate either effective or ineffective bandling of an administrative situation Copyright 2012 by The Crimson Group, Inc. Te gode sometimes document, man Poally, I think it's important to note that I had to pay overtime to the drivers because of some very beavy stones we had back in mid-December. Because of this my average hourly rate for the whole three months was $21mstead of the S18 that was in any budget. In fact, and maybe this is a mintie picky, the avere from 48, which was my beadget target, to 47. Somehow, even though it's pretty small, I think this in perusher of minutes it took my drivers to plow a cubic mile of snow during the quarter actually dropped provement should be taken into consideration Assignment 1. What is your assessment of the method the public wedis director used to construct the budget? 2. Prepare a fexible budget for the sow 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 Budget Actual (Over) Under % (Over) Under Budget Budget (2) (250) Snow days (m) Cubic miles of snow ) Costs 10 1.250 12 1.500 (20) (37) Drivers le $18,000 $24,675 $(6,675) Supplies (d) 1,125 1875 (750) Fuel 1.750 2.500 (750) Maintenance le 1,375 2.200 (825) Supervisor's salary 15.000 18 000 (3.000) Allocated adernistrative costs 4.000 5.000 (1,000) Equipment depreciation 1,250 1.250 Total $42.500 SSS SOO $(13.000) Notes: 2. Days when there was a lot one inch of snow. Less than that, and do now plowing took place. b. Computed for eact storm, by multiplying the depth of nowfall according to the official measure by the town cleck) by the miles of roadways to be plowed. 88 6688888 weld be coded to nep the mids clear. Who dever wore than 8 h 24-buar period, he/she c. Delvers were paid belyset by the mile. However, the sube af os needed to clear the mood ways depraded bogat extent ce cubic miles of now. Per exemple anch of cow from a relatively lightstorm would take less time to plow, than six inches of snow from a moderne stem. The amount of Eme needed to clear the road ways so depended as the length of the storm. For example, ita som deposited six inches of snow in a few Souns, the drivers would wait till the storm bad de cand then clear the rocks with one pass of the plows. , 1.34 or was paid a 50 percent over hoe procium for the additional houn & Mainly sand and salt Office and the administrative supplies were part of the administrative cost allocation. a Was almost directly related to miles duiven. Thus, a 24 borson, seguiting several pusses, would lead to our maintenance costs than a como toly a few hours, even if the cube made of plowed now were the same t. Based on the town't full cost conting system. The system used different allocutiom buses for different towa services, such as custodial work, administrative salaries and supplies, and repairs and maintenance. Exclusively for the new plows. The department had no other asset to be depreciated. Tow of Beington. Just 2012 2 of 2