Ultratech Company\'s headquarters are a \"campus\" in the outskirts of San Franc
ID: 2567733 • Letter: U
Question
Ultratech Company's headquarters are a "campus" in the outskirts of San Francisco, California. For the convenience of its employees and to help preserve the environment, the company operates a motor pool of buses running between points in San Francisco and the company's Campus. The motor pool operated with 20 vehicles until February, when an additional bus was acquired and put in service. The motor pool furnishes gasoline, oil, and other supplies for its buses. A mechanic does routine maintenance and minor repairs. Major repairs are performed at a nearby commercial garage. Each year, the supervisor of the motor pool prepares an annual budget, which is reviewed by the company's management and approved after suitable modifications. The following cost control report shows actual operating costs for March of the current year compared to one- twelfth of the annual budget. Ultratech Co. Motor Pool Cost Control Report For the Month Ended March 31 Annual Monthly budget (1/12March (Over) Budget of annual budget) Actual Under Budget Miles Buses Gasoline Oil, Parts, Minor Repairs Outside Repairs Insurance Salaries and Benefits Vehicle Depreciation 600,000 20 $96,000 30,000 9,600 18,000 103,320 48,000 0,00058,000 21 $8,000$8,970 2,840 980 1,625 8,610 4,200 20 2,500 800 1,500 8,610 4,000 $ (970) (340) 180 125 0 200 Total 304,920 $25,410 $27,225 $ (1,815) The annual budget was based on the following assumptions: a. $0.16 per mile for gasoline b. $ 0.05 per mile for oil, minor repairs, and parts c. $ 480 per bus per year for outside repairs. d. $ 900 per bus per year for insurance e. $ 8,610 per month for salaries and benefits. f. $ 2,400 per bus per year for depreciation. The supervisor of the motor pool, Ralph Kramden, is unhappy with the report, claiming it paints an unfair picture of the motor pool's performance. He has asked for your help preparing for a meeting with management in which he believes his performance will be criticized as a result of the variances shown in the Cost Control Report.Explanation / Answer
.1. The cost control reports variances based on static budget. The actual level of activity during the month was higher .Actual mile was higher at 58000 compared to budgeted 50000 miles. Actual number of buses also was higher.
Hence, it is expected that actual expenses would be higher than budgeted
.2. A flexible budget based on the level of activity will represent a fair picture of variances.
Flexible budget will take into account the cost that should be incurred given the level of activity. Static budget reports favourable variances when level of activity is lower and unfavourable variances when the level of activity is higher. A flexible budget avoids such distortion
.3. New performance report based on flexible budget given below:
Annual
Monthly
Monthly
March
(Over)/
Budget
Static budget
Flexible budget
Actual
Under budget
Miles
600000
50000
58000
58000
Cost Basis for budget
Amount
Buses
20
20
21
21
per mile
$0.16
Gasoline
$96,000
$8,000
$9,280
$8,970
$310
per mile
$0.05
Oil, parts, minor repair
$30,000
$2,500
$2,900
$2,840
$60
per busper year
$480
Outside repair
$9,600
$800
$ 840
$980
($140)
per bus per year
$900
Insurance
$18,000
$1,500
$ 1,575
$1,625
($50)
per month
$8,610
Salaries & benefits
$103,320
$8,610
$8,610
$8,610
$0
per bus per year
$2,400
Vehicle depreciation
$48,000
$4,000
$ 4,200
$4,200
$0
.4. Based on Flexible budget , Cost of Gasoline and oil, parts etc are under control. Outside repair and Insurance costs are more than the budget. Overall cost variance is Favourable
.5. Oruginal cost control report does not take into accounr effect of change in activity levels. Thus it reports a distorted cost variances. The flexible budget avoids this distortion
Annual
Monthly
Monthly
March
(Over)/
Budget
Static budget
Flexible budget
Actual
Under budget
Miles
600000
50000
58000
58000
Cost Basis for budget
Amount
Buses
20
20
21
21
per mile
$0.16
Gasoline
$96,000
$8,000
$9,280
$8,970
$310
per mile
$0.05
Oil, parts, minor repair
$30,000
$2,500
$2,900
$2,840
$60
per busper year
$480
Outside repair
$9,600
$800
$ 840
$980
($140)
per bus per year
$900
Insurance
$18,000
$1,500
$ 1,575
$1,625
($50)
per month
$8,610
Salaries & benefits
$103,320
$8,610
$8,610
$8,610
$0
per bus per year
$2,400
Vehicle depreciation
$48,000
$4,000
$ 4,200
$4,200
$0
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