Question

Problem 17-48 Flexible Budget (LO 17-5)

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				One-Month										Over- or
	Budget				Master Budget						July Actual				(Under-) Budget
Gasoline	$	81,000				$	6,750				$	8,515				$	1,765
Oil, minor repairs, parts, and supplies		7,200					600					761					161
Outside repairs		5,400					450					90					(360	)
Insurance		12,000					1,000					1,050					50
Salaries and benefits		63,600					5,300					5,300					0
Depreciation		52,800					4,400					4,620					220
Total cost	$	222,000				$	18,500				$	20,336				$	1,836
Total miles		900,000					75,000					94,500
Cost per mile	$	0.2467				$	0.2467				$	0.2152
Number of automobiles		20					20					21

The annual budget was based on the following assumptions:

Automobiles in the pool: 20.

Miles per year per automobile: 45,000.

Miles per gallon per automobile: 20.

Gas per gallon: $1.80.

Oil, minor repairs, parts, and supplies per mile: $0.008.

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.) (Do not round intermediate calculations. If the amounts are equal to budget, select "No change".)

	Flexible budget

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.) (Do not round intermediate calculations. If the amounts are equal to budget, select "No change".)

	Flexible budget

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c. What is the monthly flexible budget for salaries and benefits and the resulting amount over- or underbudget? (Do not round intermediate calculations. If the amounts are equal to budget, select "No change".)

	Flexible budget

Answer 1

a. Calculation of gasoline monthly flexible budget and the resulting amount over/under budget:

Master budget:

Monthly budgeted total Miles during July = 75,000 miles

Actuals:

Actual total Miles during July = 94,500 miles

Calculation of Monthly Flexible budget of Gasoline:

Gasoline monthy Fixed or Master budget at 75,000 miles = $6,750

Therefore Gasoline monthly Flexible budget at 94,500 miles would be = $6,750 x (94,500 ÷ 75,000) = $8,505

Under or Over budget:

	Flexible budget	Actuals	Over or (Under) Budget
Gasoline	$8,505	$8,515	$10	Over budget

Since the incurred Gasoline expenses (actuals) is more than the flexible budget, we can say that it is over Budget.

b. Calculation of monthly flexible budget for the oil, minor repairs, parts, and supplies and the amount over- or under budget:

Master budget:

Monthly budgeted total Miles during July = 75,000 miles

Actuals:

Actual total Miles during July = 94,500 miles

Calculation of Monthly Flexible budget of Oil, minor repairs, parts, and supplies:

Monthy Fixed or Master budget at 75,000 miles = $600

Therefore, monthly Flexible budget at 94,500 would be = $600 x (94,500 ÷ 75,000) = $756

Under or Over budget:

	Flexible budget	Actuals	Over or (Under) Budget
Oil, minor repairs, parts, and supplies	$756	$600	($156)	Under budget

Since the actual expenses incurred for Oil, minor repairs, parts, and supplies are less than the flexible budget, we can say that it is Under Budget.

c. Calculation of monthly flexible budget for salaries and benefits and the resulting amount over- or underbudget:

Since, master budget and actual expenses for salaries and benefits remain same irrespective of level of activity, we can say that these expenses are fixed costs.

Therefore, Salaries and benefis = Flexible budgeted amount = Master budget = $5,300.

Therefore, there is no change in the budget.