Western Run University offers a continuing education program in many cities throughout the state. For the convenience of its faculty, as well as to save costs, the university operates a motor pool. Until March, the motor pool operated with 15 vehicles. However, an additional automobile was acquired in March. 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 commercial garage. A supervisor manages the motor pool.
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.
The explanations and computations for flexible budget are given in six different steps. The explanation for supervisor's unhappiness is also provided.