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	$4,100 + $1.80q
Utilities	$5,300 + $0.50q
Supplies	$1,300 + $0.20q
Equipment depreciation	$18,400 + $2.90q
Factory rent	$8,300
Property taxes	$2,500
Factory administration	$13,200 + $0.50q

The Production Department planned to work 4,000 labor-hours in March; however, it actually worked 3,800 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	63,120
Indirect labor	$	10,480
Utilities	$	7,690
Supplies	$	2,310
Equipment depreciation	$	29,420
Factory rent	$	8,700
Property taxes	$	2,500
Factory administration	$	14,430

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
Planning Budget
Budgeted labor hours	4000
Direct labor	64800	=4000*16.2
Indirect labor	11300	=4100+(4000*1.8)
Utilities	7300	=5300+(4000*0.5)
Supplies	2100	=1300+(4000*0.2)
Equipment Depreciation	30000	=18400+(4000*2.9)
Factory rent	8300
Property taxes	2500
Factory administration	15200	=13200+(4000*0.5)
Total expenses	141500
2
Flexible Budget
Actual labor hours	3800
Direct labor	61560	=3800*16.2
Indirect labor	10940	=4100+(3800*1.8)
Utilities	7200	=5300+(3800*0.5)
Supplies	2060	=1300+(3800*0.2)
Equipment Depreciation	29420	=18400+(3800*2.9)
Factory rent	8300
Property taxes	2500
Factory administration	15100	=13200+(3800*0.5)
Total expenses	137080
3
	Actual	Spending variance		Flexible budget
Labor hours	3800			3800
Direct labor	63120	1560	U	61560
Indirect labor	10480	460	F	10940
Utilities	7690	490	U	7200
Supplies	2310	250	U	2060
Equipment Depreciation	29420	0	None	29420
Factory rent	8700	400	U	8300
Property taxes	2500	0	None	2500
Factory administration	14430	670	F	15100
Total expenses	138650	1570	U	137080