The KGV Blood Bank, a private charity partly supported by
government grants, is located on the Caribbean island of St. Lucia. 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 St. Lucia, but residents of St.
Lucia willingly donated their blood to help people on other islands. As a
consequence, the blood bank collected and processed about 20% 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 St. Lucia
is the East Caribbean dollar.) Continued support from the government depends on
the blood bank’s ability to demonstrate control over its costs.
KGV Blood Bank
Cost Control Report
For the Month Ended September 30
|
Planning Budget
|
Actual Results
|
Variances
|
|||
|
Liters of blood collected . .
|
600
|
780
|
|||
|
Medical supplies . . . . . . . .
|
$7,110
|
$9,252
|
$2,142
|
U
|
|
|
Lab tests . . . . . . . . . . . . . .
|
8,610
|
10,782
|
2,172
|
U
|
|
|
Equipment depreciation. .
|
1,900
|
2,100
|
200
|
U
|
|
|
Rent . . . . . . . . . . . . . . . . .
|
1,500
|
1,500
|
0
|
||
|
Utilities . . . . . . . . . . . . . . .
|
300
|
324
|
24
|
U
|
|
|
Administration . . . . . . . . .
|
14,310
|
14,575
|
265
|
U
|
|
|
Total expense . . . . . . . . . .
|
$33,730
|
$38,533
|
$4,803
|
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.
The following cost formulas were used to construct the planning
budget:
|
Cost Formulas
|
|
|
Medical supplies . . . . . . . . . . . .
|
$11.85q
|
|
Lab tests . . . . . . . . . . . . . . . . . . .
|
$14.35q
|
|
Equipment depreciation . . . . . . .
|
$1,900
|
|
Rent . . . . . . . . . . . . . . . . . . . . . .
|
$1,500
|
|
Utilities . . . . . . . . . . . . . . . . . . . .
|
$300
|
|
Administration . . . . . . . . . . . . . .
|
$13,200 + $1.85q
|
Required:
1. Prepare a new performance report for September using the
flexible budget approach.
2. Do you think any of the variances in the report you prepared
should be investigated? Why?
TUTORIAL PREVIEW
1. The cost formulas
in the flexible budget performance report below were obtained by dividing the
costs on the static budget in the problem statement by the budgeted level of
activity (600 liters). The fixed costs are carried over from the static budget.
File name: KGV Blood Bank.doc File
type: doc PRICE: $7
