Question

Flexible Budgeting

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 particularly 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 Planning Results Budget Variances $1,750 U 180 U 300 U Liters of blood collected ................ Medical supplies ........ Lab tests ....... Equipment depreciation ...... Rent Utilities Administration ........ Total expense .......... 620 $ 9,250 6,180 2,800 1,000 570 11,740 $31,540 500 $ 7,500 6,000 2,500 1,000 500 11,250 $28,750 70U 490 U $2,790 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:

Required:

1.	Prepare a new performance report for September using the flexible budget approach.
2.	Do you think any of the variances in the report you prepared should be investigated? Why?

Answer 1

			Flexible buget
liters of blood collected					620
			Variable	fixed
medical supplies			15		9300
lab tents			12		7440
Equipment depreciation				2,500	2,500
Rent				1,000	1,000
Utilities				500	500
Administration			2.5	10000	11550
total expense			29.5	14000	32290
	Flexible budget = fixed component + actual 620 liters*variable component)
				Flexible Budget Performance Report
		Actual	spending variance		Flexible	Activity variance		planned budget
		resutl			budget
liters of blood collected		620			620			500
Medical supplies		9,250	50	F	9300	1,800	U	7,500
labt tests		6,180	1,260	F	7440	1,440	U	6,000
Equipment depreciation		2,800	300	U	2,500	0	N	2,500
Rent		1,000	0	N	1,000	0	N	1,000
Utilities		570	70	U	500	0	N	500
Administration		11,740	190	U	11550	300	U	11,250
total expense		31,540	750	F	32290	3,540	U	28,750
may be only administration expense should be investigated as the variance is unfavourable