he prior fiscal years costs less 3 percent for the current years budget. He decided to measure activity by client nights, and to set the budget for pounds of laundry processed at last years 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 received the report shown in Exhibit 1 in mid-January. He reflected on its content: A lot of my costs dont change, even if the number of pounds of laundry changes. I suppose laundry labor, supplies, water-related items, and maintenance vary with changes in pounds, but thats about all. Nevertheless, shouldnt my budget reflect those changes? Also, I hadnt planned for the fact that I was given a salary increase as of October 1was I supposed to refuse it to help keep my budget in balance? Finally, I think its important to note that I had to pay overtime to the staff because the department became inundated with laundry during the cold snap we had back in mid-December. Because of this, my average hourly rate for the whole three months was $10.20 instead of the $9.00 that was in my budget. In fact, and maybe this is a little picky, the average number of minutes it took my staff to wash a pound of laundry actually dropped from .48, which was my budget target, to .47 for the quarter. Somehow, even though its pretty small, I think that should be taken into consideration.

Assignment 1. What is your assessment of the method the administrator used to construct the budget? 2. Prepare a flexible budget for the laundry department. What does it tell you? 3. Compute the appropriate labor variances. What do they tell you? 4. What should Mr. Donaldson tell the administrator about his budget variances?

SPRUCE STREET SHELTERExhibit

SPRUCE STREET SHELTERExhibit 1. Performance Report -- Laundry DepartmentOctober - December (Over) % (Over)Under UnderBudget Actual Budget Budget Client nights 9,500 11,900 (2,400) (25)Pounds of laundry processed 125,000 156,600 (31,600) (25) CostsLaundry labor $9,000 $12,512 $(3,512) (39)Supplies 1,125 1,875 (750) (67)Water and water heating and softening 1,750 2,500 (750) (43)Maintenance 1,375 2,200 (825) (60)Supervisor's salary 3,125 3,750 (625) (20)Allocated administrative costs 4,000 5,000 (1,000) (25)Equipment depreciation 1,250 1,250 - 0 --------- --------- -------- -------Total $21,625 $29,087 $(7,462) (35)