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	$16.20q
Indirect labor	$4,400 + $1.70q
Utilities	$5,500 + $0.30q
Supplies	$1,800 + $0.40q
Equipment depreciation	$18,600 + $2.40q
Factory rent	$8,100
Property taxes	$2,500
Factory administration	$13,100 + $0.50q

The Production Department planned to work 4,500 labor-hours in March; however, it actually worked 4,300 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	71,220
Indirect labor	$	11,230
Utilities	$	7,240
Supplies	$	3,810
Equipment depreciation	$	28,920
Factory rent	$	8,500
Property taxes	$	2,500
Factory administration	$	14,580

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

Answer:

Packing Solution Corporation
Production Department Planning Budget
For Month Ended March 31
Budgeted labor hours	4,500
Direct labor	72,900
Indirect labor	12,050
Utilities	6,850
Supplies	3,600
Equipment depreciation	29,400
Factory rent	8,100
Property taxes	2,500
Factory administration	15,350
Total Expense	150,750

Calculation:

We need to follow the cost formulas given in the question to calculate each of the expenses.

So, the budgeted hours = 4,500

Direct labor = $16.20q = 16.20 * 4,500 = 72,900

Indirect labor = 4,400 + $1.70q = 4,400 + $1.70 * 4,500 = 12,050

Utilities = $5,500 + $0.30q = $5,500 + $0.30* 4,500 = 6,850

Supplies = $1,800 + $0.40q = 1,800 + $0.40* 4,500 = 3,600

Equipment depreciation = $18,600 + $2.40q = 18,600 + $2.40* 4,500 = 29,400

Factory administration = $13,100 + $0.50q = 13,100 + $0.50* 4,500 =  15,350

After calculating all the expenses, we need to total it, to find the total expenses budgeted.

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

Answer:

Packing Solution Corporation
Production Department Flexible budget
For Month Ended March 31
Actual labor hours	4,300
Direct labor	69,660
Indirect labor	11,710
Utilities	6,790
Supplies	3,520
Equipment depreciation	28,920
Factory rent	8,100
Property taxes	2,500
Factory administration	15,250
Total Expense	146,450

Calculation:

We need to follow the cost formulas given in the question to calculate each of the expenses.

So, the actual hours = 4,300

Direct labor = $16.20q = 16.20 * 4,300 = 69,660

Indirect labor = 4,400 + $1.70q = 4,400 + $1.70 * 4,300 = 11,710

Utilities = $5,500 + $0.30q = $5,500 + $0.30* 4,300 = 6,790

Supplies = $1,800 + $0.40q = 1,800 + $0.40* 4,300 = 3,520

Equipment depreciation = $18,600 + $2.40q = 18,600 + $2.40* 4,300 = 28,920

Factory administration = $13,100 + $0.50q = 13,100 + $0.50* 4,300 =  15,250

After calculating all the expenses, we need to total it, to find the total expenses.

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

Answer:

Packing Solution Corporation
Production Department Flexible budget performance report
For Month Ended March 31
	Actual Results	Spending Variance		Flexible Budget	Activity Variance		Planning Budget
Budgeted labor hours	4,300			4,300			4,500
Direct labor	71,220	1,560	U	69,660	3,240	F	72,900
Indirect labor	11,230	480	F	11,710	340	F	12,050
Utilities	7,240	450	U	6,790	60	F	6,850
Supplies	3,810	290	U	3,520	80	F	3,600
Equipment depreciation	28,920	-		28,920	480	F	29,400
Factory rent	8,500	400	U	8,100	-		8,100
Property taxes	2,500	-		2,500	-		2,500
Factory administration	14,580	670	F	15,250	100	F	15,350
Total Expense	148,000	1,550	U	146,450	4,300	F	150,750

Calculation:

Spending Variance is the difference between Actual Results and Flexible Budget

Direct labor = 71,220 - 69,660 = 1,560

As their actual Direct labor is over the budget, it is an unfavourable variance

Indirect labor = 11,230 - 11,710 = 480

As their actual Indirect labor is less than the budget, it is a favourable variance

Utilities = 7,240 - 6,790 = 450

As their actual Utilities  are over the budget, it is an unfavourable variance

Supplies = 3,810 - 3,520 = 290

As their actual Supplies are over the budget, it is an unfavourable variance

Equipment depreciation = 28,920 - 28,920 = 0

There is no variance

Factory rent = 8,500 - 8,100 = 400

As their actual Factory rent is over the budget, it is an unfavourable variance

Property taxes = 2,500 - 2,500 = 0

There is no variance

Factory administration = 14,580 - 15,250 = 670

As their actual Factory administration is less than the budget, it is a favourable variance

Activity Variance is the difference between Planning budget and Flexible Budget

Direct labor = 72,900 - 69,660 = 3,240

As their Planning budget Direct labor is over the Flexible Budget, it is a favourable variance

Indirect labor = 12,050 - 11,710 = 340

As their Planning budget Indirect labor is over the Flexible Budget, it is a favourable variance

Utilities = 6,850 - 6,790 = 60

As their Planning budget Utilities are over the Flexible Budget, it is a favourable variance

Supplies = 3,600 - 3,520 = 80

As their Planning budget Supplies is over the Flexible Budget, it is a favourable variance

Equipment depreciation = 29,400 - 28,920 = 480

As their Planning budget Equipment depreciation is over the Flexible Budget, it is a favourable variance

Factory rent = 8,100 - 8,100 = 0

There is no variance

Property taxes = 2,500 - 2,500 = 0

There is no variance

Factory administration = 15,350 - 15,250 =100

As their Planning budget Factory administration is over the Flexible Budget, it is a favourable variance