Question

Packaging Solutions Corporation manufactures and sells a wide variety of packaging products. Performance reports are prepared monthly for each department. The planning budget and flexible budget for the Production Department are based on the following formulas, where q is the number of labor-hours worked in a month:

	Cost Formulas
Direct labor	$16.40q
Indirect labor	$4,200 + $1.60q
Utilities	$5,200 + $0.50q
Supplies	$1,300 + $0.20q
Equipment depreciation	$18,800 + $2.90q
Factory rent	$8,500
Property taxes	$2,900
Factory administration	$13,000 + $0.60q

The Production Department planned to work 4,100 labor-hours in March; however, it actually worked 3,900 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	65,560
Indirect labor	$	9,940
Utilities	$	7,640
Supplies	$	2,330
Equipment depreciation	$	30,110
Factory rent	$	8,900
Property taxes	$	2,900
Factory administration	$	14,690

Required:

1. Prepare the Production Department’s planning budget for the month.

2. Prepare the Production Department’s flexible budget for the month.

3. Prepare the Production Department’s flexible budget performance report for March, including both the spending and activity variances.

Answer 1

1
Planning Budget
Budgeted labor hours	4100
Direct labor	67240	=4100*16.4
Indirect labor	10760	=4200+(4100*1.6)
Utilities	7250	=5200+(4100*0.5)
Supplies	2120	=1300+(4100*0.2)
Equipment Depreciation	30690	=18800+(4100*2.9)
Factory rent	8500
Property taxes	2900
Factory administration	15460	=13000+(4100*0.6)
Total expenses	144920
2
Flexible Budget
Actual labor hours	3900
Direct labor	63960	=3900*16.4
Indirect labor	10440	=4200+(3900*1.6)
Utilities	7150	=5200+(3900*0.5)
Supplies	2080	=1300+(3900*0.2)
Equipment Depreciation	30110	=18800+(3900*2.9)
Factory rent	8500
Property taxes	2900
Factory administration	15340	=13000+(3900*0.6)
Total expenses	140480
3
	Actual	Spending variance		Flexible budget	Activity variance		Planning budget
Labor hours	3900			3900			4100
Direct labor	65560	1600	U	63960	3280	F	67240
Indirect labor	9940	500	F	10440	320	F	10760
Utilities	7640	490	U	7150	100	F	7250
Supplies	2330	250	U	2080	40	F	2120
Equipment Depreciation	30110	0	None	30110	580	F	30690
Factory rent	8900	400	U	8500	0	None	8500
Property taxes	2900	0	None	2900	0	None	2900
Factory administration	14690	650	F	15340	120	F	15460
Total expenses	142070	1590	U	140480	4440	F	144920