Midwestern University Operates a Motor Pool for the Convenience of Its

question 67

Essay

Midwestern University operates a motor pool for the convenience of its faculty and staff. The following budget was prepared for an upcoming period: $\begin{array}{lr}\text { Gasoline and oil } & \$ 40,000 \\\text { Minor repairs } & 6,000 \\\text { Insurance } & 20,000 \\\text { Office help } & 24,000 \\\text { Depreciation } & 30,000 \\\text { Total } & \underline{\$ 120,000} \\\end{array}$
The budget was based on the assumptions of 20 vehicles, with each vehicle being driven 8,000 miles. Midwestern 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.

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Definitions:

Probability

A measure of the likelihood that a certain event will occur, expressed as a number between 0 and 1, where 0 indicates impossibility and 1 indicates certainty.

Sales

The exchange of a commodity for money; the action of selling something.

Poisson Approximation

A statistical technique used to estimate the probability of a given number of events happening in a fixed interval of time or space, assuming these events occur with a known constant mean rate and independently of the time since the last event.

Flat Tire

A condition where a tire loses all or most of its air, causing it to be incapable of functioning properly.