Mike Smith, Assistant Commissioner of the Department of Public Works of Bongee Beach, was reviewing the results of a recently completed construction project on Sydney Road, a beach front road. The project had been completed under a fixed-price contract with a private developer, and the price was based on the estimated length of the road. However, the project had run considerably over budget, and Mr. Smith wished to determine the reasons for the excessive expenditures.

The city had asked the contractor to extend the length of the road by a half mile (880 yards). Because the actual length of the road had exceeded the city's original estimate, Mr. Smith knew the contractor would be entitled to some additional compensation from the city. However, he also realized that not all of the extra costs could be attributed to the additional length and had, therefore, asked his accountant to compose summary of the reasons for the deviation from the budget. While the accountant's summary (Exhibit 1) shed some light on the reasons for the $36,080 variance, Mr. Smith knew additional information and was convinced that the accountant's summary did not tell the full story. His additional information is as follows.

(a). The contractor had given his grading crew a wage increase, and the cost per linear yard of grading had increased from $12 to $15.

(b). Because of material wastage, the road had required 21 rather than 20 square yards of asphalt per linear yard for paving.

(c). In his discussions with the contractor, he had learned that the efficiency of the paving crew had increased by 20 percent, resulting in some apparent savings which did not show up on the accountant's report.

Exhibit 1 Summary of Budget Variance

Activity Rate Quantity Cost Grading

Actual $15 per linear yard 5,280 linear yards $79,200 Budget $12 per linearyard 4,400 linen yrd

52800

Variance $26,400

Paving

Actual $8 per square yrd 110,880 sqr yrd

$887,040

Budget $10 per square yrd 88,000 sqr yrd

880000

Variance $7,040

Supporting

Actual $3 per linear yrd 5,280 linear yards $15,840

Budget $3 per linear yrd 4,400 linear yrds

13200

Variance $2,640

Mr. Smith will have a meeting with the contractor and need additional analyses to determine the additional amount the city would owe.

Requirements:

1.What is the variance amount that is due to the change in the length of the road? Favorable or unfavorable? (3 marks)

2.What is the variance amount associated with the additional information (a), (b), and (c), respectively? Analyze the cause to each variance (i.e., a price or efficiency variance of either materials or labor). If information is not sufficient, list the required information to identify the causes. (9 marks)

3.Discuss who (the city or the contractor) should be responsible for each variance analyzed in (1) and (2), respectively. How much more should the city pay? How much should the contractor be asked to absorb? (3 marks)