Subtask 3b:
The Antigua Blood Bank, a private charity partly supported by government grants, is located on the Caribbean island of Antigua. 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 Antigua, but residents of Antigua willingly donated their blood to help people on other islands. As a consequence, the blood bank collected and processed over 30% 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. (The currency on Antigua is the East Caribbean dollar.) Continued support from the government depends on the Blood Bank’s ability to demonstrate control over its costs.
Antigua Blood Bank
Cost Control Report
For the Month Ended September 30
Actual Budget Variance
Liters of blood collected 320 240 80
Variable costs:
Medical supplies $ 4,650 $ 3,360 $ 1,290 U
Lab tests 2,800 2,760 40 U
Refreshments for donors 2,188 1,488 700 U
Administrative supplies 620 480 140 U
Total variable cost 10,258 8,088 2,170 U
Fixed costs:
Staff salaries 8,000 8,000 0
Equipment depreciation 1,400 1,000 400 U
Rent 500 500 0
Utilities 250 225 25 U
Total fixed cost 10,150 9,725 425 U
Total cost $20,408 $17,813 $2,595 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.
Required:
1. Prepare a new performance report for September using the flexible budget approach. (Note: Even though some of these costs might be classified as direct costs rather than as overhead, the flexible budget approach can still be used to prepare a flexible budget performance report.)
2. Do you think any of the variances in the report you prepared should be investigated? Why?
To prepare a new performance report for September using the flexible budget approach, we need to calculate the budgeted cost of each expense based on the actual level of activity (liters of blood collected), and then compare it to the actual cost to determine the variances.
To calculate the flexible budget for each expense, we need to determine the budgeted cost per unit of activity (liters of blood collected). We can do this by dividing the budgeted cost by the planned activity level.
1. Calculate the budgeted cost per unit of activity for each expense:
- Medical supplies: $3,360 / 240 liters = $14 per liter
- Lab tests: $2,760 / 240 liters = $11.50 per liter
- Refreshments for donors: $1,488 / 240 liters = $6.20 per liter
- Administrative supplies: $480 / 240 liters = $2 per liter
- Staff salaries: $8,000 (fixed cost)
- Equipment depreciation: $1,000 (fixed cost)
- Rent: $500 (fixed cost)
- Utilities: $225 (fixed cost)
2. Calculate the flexible budget for each expense based on the actual liters of blood collected:
- Medical supplies: $14 per liter x 320 liters = $4,480
- Lab tests: $11.50 per liter x 320 liters = $3,680
- Refreshments for donors: $6.20 per liter x 320 liters = $1,984
- Administrative supplies: $2 per liter x 320 liters = $640
- Staff salaries: $8,000 (fixed cost)
- Equipment depreciation: $1,000 (fixed cost)
- Rent: $500 (fixed cost)
- Utilities: $225 (fixed cost)
3. Compare the flexible budget to the actual cost to calculate the variances:
- Medical supplies variance: Actual cost ($4,650) - Flexible budget ($4,480) = $170 U (unfavorable)
- Lab tests variance: Actual cost ($2,800) - Flexible budget ($3,680) = $880 F (favorable)
- Refreshments for donors variance: Actual cost ($2,188) - Flexible budget ($1,984) = $204 U (unfavorable)
- Administrative supplies variance: Actual cost ($620) - Flexible budget ($640) = $20 F (favorable)
- Staff salaries variance: Actual cost ($8,000) - Flexible budget ($8,000) = $0
- Equipment depreciation variance: Actual cost ($1,400) - Flexible budget ($1,000) = $400 U (unfavorable)
- Rent variance: Actual cost ($500) - Flexible budget ($500) = $0
- Utilities variance: Actual cost ($250) - Flexible budget ($225) = $25 U (unfavorable)
Now, let's move on to the second part of the question regarding whether any of the variances should be investigated.
Variances should be investigated if they are significant or have a material impact on the Blood Bank's overall performance. In this case, the variances that should be investigated are those that are relatively large and unfavorable. These include:
- Medical supplies variance: $170 U
- Refreshments for donors variance: $204 U
- Equipment depreciation variance: $400 U
- Utilities variance: $25 U
These variances indicate that the actual costs for these expense items were higher than the budgeted costs. Investigating these variances can help identify the reasons for the cost overruns and determine if there are any opportunities to reduce costs in the future.
Overall, investigating these variances will contribute to the Blood Bank's ability to demonstrate control over its costs and improve its financial performance.