In late October, Mathew Cohan, President of Cohan Construction Company, was reviewing the results of a recently-completed construction project on Huntington Avenue. The project, which had been completed under a contract with the City of Boston, had run considerably over budget, and Mr. Cohan wished to determine the reasons for the excessive expenditures.
Because the actual length of the road had exceeded the city’s estimate, Mr. Cohan knew that he would be entitled to some additional compensation from the city. However, he also realized that not all of the extra costs could be attributed to the additional length and therefore had asked his accountant to prepare a summary of the reasons for the budget deviation.
While the accountant’s summary (Exhibit 1) shed some light on the reasons for the variance, Mr. Cohan was convinced that it did not tell the full story. He commented:
I know the road was a half mile longer than we anticipated, but that’s the city’s problem. However, because of wastage we used 21 rather than 20 square yards of asphalt per yard of road length. Also, the paving foreman told me that the [paving] crew’s efficiency increased by 20 percent over what we had budgeted, resulting in some apparent savings, but those don’t show up on this report. Finally, there was a wage increase for the grading crew, which increased the cost per yard of grading from $12 to $15.
Inasmuch as his meeting with the mayor’s contract performance officer was the next day, Mr. Cohan felt he needed to have a much more thorough analysis of the reasons for the variance. He asked his accountant to prepare an analysis that would explain in greater detail why the actual cost of the road exceeded budget by such a large amount.
Assignment
- Compute the relevant variances. What do they show that the accountant’s report does not?
- What additional information would you suggest Mr. Cohan obtain about this project? Why?
- How much more should the city pay? How much should the city ask Cohan Construction Company to absorb?