The City of Lansing is located in the Midwest United States. The director of public works has prepared a budget for each department for the current fiscal year, and has computed quarterly budgets as one-fourth of each department's annual budget. To prepare the budgets, he analyzed the prior three years' costs, and had learned that almost all of them had increased each year, with more rapid increases in the last two years. To encourage department heads to reduce operating costs, he developed the current year's budget based on the prior year's costs less 3 percent. For the snow removal department, he also estimated the cubic miles of snow to be removed, which he set at an average of the past years. Mike Ross, the head of the snow removal department for the City of Lansing, received an email from the director along with Exhibit 1. Mike, 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. Mike 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. He reflected on the content of Exhibit 1: 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 supposed to refuse it to help keep my budget in balance? Finally, I think it is 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 that was in my budget. In fact, and maybe this is a little picky, the average number of minutes it took my drivers to plow a cubic mile of snow during the quarter actually dropped from 48, which was my budget target, to 47. Somehow, even though it's pretty small, I think this improvement should be taken into consideration. Exhibit 1. Performance report-Snow removal department October-December Snow days (a) Cubic miles of snow (b) Budget 10 1,250 Actual (Over) Under Budget % (Over) Under Budget (2) (20) (250) (20) 12 1,500 Costs Drivers (c) Supplies (d) Fuel Maintenance (e) Supervisor's salary Equipment depreciation () Total 18,000 1,125 1,750 1,375 15,000 1,250 38,500 24,675 1,875 2,500 2,200 18,000 1,250 50,500 (6,675) (750) (750) (825) (3,000) (12,000) (37) (67) (43) (60) (20) 0 (31) (a) Days when there was at least one inch of snow. (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. The number of hours needed to clear the roadways depend 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. When a driver worked more than 8 hours in a 24-hour period, he/she was paid an overtime premium for the additional hours. (d) Mainly sand and salt. Office and other administrative supplies were not included. (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. (1) Exclusively for the snow plows. The department had no other sets to be depreciated. Requirements 1. What is your assessment of the method the public works director used to construct the budget? Identify and explain your concerns. No calculations are required. (4 marks) 2. Prepare a flexible budget for the snow plowing department. What does it tell you about the performance of the snow plowing department? Calculation should be rounded to two decimal places. (7 marks) 3. Compute the appropriate variances for cost of drivers. What do the analyses tell you in addition to requirement 2? Calculation should be rounded to two decimal places. (6 marks) 4. What plan should Mr. Ross present to the public works director for making cost reductions? No calculations are required. (3 marks)