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	$16.10q
Indirect labor	$4,300 + $2.00q
Utilities	$5,700 + $0.80q
Supplies	$1,600 + $0.20q
Equipment depreciation	$18,500 + $2.60q
Factory rent	$8,600
Property taxes	$2,700
Factory administration	$13,600 + $0.60q

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	$	62,720
Indirect labor	$	11,480
Utilities	$	9,290
Supplies	$	2,610
Equipment depreciation	$	28,380
Factory rent	$	9,000
Property taxes	$	2,700
Factory administration	$	15,230

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

Packaging Solutions Corporation
Production Department Planning Budget [Refer working note 1]
For the Month Ended March 31
Direct labor	$64,400
Indirect labor	$12,300
Utilities	$8,900
Supplies	$2,400
Equipment Depreciation	$28,900
Factory rent	$8,600
Property taxes	$2,700
Factory administration	$16,400
Total Expenses	$144,600

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Packaging Solutions Corporation
Production Department Flexible Budget [Refer working note 2]
For the Month Ended March 31
Direct labor	$61,180
Indirect labor	$11,900
Utilities	$8,740
Supplies	$2,360
Equipment Depreciation	$28,380
Factory rent	$8,600
Property taxes	$2,700
Factory administration	$16,260
Total Expenses	$140,120

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Packaging Solutions Corporation
Production Department Flexible Budget Performance Report
For the Month Ended March 31
	Actual results	Spending Variances [Actual Results - Flexible Budget]		Flexible Budget	Activity Variance [Flexible budget - Planning budget]		Planning Budget
Labor-hours	3800			3800			4000
Direct labor	$62,720	$1,540	U	$61,180	$3,220	F	$64,400
Indirect labor	$11,480	$420	F	$11,900	$400	F	$12,300
Utilities	$9,290	$550	U	$8,740	$160	F	$8,900
Supplies	$2,610	$250	U	$2,360	$40	F	$2,400
Equipment Depreciation	$28,380	$0	None	$28,380	$520	F	$28,900
Factory rent	$9,000	$400	U	$8,600	$0	None	$8,600
Property taxes	$2,700	$0	None	$2,700	$0	None	$2,700
Factory administration	$15,230	$1,030	F	$16,260	$140	F	$16,400
Total Expenses	$141,410	$1,290	U	$140,120	$4,480	F	$144,600

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Working note 1 - Planning budget
Direct labor                       [Variable cost = 4,000 hours x $16.10]	$64,400
Indirect labor                     [Fixed cost + Variable cost = $4,300 + (4,000 hours x $2.00)]	$12,300
Utilities                              [Fixed cost + Variable cost = [$5,700 + ($4,000 hours x $0.80)]	$8,900
Supplies                              [Fixed cost + Variable cost = [$1,600 + ($4,000 hours x $0.20)]	$2,400
Equipment depreciation      [Fixed cost + Variable cost = [$18,500 + ($4,000 hours x $2.60)]	$28,900
Factory rent                           [Fixed cost]	$8,600
Property taxes                         [Fixed cost]	$2,700
Factory administration           [Fixed cost + Variable cost = [$13,600 + ($4,000 hours x $0.60)]	$16,400
Total expenses	$144,600

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Working note 2 - Flexible budget
Direct labor                       [Variable cost = 3,800 hours x $16.10]	$61,180
Indirect labor                     [Fixed cost + Variable cost = $4,300 + (3,800 hours x $2.00)]	$11,900
Utilities                              [Fixed cost + Variable cost = [$5,700 + ($3,800 hours x $0.80)]	$8,740
Supplies                              [Fixed cost + Variable cost = [$1,600 + ($3,800 hours x $0.20)]	$2,360
Equipment depreciation      [Fixed cost + Variable cost = [$18,500 + ($3,800 hours x $2.60)]	$28,380
Factory rent                           [Fixed cost]	$8,600
Property taxes                         [Fixed cost]	$2,700
Factory administration           [Fixed cost + Variable cost = [$13,600 + ($3,800 hours x $0.60)]	$16,260
Total expenses	$140,120