Question

numb 4

1.       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 . . . . . . . . . . . . . . . . . . $ 15.80 q

Indirect labor . . . . . . . . . . . . . . . . . $ 8,200 + $ 1.60 q

Utilities . . . . . . . . . . . . . . . . . . . . . . $ 6,400 + $ 0.80 q

Supplies . . . . . . . . . . . . . . . . . . . . . $ 1,100 + $ 0.40 q

Equipment depreciation . . . . . . . . $ 23,000 + $ 3.70 q

Factory rent . . . . . . . . . . . . . . . . . . $ 8,400

Property taxes . . . . . . . . . . . . . . . . $ 2,100

Factory administration . . . . . . . . . . $ 11,700 + $ 1.90 q

The actual costs incurred in March in the Production Department 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. The company had budgeted for an activity level of 8,000 labor- hours in March. Prepare the Production Department’s planning budget for the month.

2. The company actually worked 8,400 labor- hours in March. Prepare the Production Depart-ment’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.

4. What aspects of the flexible budget performance report should be brought to management’s attention? Explain.

Answer 1

1. Production Department’s planning budget for the month of march is:

Packaging Solutions Corporation
Production Department Planning Budget
For the Month Ended march 31
Particulars		Planning Budget
Labour hours		8,000
Direct Labour	15.8q	126,400
Indirect labour	8,200+1.6q	21,000
Utilities	6,400+.8q	12,800
Supplies	1,100+.4q	4,300
Equipment dep	23,000+3.7q	52,600
Factory Rent	8,400	8,400
Property taxes	2,100	2,100
Factory administration	11,700+1.9q	26,900
Total expense		254,500

2. Production Depart-ment’s flexible budget for the month of March is:

Packaging Solutions Corporation
Production Department Flexible Budget
For the Month Ended march 31
Particulars		Flexible Budget
Labour hours		8,400
Direct Labour	15.8q	132,720
Indirect labour	8,200+1.6q	21,640
Utilities	6,400+.8q	13,120
Supplies	1,100+.4q	4,460
Equipment dep	23,000+3.7q	54,080
Factory Rent	8,400	8,400
Property taxes	2,100	2,100
Factory administration	11,700+1.9q	27,660
Total expense		264,180

3. Production Department’s flexible budget performance report for March, including both the spending and activity variances is as shown below:

Packaging Solutions Corporation
Flexible Budget Performance Report
For the Month Ended march 31
Particulars	Actual Results	Revenue and spending variances		Flexible Budget	Activity variances		Planning Budget
		Actual-Flexible			Planning-Flexible
Labour hours	8,400			8,400			8,000
Direct Labour	134,730	$2,010	U	132,720	-6,320	U	126,400
Indirect labour	19,860	($1,780)	F	21,640	-640	U	21000
Utilities	14,570	$1,450	U	13,120	-320	U	12,800
Supplies	4,980	$520	U	4,460	-160	U	4,300
Equipment dep	54,080	$0	None	54,080	-1,480	U	52,600
Factory Rent	8,700	$300	U	8,400	0	None	8,400
Property taxes	2,100	$0	None	2,100	0	None	2,100
Factory administration	26,470	($1,190)	F	27,660	-760	U	26,900
Total expense	265,490	$1,310	U	264,180	-9,680	U	254,500

4. Flexible Budget Performane Report take into consideration the actual direct labour hours to calculate the variances.

Company should focus more on the labor cost as it is higher than the budgeted amount.