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	$4,200 + $1.60q
Utilities	$5,700 + $0.50q
Supplies	$1,300 + $0.10q
Equipment depreciation	$18,200 + $2.90q
Factory rent	$8,000
Property taxes	$2,700
Factory administration	$13,300 + $0.70q

The Production Department planned to work 4,200 labor-hours in March; however, it actually worked 4,000 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	65,940
Indirect labor	$	10,100
Utilities	$	8,190
Supplies	$	1,930
Equipment depreciation	$	29,800
Factory rent	$	8,400
Property taxes	$	2,700
Factory administration	$	15,470

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

1
Planning Budget
Budgeted labor hours	4200
Direct labor	67620	=4200*16.1
Indirect labor	10920	=4200+(4200*1.6)
Utilities	7800	=5700+(4200*0.5)
Supplies	1720	=1300+(4200*0.1)
Equipment Depreciation	30380	=18200+(4200*2.9)
Factory rent	8000
Property taxes	2700
Factory administration	16240	=13300+(4200*0.7)
Total expenses	145380
2
Flexible Budget
Actual labor hours	4000
Direct labor	64400	=4000*16.1
Indirect labor	10600	=4200+(4000*1.6)
Utilities	7700	=5700+(4000*0.5)
Supplies	1700	=1300+(4000*0.1)
Equipment Depreciation	29800	=18200+(4000*2.9)
Factory rent	8000
Property taxes	2700
Factory administration	16100	=13300+(4000*0.7)
Total expenses	141000
3
	Actual	Spending variance		Flexible budget	Activity variance		Planning budget
Labor hours	4000			4000			4200
Direct labor	65940	1540	U	64400	3220	F	67620
Indirect labor	10100	500	F	10600	320	F	10920
Utilities	8190	490	U	7700	100	F	7800
Supplies	1930	230	U	1700	20	F	1720
Equipment Depreciation	29800	0	None	29800	580	F	30380
Factory rent	8400	400	U	8000	0	None	8000
Property taxes	2700	0	None	2700	0	None	2700
Factory administration	15470	630	F	16100	140	F	16240
Total expenses	142530	1530	U	141000	4380	F	145380