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 car. 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 cars 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 cars in the pool.
2 60,000 kilometres per year per car.
3 8 kilometres per litre of petrol for each car.
4 £.44 per litre of petrol.
5 £.02 per kilometre for oil, minor repairs, parts and supplies.
6 £108 per car 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.
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