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	$16.30q
Indirect labor	$4,700 + $1.40q
Utilities	$5,400 + $0.80q
Supplies	$1,800 + $0.30q
Equipment depreciation	$18,600 + $2.40q
Factory rent	$8,100
Property taxes	$2,400
Factory administration	$13,300 + $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	$	65,150
Indirect labor	$	9,620
Utilities	$	9,070
Supplies	$	3,240
Equipment depreciation	$	27,960
Factory rent	$	8,500
Property taxes	$	2,400
Factory administration	$	14,990

Required:

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

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

3. Calculate the spending variances for all expense items.

Answer 1

	1)	labor hours				4,100
			planning Budget
			fixed	variable
	Direct labor			16.3		66830
	indirect labor		4,700	1.4		10440
	utilities		5,400	0.8		8680
	supplies		1,800	0.3		3030
	Equipment depreciation		18,600	2.4		28440
	Factory rent		8,100			8,100
	property taxes		2,400			2,400
	factory administration		13,300	0.6		15760
	total expense		54,300	21.8		143680
		the highlighte figures are the answers
		planning budget = fixed component + 4100 hrs*variable component
	2)	labor hours				3,900
			Flexible budget
			fixed	variable
	Direct labor			16.3		63570
	indirect labor		4,700	1.4		10160
	utilities		5,400	0.8		8520
	supplies		1,800	0.3		2970
	Equipment depreciation		18,600	2.4		27960
	Factory rent		8,100			8,100
	property taxes		2,400			2,400
	factory administration		13,300	0.6		15640
	total expense		54,300	21.8		139320
	3)		Spending variance
				Actual	flexible	Spending variance
	Direct labor			65,150	63570	1,580	U
	indirect labor			9,620	10160	540	F
	utilities			9,070	8520	550	U
	supplies			3,240	2970	270	U
	Equipment depreciation			27,960	27960	0	N
	Factory rent			8,500	8,100	400	U
	property taxes			2,400	2,400	0	N
	factory administration			14,990	15640	650	F
	total expense			140,930	139320	1,610	U