A bank manager of City savings bank Inc. uses the managerial accounting system to track the costs of operating the various departments with in the bank. The departments include Cash Management, Trust, Commercial Loans, Mortgage Loans, Operations, Credit card, and Branch Services. The budget and actual results for the Operations Department are as follows:
 

Resources	Budget	actual
Salaries	$200,000	$200,000
benefits	30,000	30,000
Supplies	45,000	42,000
travel	20,000	30,000
Training	25,000	35,000
overtime	25,000	20,000
total	$345,000	$357,000
Excess of actual over budget		$12,000

 

(a) What information is provided by the budget? Specifically, what questions can the bank manager ask of the Operations Department manager?
(b) What information does the budget fail to provide? Specially, could the budget information be presented differently to provide even more insight for the bankmanager?

(a)The budget information indicates that the actual expenditures by the Operations Department exceeded what was planned by $12,000. The bank manager may ask the operations manager why the travel and training expenditures exceeded the plan by a total of $20,000. It may be that the additional expenditures were necessary, but an explanation is in order.

(b)The bank manager does not know if the actual resources consumed by the Operations Department are the right amount of resources for doing the right things. In other words, this budget doesn’t say anything about the actual work of the Operations Department and how much cost this work consumes. The bank manager doesn’t have a good sense if there is waste in the department or not. The $12,000 excess expenditure over budget raises several questions. If the department did twice as much work as planned, then the $12,000 is a bargain. If, on the other hand, the department did much less work than planned, then the $12,000 under-states how poorly the department used resources. Again, how much work the department actually did is unknown, so these questions cannot be answered. A flexible budget would provide more information about the work of the department. Examples of the kind of work conducted by the department might include processing credit card statements, processing checking statements, processing loan repayments, and correcting errors.The budget doesn’t indicate why there was more travel and training than expected. Maybe the department introduced a new computer system, and all employees needed off-site training in order to use the system. This would explain the additional spending on travel and training. The training needed to be done, regardless of the budget.

The lower than expected overtime may be a favorable result. However, there may have been less overtime because employees were involved in more training days than expected or performed less work than planned. Again, a flexible budget would provide more information for evaluating the department’s performance.