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	$16.60q
Indirect labor	$4,600 + $1.40q
Utilities	$5,400 + $0.50q
Supplies	$1,500 + $0.20q
Equipment depreciation	$18,000 + $2.60q
Factory rent	$8,500
Property taxes	$3,000
Factory administration	$13,500 + $0.90q

The Production Department planned to work 4,200 labor-hours in March; however, it actually worked 4,000 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	68,040
Indirect labor	$	9,660
Utilities	$	7,890
Supplies	$	2,550
Equipment depreciation	$	28,400
Factory rent	$	8,900
Property taxes	$	3,000
Factory administration	$	16,510

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) Production Department's Planning Budget (q = 4,200 lab hrs) (Amts in $)

Cost	Computations	Amount
Direct Labor	($16.60*4,200)	69,720
Indirect Labor	$4,600+($1.40*4,200)	10,480
Utilities	$5,400+($0.50*4,200)	7,500
Supplies	$1,500+($0.20*4,200)	2,340
Equipment Depreciation	$18,000+($2.60*4,200)	28,920
Factory Rent	$8,500	8,500
Property Taxes	$3,000	3,000
Factory Administration	$13,500+($0.90*4,200)	17,280
Total Expense		147,740

2) Production Department's Flexible Budget (q = 4,000 lab hrs) (Amts in $)

Cost	Computations	Amount
Direct Labor	($16.60*4,000)	66,400
Indirect Labor	$4,600+($1.40*4,000)	10,200
Utilities	$5,400+($0.50*4,000)	3,400
Supplies	$1,500+($0.20*4,000)	2,300
Equipment Depreciation	$18,000+($2.60*4,000)	28,400
Factory Rent	$8,500	8,500
Property Taxes	$3,000	3,000
Factory Administration	$13,500+($0.90*4,000)	17,100
Total Expense		139,300

3) Calculation of Spending Variances for all expense (Amounts in $)

Cost	Flexible Budget (A)	Actual Expense (B)	Spending Variance (A-B)
Direct Labor	66,400	68,040	1,640 U
Indirect Labor	10,200	9,660	540 F
Utilities	3,400	7,890	4,490 U
Supplies	2,300	2,550	250 U
Equipment Depreciation	28,400	28,400	0
Factory Rent	8,500	8,900	400 U
Property Taxes	3,000	3,000	0
Factory Administration	17,100	16,510	590 F
Total Expense	139,300	144,950	5,650 U

U means Unfavorable variance and F means Favorable Variance.