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	$4,500 + $1.60q
Utilities	$5,300 + $0.70q
Supplies	$1,200 + $0.10q
Equipment depreciation	$18,100 + $2.90q
Factory rent	$8,100
Property taxes	$2,700
Factory administration	$13,700 + $0.70q

The Production Department planned to work 4,300 labor-hours in March; however, it actually worked 4,100 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	68,410
Indirect labor	$	10,560
Utilities	$	8,700
Supplies	$	1,840
Equipment depreciation	$	29,990
Factory rent	$	8,500
Property taxes	$	2,700
Factory administration	$	15,940

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
	Production Department’s planning budget
Budgeted labor hours	4300
Direct labor	70090	=4300*16.3
Indirect labor	11380	=4500+(4300*1.6)
Utilities	8310	=5300+(4300*0.7)
Supplies	1630	=1200+(4300*0.1)
Equipment depreciation	30570	=18100+(4300*2.9)
Factory rent	8100
Property taxes	2700
Factory administration	16710	=13700+(4300*0.7)
Total expense	149490
2
	Production Department’s flexible budget
Actual labor hours	4100
Direct labor	66830	=4100*16.3
Indirect labor	11060	=4500+(4100*1.6)
Utilities	8170	=5300+(4100*0.7)
Supplies	1610	=1200+(4100*0.1)
Equipment depreciation	29990	=18100+(4100*2.9)
Factory rent	8100
Property taxes	2700
Factory administration	16570	=13700+(4100*0.7)
Total expense	145030
3
	Actual	Spending variances		Flexible budget	Activity variances		Planning budget
Labor hours	4100			4100			4300
Direct labor	68410	1580	U	66830	3260	F	70090
Indirect labor	10560	500	F	11060	320	F	11380
Utilities	8700	530	U	8170	140	F	8310
Supplies	1840	230	U	1610	20	F	1630
Equipment depreciation	29990	0	None	29990	580	F	30570
Factory rent	8500	400	U	8100	0	None	8100
Property taxes	2700	0	None	2700	0	None	2700
Factory administration	15940	630	F	16570	140	F	16710
Total expense	146640	1610	U	145030	4460	F	149490