Question: Flexible Budgeting For the convenience of its reporters and staff based in London, CNN operates a motor pool. The motor pool operated with 25 vehicles until February of this year, when it acquired an additional automobile. The motor pool furnishes petrol (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 an operating budget, informing CNN management of the funds needed to operate the pool. Depreciation on the automobiles is recorded in the budget in order to determine the cost per mile. The following schedule presents the annual budget approved by the news division. The actual costs for March are compared with one-twelfth of the annual budget.
The annual budget was constructed based on the following assumptions:
1. 25 automobiles in the pool
2. 60,000 kilometers per year per automobile
3. 8 kilometers per liter of petrol for each automobile
4. £.44 per liter of petrol
5. £.02 per kilometer for oil, minor repairs, parts, and supplies
6. £108 per automobile in outside repairs
The supervisor is unhappy with the monthly report comparing budget and actual costs for March; she claims it presents her performance unfairly. Her previous employer used flexible budgeting to compare actual costs with budgeted amounts.
1. Employing flexible-budgeting techniques, prepare a report that shows budgeted amounts, actual costs, and monthly variation for March.
2. Explain briefly the basis of your budget figure for outside repairs.