The variances from the budget will help you identify which costs are out of line, and the sizes of the variances willindicate the most important ones. Your first such report accompanies this announcement. [Performance Report]

As this report indicates, your costs are significantly above budget for the quarter. You need to pay particular attention to labor, supplies, and maintenance.

In March, the hotel had hired a new administrator to improve its business activities. A business 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 budgeting system, along with the provision of quarterly cost reports to the hotel's department heads. (Previously, cost data had been presented to department heads only in- frequently.) The annual budget for the current fiscal year had been constructed by the new administrator, based on an analysis of the prior three years costs. The analysis showed that all costs increased each 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 system would reduce costs to this level. However, in view of the rapidly increasing prices, he finally chose the 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. Smith had received the report shown in the Performance Report in mid-January.

After reviewing the Performance report he considered; 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 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.

Questions:

1. Prepare a flexible budget for the laundry department. Should be similar to performance report below that includes original budget, flexible budget, actuals, volume variance, spending variance, total variance. What does it tell you?

2. Compute the appropriate labor variances. You do not need to include values in all cells. What do they tell you?

	Rate per hr.	Rate per min.	Min. per lb.	# of lbs.	Total
Budget
Actual
Flexible Budget
Volume Variance
Spending Variance
Total Variance
Wage Variance
Efficiency Variance

3. What should Mr. Smith tell the administrator about his budget variances?

Performance Report--Laundry Department (Oct-Dec)

	Budget	Actual	(over) under budget	%(over) under budget
Client Nights	9500	11,900	-2400	-25
Pounds of Laundry processed 125000		156600	-31600	-25
Costs
Laundry Labor	9000	12512	-3512	-39
Supplies	1125	1875	-750	-67
Water and water heating	1750	2500	-750	-43
Maintenance	1375	2200	-825	-60
Supervisor's salary	3125	3750	-625	-20
Allocated administrative Costs	4000	5000	-1000	-25
Equipment Depreciation	1250	1250	--	0
Total	21625	29087	-7462	-35

*Rates 150 beds are available. Mr. Smith's 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.

Costs	Budget rate	budget pounds	budgeted amount
Pounds of Laundry		125000	$ 125,000.00
Laundry Labor (qty=hours)	$ 9.00	1000	$ 9,000.00
Minutes of labor/lb		60000	$ 0.48
Supplies	$ 0.009	125000	$ 1,125.00
Water, water heating, softening	$ 0.01	125000	$ 1,750.00
maintenance	$ 0.01	125000	$ 1,375.00
supervisor's salary	$ 0.03	125000	$ 3,125.00
allocated admin costs	$ 0.03	125000	$ 4,000.00
equipment depreciation	$ 0.01	125000	$ 1,250.00