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	$4,300 + $1.50q
Utilities	$5,800 + $0.50q
Supplies	$1,700 + $0.10q
Equipment depreciation	$18,000 + $2.40q
Factory rent	$8,000
Property taxes	$2,500
Factory administration	$13,700 + $0.70q

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	$	63,920
Indirect labor	$	9,480
Utilities	$	8,190
Supplies	$	2,310
Equipment depreciation	$	27,120
Factory rent	$	8,400
Property taxes	$	2,500
Factory administration	$	15,730

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.

Required 1 Required 2 Required 3 Prepare the Production Department's planning budget for the month. 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 $ 0 < Required 1 Required 2 >

Answer 1

Ans. 1	Packaging Solutions Corporation
	Production Department Planning Budget
	For the Month Ended March 31
	Labor hours	4000
	Direct labor	$65,600
	Indirect labor	$10,300
	Utilities	$7,800
	Supplies	$2,100
	Equipment depreciation	$27,600
	Factory rent	$8,000
	Property taxes	$2,500
	Factory administration	$16,500
	Total expenses	$140,400
Ans. 2	Packaging Solutions Corporation
	Production Department Flexible Budget
	For the Month Ended March 31
	Labor hours	3800
	Direct labor	$62,320
	Indirect labor	$10,000
	Utilities	$7,700
	Supplies	$2,080
	Equipment depreciation	$27,120
	Factory rent	$8,000
	Property taxes	$2,500
	Factory administration	$16,360
	Total expenses	$136,080
	*Calculations for Flexible budget & Planning budget:
		Planning Budget	Flexible Budget
	Labor hours	4000	3800
	Direct labor	$16.40 * 4,000	$16.40 * 3,800
	Indirect labor	$4,300 + ($1.50*4,000)	$4,300 + ($1.50*3,800)
	Utilities	$5,800 + ($0.50*4,000)	$5,800 + ($0.50*3,800)
	Supplies	$1,700 + ($0.10*4,000)	$1,700 + ($0.10*3,800)
	Equipment depreciation	$18,000 + ($2.40*4,000)	$18,000 + ($2.40*3,800)
	Factory rent	$8,000	$8,000
	Property taxes	$2,500	$2,500
	Factory administration	$13,700 + ($0.70*4,000)	$13,700 + ($0.70*3,800)
Ans. 3	Packaging Solutions Corporation
	Production Department Flexible Budget Performance Report
	For the Month Ended March 31
		Actual Results	Spending variance		Flexible Budget	Activity variance		Planning Budget
	Labor hours	3800			3800			4000
	Direct labor	$63,920	$1,600	U	$62,320	$3,280	F	$65,600
	Indirect labor	$9,480	$520	F	$10,000	$300	F	$10,300
	Utilities	$8,190	$490	U	$7,700	$100	F	$7,800
	Supplies	$2,310	$230	U	$2,080	$20	F	$2,100
	Equipment depreciation	$27,120	$0	none	$27,120	$480	F	$27,600
	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	$15,730	$630	F	$16,360	$140	F	$16,500
	Total expenses	$137,650	$1,570	U	$136,080	$4,320	F	$140,400
	Spending variance   =   Actual results - Flexible budget
	Activity variance =   Flexible budget - Planning budget
	*Flexible budget is prepared on the basis of actual units (labor hours).
	*Fixed expenses remain same as planning budget.
	*Increase in expenses from flexible budget to actual results & Planning budget to flexible budget =   Unfavorable.
	*Decrease in expenses from flexible budget to actual results & Planning budget to flexible budget =   Favorable.