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 + $1.90q
Utilities	$5,600 + $0.50q
Supplies	$1,300 + $0.10q
Equipment depreciation	$18,700 + $2.50q
Factory rent	$8,000
Property taxes	$2,500
Factory administration	$13,100 + $0.80q

The Production Department planned to work 4,100 labor-hours in March; however, it actually worked 3,900 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	64,740
Indirect labor	$	11,070
Utilities	$	8,040
Supplies	$	1,920
Equipment depreciation	$	28,450
Factory rent	$	8,400
Property taxes	$	2,500
Factory administration	$	15,610

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.

	Packaging Solutions Corporation Production Department Planning Budget For the Month Ended March 31 Direct labor Indirect labor Utilities Supplies Equipment depreciation Factory rent Property taxes Factory administration Total expense

Answer 1

Packaging Solutions Corporation
Production Department Planning Budget [Refer working note 1]
For the Month Ended March 31
Budgeted labor hours	4100
Direct labor	$66,420
Indirect labor	$11,890
Utilities	$7,650
Supplies	$1,710
Equipment Depreciation	$28,950
Factory rent	$8,000
Property taxes	$2,500
Factory administration	$16,380
Total Expenses	$143,500

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Packaging Solutions Corporation
Production Department Flexible Budget [Refer working note 2]
For the Month Ended March 31
Actual labor hours	3900
Direct labor	$63,180
Indirect labor	$11,510
Utilities	$7,550
Supplies	$1,690
Equipment Depreciation	$28,450
Factory rent	$8,000
Property taxes	$2,500
Factory administration	$16,220
Total Expenses	$139,100

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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	3900			3900			4100
Direct labor	$64,740	$1,560	U	$63,180	$3,240	F	$66,420
Indirect labor	$11,070	$440	F	$11,510	$380	F	$11,890
Utilities	$8,040	$490	U	$7,550	$100	F	$7,650
Supplies	$1,920	$230	U	$1,690	$20	F	$1,710
Equipment Depreciation	$28,450	$0	None	$28,450	$500	F	$28,950
Factory rent	$8,400	$400	U	$8,000	$0	None	$8,000
Property taxes	$2,500	$0	None	$2,500	$0	None	$2,500
Factory administration	$15,610	$610	F	$16,220	$160	F	$16,380
Total Expenses	$140,730	$1,630	U	$139,100	$4,400	F	$143,500

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Working note 1 - Planning budget
Direct labor                       [Variable cost = 4,100 hours x $16.20]	$66,420
Indirect labor                     [Fixed cost + Variable cost = $4,100 + (4,100 hours x $1.90)]	$11,890
Utilities                              [Fixed cost + Variable cost = [$5,600 + ($4,100 hours x $0.50)]	$7,650
Supplies                              [Fixed cost + Variable cost = [$1,300 + ($4,100 hours x $0.10)]	$1,710
Equipment depreciation      [Fixed cost + Variable cost = [$18,700 + ($4,100 hours x $2.50)]	$28,950
Factory rent                           [Fixed cost]	$8,000
Property taxes                         [Fixed cost]	$2,500
Factory administration           [Fixed cost + Variable cost = [$13,100 + ($4,100 hours x $0.80)]	$16,380
Total expenses	$143,500

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Working note 2 - Flexible budget
Direct labor                       [Variable cost = 3,900 hours x $16.20]	$63,180
Indirect labor                     [Fixed cost + Variable cost = $4,100 + (3,900 hours x $1.90)]	$11,510
Utilities                              [Fixed cost + Variable cost = [$5,600 + ($3,900 hours x $0.50)]	$7,550
Supplies                              [Fixed cost + Variable cost = [$1,300 + ($3,900 hours x $0.10)]	$1,690
Equipment depreciation      [Fixed cost + Variable cost = [$18,700 + ($3,900 hours x $2.50)]	$28,450
Factory rent                           [Fixed cost]	$8,000
Property taxes                         [Fixed cost]	$2,500
Factory administration           [Fixed cost + Variable cost = [$13,100 + ($3,900 hours x $0.80)]	$16,220
Total expenses	$139,100