Each year the supervisor prepares an operating budget for the motor pool. The budget informs university management of the funds needed to operate the pool. Depreciation on the automobiles is recorded in the budget in order to determine the costs per mile.
The schedule below presents the annual budget approved by the university. The actual costs for April are compared to one-twelfth of the annual budget. The annual budget was constructed based on the following assumptions:
1. 15 automobiles in the pool.
2. 25,000 miles per year per automobile.
3. 25 mile per gallon per automobile.
4. $1.20 per gallon of gas.
5. $0.015 per mile for oil, minor repairs, parts, and supplies.
6. $300 per automobile in outside repairs.
The supervisor is unhappy with the monthly report comparing budget and actual costs for April, claiming it presents performance for April unfairly. The supervisor's previous employer used flexible budgeting.
Annual One month April (Over*)
Budget Budget Actual Under
Gasoline $18,000 $1,500 $1,720 $(220)*
Oil, minor repairs
Parts, and supplies $5,625 469 550 (81)*
Outside repairs 4,500 375 495 (120)*
Insurance 18,000 1,500 1,600 (100)*
Salaries and benefits 90,000 7,500 7,500 -----
Depreciation 66,000 5,500 5,867 (367)*
$202,125 $16,844 $17,732 $(888)*
Total miles 375,000 31,250 35,000
Cost per mile $0.539 $0.539 $0.507
Number of autos 15 15 16
a. Employing flexible budgeting techniques, prepare a report that shows budgeted
amounts, actual costs, and monthly variation for April.
b. Explain briefly the basis of your budget figure for outside repairs.