Question

The Centrico Medical Laboratory, a government-sponsored charity, is located on the island of Ste. Lucretia. The laboratory has just finished its operations for September, which was a particularly busy month due to a chemical spill that affected a few neighbouring small islands, causing many illnesses. The chemical spill and contamination largely bypassed Ste. Lucretia’s water supply, but residents of Ste. Lucretia willingly donated supplies and the laboratory assisted in the medical testing to help people on other islands. As a consequence, the medical laboratory collected and processed over 25% more laboratory samples from potentially ill residents than had been originally planned for the month.

A report prepared by a government official comparing actual costs to costs included in the static budget for the medical laboratory appears below. (The currency in Ste. Lucretia is the East Caribbean dollar.) Continued support from the government depends on the lab’s ability to demonstrate control over its costs:

CENTRICO MEDICAL LABORATORY
Cost Control Report
For the Month Ended September 30
    Actual   Static
Budget   Static
Budget
Variance
Laboratory samples collected      1,160.00         890.00         270.00     
   
Variable costs:                             
Medical supplies   $   17,984.00      $   13,083.00      $   4,901.00     
Lab tests      20,041.00         16,020.00         4,021.00     
Refreshments for staff and volunteers      2,078.00         1,691.00         387.00     
Administrative supplies      376.00         534.00         (158.00   )
   
Total variable cost      40,479.00         31,328.00         9,151.00     
   
Fixed costs:                             
Staff salaries      21,700.00         21,700.00         0     
Equipment depreciation      3,334.00         3,040.00         294.00     
Rent      3,200.00         3,200.00         0     
Utilities      577.00         545.00         32.00     
   
Total fixed cost      28,811.00         28,485.00         326.00     
   
Total cost   $   69,290.00      $   59,813.00      $   9,477.00     
   

The managing director of the medical laboratory is very unhappy with this report, claiming that his costs were higher than expected due to the emergency on the neighbouring islands. He also points out that the additional costs were fully covered by payments from grateful recipients on the other islands. The government official who prepared the report counters that all of the figures were submitted by the medical laboratory to the government; he was just pointing out that actual costs were considerably higher than promised in the budget.

Required:
1. Prepare a new performance report for September using the flexible budget approach. (Note: Even though there are no revenues in this setting, the flexible budget approach can still be used to prepare a flexible budget performance report. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance). Round your answers to 2 decimal places.)

Answer 1

Fixed costs remain the same in fixed budget and flexible budget. Variable cost is calculated by dividing total variable cost in fixed budget and budgeted units and multiply with actual units.

Flexible Budget Variance = Actual Results - Flexible Budget

Variance in Expense is favorable when the actual expense is less than Flexible budgeted expenses. Variance in Expense is Unfavorable when the actual expense is more than Flexible budgeted expenses.