Question

A 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	$16.50q
Indirect labor	$4,100 + $2.00q
Utilities	$5,100 + $0.70q
Supplies	$1,600 + $0.20q
Equipment depreciation	$18,600 + $3.00q
Factory rent	$8,200
Property taxes	$2,800
Factory administration	$13,800 + $0.80q

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	$	67,620
Indirect labor	$	11,680
Utilities	$	8,430
Supplies	$	2,650
Equipment depreciation	$	30,600
Factory rent	$	8,600
Property taxes	$	2,800
Factory administration	$	16,390

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

Part 1 -

Production Department’s planning budget for the month
Planned Labor Hours (q)	4200
Direct Labor ($16.50q)	$69,300
Indirect labor (4,100 + $2q)	$12,500
Utilities (5100 + $0.7q)	$8,040
Supplies (1600 + $0.2q)	$2,440
Equipment depreciation (18600 + $3q)	$31,200
Factory rent	$8,200
Property taxes	$2,800
Factory administration (13800 + $0.8q)	$17,160
Total Expenses	$151,640

Part 2 –

Production Department’s Flexible budget for the month
Activity Level (Labor Hours) (q)	4,000
Direct Labor ($16.50q)	$66,000
Indirect labor (4,100 + $2q)	$12,100
Utilities (5100 + $0.7q)	$7,900
Supplies (1600 + $0.2q)	$2,400
Equipment depreciation (18600 + $3q)	$30,600
Factory rent	$8,200
Property taxes	$2,800
Factory administration (13800 + $0.8q)	$17,000
Total Expenses	$147,000

Part 3 –

Flexible Budget Preformance Report for the month
	Actual Result	Revenue and Spending Variance	Flexible Budget	Activity Variance	Planning Budget
Activity Level (Labor Hours)	4,000			4,000			4,200
Direct Labor	$67,620	$1,620	U	$66,000	$3,300	F	$69,300
Indirect labor	$11,680	$420	F	$12,100	$400	F	$12,500
Utilities	$8,430	$530	U	$7,900	$140	F	$8,040
Supplies	$2,650	$250	U	$2,400	$40	F	$2,440
Equipment depreciation	$30,600	$0	NONE	$30,600	$600	F	$31,200
Factory rent	$8,600	$400	U	$8,200	$0	NONE	$8,200
Property taxes	$2,800	$0	NONE	$2,800	$0	NONE	$2,800
Factory administration	$16,390	$610	F	$17,000	$160	F	$17,160
Total Expenses	$148,770	$1,770	U	$147,000	$4,640	F	$151,640

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