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	$4,000 + $1.50q
Utilities	$5,000 + $0.90q
Supplies	$1,500 + $0.10q
Equipment depreciation	$18,100 + $2.90q
Factory rent	$8,500
Property taxes	$2,800
Factory administration	$13,700 + $0.50q

The Production Department planned to work 4,400 labor-hours in March; however, it actually worked 4,200 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	70,040
Indirect labor	$	9,780
Utilities	$	9,350
Supplies	$	2,150
Equipment depreciation	$	30,280
Factory rent	$	8,900
Property taxes	$	2,800
Factory administration	$	15,130

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)	labor hours				4,400
			planning Budget
			fixed	variable
	Direct labor			16.3		71720
	indirect labor		4,000	1.5		10600
	utilities		5,000	0.9		8960
	supplies		1,500	0.1		1940
	Equipment depreciation		18,100	2.9		30860
	Factory rent		8,500			8,500
	property taxes		2,800			2,800
	factory administration		13,700	0.5		15900
	total expense		53,600	22.2		151280
		the highlighte figures are the answers
		planning budget = fixed component + 8000 hrs*variable component
	2)	labor hours				4,200
			Flexible budget
			fixed	variable
	Direct labor			16.3		68460
	indirect labor		4,000	1.5		10300
	utilities		5,000	0.9		8780
	supplies		1,500	0.1		1920
	Equipment depreciation		18,100	2.9		30280
	Factory rent		8,500			8,500
	property taxes		2,800			2,800
	factory administration		13,700	0.5		15800
	total expense		53,600	22.2		146840
	3)		Spending variance
				Actual	flexible	Spending variance
	Direct labor			70,040	68460	1,580	U
	indirect labor			9,780	10300	520	F
	utilities			9,350	8780	570	U
	supplies			2,150	1920	230	U
	Equipment depreciation			30,280	30280	0	N
	Factory rent			8,900	8,500	400	U
	property taxes			2,800	2,800	0	N
	factory administration			15,130	15800	670	F
	total expense			148,430	146840	1,590	U