The Crimson Press Curriculum Center

First Page and the Assignment Questions:
Sam Donaldson, supervisor of the snow removal department for the Town of Bellington, stared at the memo he had just received from the director of public works. The opening paragraphs were anything but reassuring:

As you know, I have instituted a new responsibility accounting system. From now on you will receive quarterly reports that compare the costs of operating your department with your budget. The reports will highlight the differences (variances) so that you can easily zero in on any departures from your budget. Basically, responsibility accounting means you are to keep the costs in your department within your budget. The variances will help you identify those costs that are out of line, and the sizes of the variances will indicate the most important cost items to address. Your first report accompanies this memo. [Exhibit 1]

   Sam, your report indicates that several of your costs are significantly above your quarterly budget. You need to pay particular attention to the salaries of your snowplow drivers. 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 midwinter was the busiest time of the year for snow removal, and a big storm had been predicted for the weekend.

BACKGROUND

   The Town of Bellington was located in the north-central United States. Founded in the mid-1800s by immigrants from northern Europe, it had grown slowly over the intervening years. The new director of public works, a business school graduate with prior experience in manufacturing and service companies in the private sector, had been hired last year. He had almost immediately instituted a new responsibility accounting system, which included a revised budgeting process and quarterly reports for his various department heads, such as snow removal, street cleaning, road repair, and traffic light maintenance. Previously, cost data had been presented to department heads only infrequently, but the new director was certain that more frequent information would provide greater incentives for his department heads to keep their costs under control.

   The new director also had prepared a budget for each department for the current fiscal year, and had computed quarterly budgets as one-fourth of each department’s annual budget. To prepare the budgets, he had analyzed the prior three years’ costs, and, in so doing, had learned that almost all of them had increased each year, with more rapid increases in the last two years. His first thought had been to establish the budgeted line items at an average of the prior three years' costs, hoping that such an approach would encourage his department heads to reduce their operating costs to this level. However, in view of the rapid cost increases during the past two years, he chose instead to base the current year’s budget on the prior year’s costs less 3 percent. For the snow removal department, he also estimated the cubic miles of snow to be removed, which he set at an average of the past three years.

   Mr. Donaldson had received the report shown in Exhibit 1 in mid-January. He reflected on its content:

Some of my costs don’t change, even if there’s a change in the cubic miles of snow we plow. On the other hand, drivers, supplies, fuel, and maintenance vary almost directly with changes in cubic miles. Shouldn’t my budget reflect this distinction? Also, my budget didn’t include my October salary increase—was I supposed to refuse it to help keep my budget in balance?

   Finally, I think it’s important to note that I had to pay overtime to the drivers because of some very heavy storms we had back in mid-December. Because of this, my average hourly rate for the whole three months was $21 instead of the $18 that was in my budget. In fact, and maybe this is a little picky, the average number of minutes it took my drivers to plow a cubic mile of snow during the quarter actually dropped from 48, which was my budget target, to 47. Somehow, even though it’s pretty small, I think this improvement should be taken into consideration.

Assignment

1.   What is your assessment of the method the public works director used to construct the budget?
2.   Prepare a flexible budget for the snow plowing department. What does it tell you?
3.    Compute the appropriate variances for drivers. What do they tell you?
4.   What plan should Mr. Donaldson present to the public works director for making the needed cost reductions?