Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 3

Flexible Budget

Oak Hill Township operates a motor pool with 20 vehicles The motor pool furnishes gasoline, oil, and other supplies for the cars and hires one mechanic who does routine maintenance and minor repairs Major repairs are done at a nearby commercial garage A supervisor manages the operations.

?Each year, the supervisor prepares a master budget for the motor pool Depreciation on the automobiles is recorded in the budget to determine the costs per mile.

?The following schedule presents the master budget for the year and for the month of July.

OAK HILL TOWNSHIP Motor Pool Budget Report for July
	Annual Master Budget	One-Month Master Budget	July Actual	Over- or (Under-) Budget
Gasoline	$ 81,000	$ 6,750	$ 8,515	$1,765
Oil, minor repairs, parts, and supplies	7,200	600	760	160
Outside repairs	5,400	450	100	(350)
Insurance	12,000	1,000	1,050	50
Salaries and benefits	60,000	5,000	5,000	-0-
Depreciation	52,800	4,400	4,620	220
Total cost	$218,400	$18,200	$20,045	$1,845
Total miles	900,000	75,000	94,500
Cost per mile	$02427	$02427	$02121
Number of automobiles	20	20	21

?The annual budget was based on the following assumptions:

1. Automobiles in the pool: 20.

2. Miles per year per automobile: 45,000.

3. Miles per gallon per automobile: 20.

4. Gas per gallon: $180.

5. Oil, minor repairs, parts, and supplies per mile: $0008.

6. Outside repairs per automobile per year: $270.

?The supervisor is unhappy with the monthly report, claiming that it unfairly presents his performance for July His previous employer used flexible budgeting to compare actual costs to budgeted amounts.

Required

a. What is the gasoline monthly flexible budget and the resulting amount over- or underbudget? (Use miles as the activity base.)

---

b. What is the monthly flexible budget for the oil, minor repairs, parts, and supplies and the amount over- or underbudget? (Use miles as the activity base.)

---

c. What is the monthly flexible budget for salaries and benefits and the resulting amount over- or underbudget?

---

d. What is the major reason for the cost per mile to decrease from $02427 budgeted to $02121 actual?

Step 1 of 4

Flexible budget is based on actual activity of 94,500 miles for costs that vary per mile.

a.?$8,505;?$10 over budget.  

??$6,750 x (94,500 miles ÷ 75,000 miles) = $8,505