Budgets serve five main purposes; planning, facilitating communication and coordination, allocating resources, controlling profits and operations and evaluating performance and providing incentives. The budgeting process requires both technical and interpersonal leadership skills to achieve each of these purposes effectively. The director’s memo demonstrates several short comings in the budgeting process. The director instituted the “responsibility accounting system” as a means of evaluating performance. However, the DPW director has not consulted Sam in the budget process. Sam understands that his total expenditures are impacted by relatively unpredictable events that contribute to an uncontrollable element of his cost. The
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However, if we look at hours plowed as the cost driver, the amount of hours plowed per day actually decreases from 100 to 97.92. Thus, Sam must be overestimating the amount of overtime pay incurred per day, further increasing the need for him to increase the standard rates of his cost drivers.

A more efficient way to determine the total cost of drivers would be for Sam to use plow hours as a cost driver, and plug his average base wage rate and budgeted hours into this equation:

Driver’s Cost = (% of wage overtime x budgeted hours x 1.5 x base wage rate) + (% regular pay x budgeted hours x base wage rate)

Simply using a constant rate with plow hours to determine driver cost is not sufficient, since driver cost is step-variable due to overtime pay.

The % of wage overtime changes depending on the number of employees Sam has and the base wage rate. Since the case didn’t specify, assume that Sam has 10 employees. Each employee is then working 9.79 hours per day if actual hours per day is 97.92, which equates to 18% overtime pay (1.79 / 9.79). Since actual costs were $24,675, if we plug those numbers into the equation we can find a more accurate base wage rate for Sam’s company.

24,675 = (18% x 1175 x 1.5 x base wage rate) + (82% x 1175 x base wage rate)

Base wage rate = $19.27

So if this is the base wage rate, we can see why Sam’s previous prediction of an $18 average wage was off. The average

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