Question

The St. Lucia Blood Bank, a private charity partly supported by government grants, is located on the Caribbean island of St. Lucia. The blood bank has just finished its operations for September, which was a very busy month due to a powerful hurricane that hit neighboring islands causing many injuries. The hurricane largely bypassed St. Lucia, but residents of St. Lucia willingly donated their blood to help people on other islands. As a consequence, the blood bank collected and processed over 20% more blood than had been originally planned for the month.

A report prepared by a government official comparing actual costs to budgeted costs for the blood bank appears below. Continued support from the government depends on the blood bank’s ability to demonstrate control over its costs.

St. Lucia Blood Bank Cost Control Report For the Month Ended September 30
	Actual Results		Planning Budget		Variances
Liters of blood collected		580		460
Medical supplies	$	10,626	$	8,740	$	1,886	U
Lab tests		6,123		5,888		235	U
Equipment depreciation		4,375		4,000		375	U
Rent		1,750		1,750		0
Utilities		975		875		100	U
Administration		12,879		12,314		565	U
Total expense	$	36,728	$	33,567	$	3,161	U

The managing director of the blood bank was very unhappy with this report, claiming that his costs were higher than expected due to the emergency on the neighboring islands. He also pointed out that the additional costs had been fully covered by payments from grateful recipients on the other islands. The government official who prepared the report countered that all of the figures had been submitted by the blood bank to the government; he was just pointing out that actual costs were a lot higher than promised in the budget.

The following cost formulas were used to construct the planning budget:

	Cost Formulas
Medical supplies	$19.00q
Lab tests	$12.80q
Equipment depreciation	$4,000
Rent	$1,750
Utilities	$875
Administration	$10,750 + $3.40q

  
Required:

1.Complete the flexible budget performance report for September. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

• Requirement

	Actual Results	Spending Variance		Flexible Budget	Activity variance		Planning Budget
Litres of blood collected (q)	580			580			460
	[A]	[B = Difference between A & C]		[C = Fixed + (Var x Actual units)]	[D = Difference between C & E]		[E= Fixed + (Var x Planned units)]
Medical Supplies	$10,626	$394	F	$11,020	$2,280	U	$8,740
Lab Tests	$6,123	$1,301	F	$7,424	$1,536	U	$5,888
Equipment depreciation	$4,375	$375	U	$4,000	$0	None	$4,000
Rent	$1,750	$0	None	$1,750	$0	None	$1,750
Utilities	$975	$100	U	$875	$0	None	$875
Administrative	$12,879	$157	U	$12,722	$408	U	$12,314
Total Expenses	$36,728	$1,063	F	$37,791	$4,224	U	$33,567

--Working

	Fixed part	+(	Variable part	x	Actual/Planned units	)
Medical Supplies	$0	+(	$               19.00	x	580 or 460	)
Lab Tests	$0	+(	$               12.80	x	580 or 460	)
Equipment depreciation	$4,000	+(		x	580 or 460	)
Rent	$1,750	+(	$                      -	x	580 or 460	)
Utilities	$875	+(	$                      -	x	580 or 460	)
Administrative	$10,750	+(	$                  3.40	x	580 or 460	)
Total Expenses	$17,375	+(	$               35.20	x	580 or 460	)

Conceptual notes:

#1: Flexible Budget data is based on 'budgeted rates' applied on 'actual level/output/units'

#2: Spending Variance = Difference between 'Actual data' and 'Flexible Budget data'

#3: Activity Variance = Difference between 'Flexible Budget data' and 'Static/Planned Budget data'.

* Favourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are LESS than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are LESS than Static/Planned budget expenses/costs [Activity Variance]

* Unfavourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are MORE than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are MORE than Static/Planned budget expenses/costs [Activity Variance]