Budgets serve five main purposes; planning, facilitating communication and coordination, allocating resources, controlling profits and operations and evaluating performance and providing incentives. The budgeting process requires both technical and interpersonal leadership skills to achieve each of these purposes effectively. The director’s memo demonstrates several short comings in the budgeting process. The director instituted the “responsibility accounting system” as a means of evaluating performance. However, the DPW director has not consulted Sam in the budget process. Sam understands that his total expenditures are impacted by relatively unpredictable events that contribute to an uncontrollable element of his cost. The…show more content… This should have been his forecasted cost for 1,250 cubic miles of snow to plow.
Table [ 2 ] Flexible Budget
2. The table below shows budgeted and fixed overhead rates. Maintenance is the only variable overhead cost. The budgeted maintenance cost per plow mile is $1.375. The budgeted fixed overhead rate is $20.25 per plow mile. The variable cost variances are all unfavorable at the increased activity level, and the company needs to revise its cost driver estimates to account for the increase in costs. The negative adjustment for inflation that the company implemented in May most likely contributed significantly to this discrepancy.
Table [ 3 ] Variable and Fixed Overhead Rates
Applying these rates to the actual plow hours consumed, and the actual variable overhead, provides us with variable spend and efficiency variance respectively. The variable spends variance shows that Sam paid more than expected for maintenance at the budgeted rate. The case states that last year there were several heavy storms. Wear under on the plows under these conditions was potentially more than anticipated. An unfavorable spend variance is relatively small. Perhaps some of the plows suffered slight damage that took more time than a routine service to fix. Alternately, most of
