Expert Q&A Mr. Donaldson knew he needed a plan, yet midwinter was the busiest time of the yea shelter, and the laundry was piling up faster than his staff could wash it BACKGROUND Done Spruce Street Shelter was located in the heart of a large metropolitan area in the north-central United States. Founded in the late 1800s, it had been serving the homeless ever since, providing box meals, shelter, and companionship p. Suted on a busy urban thoroughfare, it was a haven of last re- sort for many of the city's indigent, and "home" for many others. As might be expected, the de- mund for its services was especially high in the winter, when temperatures frequently dropped to freezing. The shelter provided three services. Its most significant activity was the Hot-Meal Program, where it served hundreds of meals a day. A meal of hot soup and a sandwich was available to a one who amived between the hours of noon and 2pm and 5pm to 7pm. Its second program Overnight Hostel, where it had 150 beds that were available on a fint-come, first-served basis. The linen was changed daily, and fresh towels were always available, so that the shelter's clients could look forward to "clean sheets and a hot shower. Finally, it had a counseling program, in which a staff of three full time social workers assisted clients to cope w e difficulties that had brought them to the shelter, and in establishing themselves in a more self-sufficient Idestyle. SYSTEM CHANGES In March, the shelter had hired a new administrator to improve its business activities. A busi ness school graduate with prior experience in manufacturing and service companies in the private sector, one of his first steps had been to introduce what he called "responsibility accounting He had instituted a new hadgeting system, along with the provision of quarterly cost reports to the shelter's department heads. (Previously, cost data had been presented to department heals only in The fal budget for the cue fical year had been contracted by the new admini based on an analysis of the price there year costs. The analysis showed that all costs increased cach year, with more rapid increases between the second and third year. He considered establishing the budget at an average of the prior three years' costs hoping that the installation of the systems would induce costs to this level. However, in view of the rapidly increasing prices, be finally chose the prior fiscal year's costs less 3 percent for the current year's budget. He decided to measure ac tivity by client nights, and to set the budget for pounds of laundry processed at last year's level. which was approximately equal to the volume of each of the past three years. Quarterly budgets were computed as one-fourth of the annual budget. Mr. Donaldson had re- ceived the report shown in Exhibit 1 in mid-January. He reflected on its content A lot of my don't change if the sumber of pounds of laundry changes. I suppose laundry b bor, supplies, water related inces, and maintenance vary with changes in pounds, but that's about all Nevertheless, shouldn't my budget select those changes? Also, I had planned for the fact that I was given a salary increase as of October 1-was I supposed to refuse a to help keep my bodprt in halance? Finally, I think it's important to note that I had so pay overtime to the staff because the department average hourly rate for the whole three months was $10.30 instead of the 5900 that was in my budget. In laundry actually dropped from 48, which was my budget target, to 47 for the quarter. Somehow, though it's pretty all. I think that should be taken in considentin SPRUCE STREET SHELTER Exhibit 1. Performance Report-Laundry Department October-December (Over) (Over) Under Under Balget Actual Budget Client nights 9.500 11,900 (2,400) (25) Pounds of laundry processed 125,000 156,500 (31,500) (25) Costs Laundry labor $9,000 $12.512 $3512) (39) Supplies 1,125 1375 (750) (67) Water and water heating and softening 1.750 2.500 (750) (43) Maintenance 1.375 2300 (825) (60) Supervisor's salary 3125 3,750 (625) (20) Allocated administrative costs 4,000 (1000) (25) Equipment depreciation 1250 1250 Total $21.625 $29,087 $7,462) (35) Spruce Street Shelter Case Assignment First, read the Spruce Street Shelter case carefully. Then, think about the following questions (on your own, and in discussion with your team-members, if any). These questions are based on the Assignment questions listed at the end of the case, but with additional hints and details. 1. What is your assessment of the method the administrator used to construct the budget? Think specifically about the assumptions he/she has made, and whether you find them reasonable given the other information provided in the case. Also think about the budget process and assumptions from Mr. Donaldson's perspective- standing in his shoes, what comments/feedback would you have about the budget? Are there any important factors or things to consider that the budgeting process has missed, in your opinion? 2. Prepare a flexible budget for the laundry department. 3. Compute labor price and efficiency variances. 4. Analyze and interpret the variances, and summarize your thoughts in a short report addressed to the administrator that evaluates performance in this period. Specifically, think about: what causes can you identify for each of the variances? Do any of the variances appear linked/connected? Which of the variances appear to have within Mr. Donaldson's control versus outside his control? What are the important questions that the administration should ask / issues they should investigate? You may formulate your answers as paragraphs or as bullet points, as long as you convey the necessary information. Please restrict your write-up to 4 sides of letter paper, typed and single- spaced, at the maximum. To this, please attach numerical exhibits showing your variance analysis calculations. All answers and exhibits must be neatly typed and formatted in a readable way