Advanced University operates a motor pool for the convenience of its faculty and staff. The following budget was prepared for an upcoming period: Gasoline and oil$40,000Minor repairs6,000Insurance20,000Office help24,000Depreciation30,000Total$120,000The budget was based on the assumptions of 20 vehicles, with each vehicle being driven 8,000 miles. Advanced acquired two additional vehicles early in the period under study. Actual miles driven during the period totaled 180,000.Discussions with the motor pool manager revealed that pool costs are variable and fixed in nature. The manager believed that miles driven was the most appropriate cost driver for studying gasoline and oil expense. In contrast, the number of vehicles in the pool was the best base to use when studying minor repairs,
insurance, and depreciation. Office help is a fixed cost.Required:A. Contrast a static budget with a flexible budget.B. Suppose that the university's budget officer desired to prepare a report that compared budgeted and actual costs. Should the report be based on a static budget or a flexible budget? Why?C. On the basis of the information presented, determine the budgeted amounts for the five preceding costs that would be used in a flexible budget.
What will be an ideal response?
A. A static budget is based on a single expected activity level. In contrast, a flexible budget reflects data for several activity levels.
B. A performance report that incorporates flexible budgets is preferred. The report compares budgeted and actual performance at the same volume level, eliminating any variations in activity. In essence, everything is placed on a "level playing field."
C. Gasoline and oil: $40,000 ÷ (8,000 × 20) = $0.25 per mile; 180,000 miles × $0.25
= $45,000
Minor repairs: $6,000 ÷ 20 = $300 per vehicle; 22 vehicles × $300 = $6,600
Insurance: $20,000 ÷ 20 = $1,000 per vehicle; 22 vehicles × $1,000 = $22,000
Office help: $24,000 (fixed)
Depreciation: $30,000 ÷ 20 = $1,500 per vehicle; 22 vehicles × $1,500 = $33,000
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