Sam Donaldson, the laundry supervisor of the Spruce Street Shelter, stared at the memo that had just reached his desk:

The shelter has adopted a responsibility accounting system. From now on you will receive quarterly reports comparing the costs of operating your department with budgeted costs. The reports will highlight the differences (variances) so that you can zero in on the departure from budgeted costs. (This is called management by exception.) Responsibility accounting means you are accountable for keeping the costs in your department within the budget. The variances from the budget will help you identify which costs are out of line, and the sizes of the variances will indicate the most important ones. Your first such report accompanies this announcement. [Exhibit 1]

As this report indicates, your costs are significantly above budget for the quarter. You need to pay particular attention to labor, supplies, and maintenance. Please get back to me by the end of next week with a plan for making the needed reductions.

Mr. Donaldson knew he needed a plan, yet mid-winter was the busiest time of the year at the shelter, and the laundry was piling up faster than his staff could wash it.

BACKGROUND

Spruce Street Shelter was located in the heart of a large metropolitan area in the north-central United States. Founded in the late 1800s, it had been serving the homeless ever since, providing hot meals, shelter, and companionship. Situated on a busy urban thoroughfare, it was a haven of last resort for many of the city's indigent, and “home” for many others. As might be expected, the demand for its services was especially high in the winter, when temperatures frequently dropped to below zero, and life “on the street” became unbearable.

The shelter provided three services. Its most significant activity was the Hot-Meal Program, where it served hundreds of meals a day. A meal of hot soup and a sandwich was available to anyone who arrived between the hours of noon and 2pm and 5pm to 7pm. Its second program was its Overnight Hostel, where it made available 150 beds on a first-come, first-served basis. The linen was changed daily, and fresh towels were always available, so that its clients could look forward to “clean sheets and a hot shower.” Finally, it had a counseling program, in which a staff of three full-time social workers assisted clients to cope with the difficulties that had brought them to the shelter, and in establishing themselves in a more self-sufficient lifestyle.

In March, the shelter had hired a new administrator to improve its business activities. A business school graduate with prior experience in manufacturing and service companies in the private sector, one of his first steps had been to introduce what he called “responsibility accounting.” He had instituted a new budgeting system, along with the provision of quarterly cost reports to the shelter’s department heads. (Previously, cost data had been presented to department heads only infrequently.) . . .

Assignment

1. What is your assessment of the method the administrator used to construct the budget?
2. Prepare a flexible budget for the laundry department. What does it tell you?
3. Compute the appropriate labor variances. What do they tell you.
4. What should Mr. Donaldson tell the administrator about his budget variances?