Question

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Exercise 9-16 Flexible Budgets in a Cost Center [LO9-1, LO9-2]

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	$15.80q
Indirect labor	$8,200 + $1.60q
Utilities	$6,400 + $0.80q
Supplies	$1,100 + $0.40q
Equipment depreciation	$23,000 + $3.70q
Factory rent	$8,400
Property taxes	$2,100
Factory administration	$11,700 + $1.90q

The Production Department planned to work 8,000 labor-hours in March; however, it actually worked 8,400 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	134,730
Indirect labor	$	19,860
Utilities	$	14,570
Supplies	$	4,980
Equipment depreciation	$	54,080
Factory rent	$	8,700
Property taxes	$	2,100
Factory administration	$	26,470

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				8,000
		planning Budget
		fixed	variable
Direct labor			15.8		126400
indirect labor		8,200	1.6		21000
utilities		6,400	0.8		12800
supplies		1,100	0.4		4300
Equipment depreciation		23,000	3.7		52600
Factory rent		8,400			8,400
property taxes		2,100			2,100
factory administration		11,700	1.9		26900
total expense		60,900	24.2		254500
	the highlighte figures are the answers
	planning budget = fixed component + 8000 hrs*variable component
2)	labor hours				8,400
		Flexible budget
		fixed	variable
Direct labor			15.8		132720
indirect labor		8,200	1.6		21640
utilities		6,400	0.8		13120
supplies		1,100	0.4		4460
Equipment depreciation		23,000	3.7		54080
Factory rent		8,400			8,400
property taxes		2,100			2,100
factory administration		11,700	1.9		27660
total expense		60,900	24.2		264180
3)		Spending variance
			Actual	flexible	Spending variance
Direct labor			134,730	132720	2,010	U
indirect labor			19,860	21640	1,780	F
utilities			14,570	13120	1,450	U
supplies			4,980	4460	520	U
Equipment depreciation			54,080	54080	0	N
Factory rent			8,700	8,400	300	U
property taxes			2,100	2,100	0	N
factory administration			26,470	27660	1,190	F
total expense			265,490	264180	1,310	U