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	$16.40q
Indirect labor	$4,200 + $1.50q
Utilities	$5,700 + $0.30q
Supplies	$1,400 + $0.20q
Equipment depreciation	$18,200 + $2.80q
Factory rent	$8,200
Property taxes	$3,000
Factory administration	$13,600 + $0.90q

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	$	68,840
Indirect labor	$	9,830
Utilities	$	7,380
Supplies	$	2,470
Equipment depreciation	$	29,680
Factory rent	$	8,600
Property taxes	$	3,000
Factory administration	$	16,700

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

• Workings

	WORKING COLUMNS						Actual Result	Revenue & Spending Variance		Flexible Budget	Activity variance		Planning Static Budget
Labor hours							4,100			4,100			4,300
							[A]	[B = Difference between A & C]		[C = Fixed + (Var x Actual units)]	[D = Difference between C & E]		[E= Fixed + (Var x Planned units)]
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Expenses:
Direct Labor	$0	+(	$               16.40	x	4100 or 4300	)	$68,840	$1,600	U	$67,240	$3,280	F	$70,520
Indirect Labor	$4,200	+(	$                  1.50	x	4100 or 4300	)	$9,830	$520	F	$10,350	$300	F	$10,650
Utilities	$5,700	+(	$                  0.30	x	4100 or 4300	)	$7,380	$450	U	$6,930	$60	F	$6,990
Supplies	$1,400	+(	$                  0.20	x	4100 or 4300	)	$2,470	$250	U	$2,220	$40	F	$2,260
Equipment Depreciation	$18,200	+(	$                  2.80	x	4100 or 4300	)	$29,680	$0	N	$29,680	$560	F	$30,240
Factory Rent	$8,200	+(	$                      -	x	4100 or 4300	)	$8,600	$400	U	$8,200	$0	None	$8,200
Property Taxes	$3,000	+(	$                      -	x	4100 or 4300	)	$3,000	$0	N	$3,000	$0	None	$3,000
Factory Administration	$13,600	+(	$                  0.90	x	4100 or 4300	)	$16,700	$590	F	$17,290	$180	F	$17,470
Total Expenses	$54,300	+(	$               22.10	x	4100 or 4300	)	$146,500	$1,590	U	$144,910	$4,420	F	$149,330

• Requirement [1]

	Planning Static Budget
Labor hours	4,300
Expenses:
Direct Labor	$70,520
Indirect Labor	$10,650
Utilities	$6,990
Supplies	$2,260
Equipment Depreciation	$30,240
Factory Rent	$8,200
Property Taxes	$3,000
Factory Administration	$17,470
Total Expenses	$149,330

• Requirement 2

	Flexible Budget
Labor hours	4,100
Expenses:
Direct Labor	$67,240
Indirect Labor	$10,350
Utilities	$6,930
Supplies	$2,220
Equipment Depreciation	$29,680
Factory Rent	$8,200
Property Taxes	$3,000
Factory Administration	$17,290
Total Expenses	$144,910

• Requirement 3

	Spending Variance
Expenses:
Direct Labor	$1,600	U
Indirect Labor	$520	F
Utilities	$450	U
Supplies	$250	U
Equipment Depreciation	$0	N
Factory Rent	$400	U
Property Taxes	$0	N
Factory Administration	$590	F
Total Expenses	$1,590	U