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 $16.30q Indirect labor $4,500 + $2.10q Utilities $5,100 + $0.70q Supplies $1,800 + $0.20q Equipment depreciation $18,800 + $2.60q Factory rent $8,000 Property taxes $3,000 Factory administration $13,300 + $0.80q 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 $ 66,780 Indirect labor $ 12,500 Utilities $ 8,430 Supplies $ 2,850 Equipment depreciation $ 29,200 Factory rent $ 8,400 Property taxes $ 3,000 Factory administration $ 15,890 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

Ans. 1	Packaging Solutions Corporation
	Production Department Planning Budget
	For the Month Ended March 31
	Labor hours	4200
	Direct labor	$68,460
	Indirect labor	$13,320
	Utilities	$8,040
	Supplies	$2,640
	Equipment depreciation	$29,720
	Factory rent	$8,000
	Property taxes	$3,000
	Factory administration	$16,660
	Total expenses	$149,840
Ans. 2	Packaging Solutions Corporation
	Production Department Flexible Budget
	For the Month Ended March 31
	Labor hours	4000
	Direct labor	$65,200
	Indirect labor	$12,900
	Utilities	$7,900
	Supplies	$2,600
	Equipment depreciation	$29,200
	Factory rent	$8,000
	Property taxes	$3,000
	Factory administration	$16,500
	Total expenses	$145,300
	*Calculations for Flexible budget & Planning budget:
		Planning Budget	Flexible Budget
	Labor hours	4200	4000
	Direct labor	$16.30 * 4,200	$16.30 * 4,000
	Indirect labor	$4,500 + ($2.10*4,200)	$4,500 + ($2.10*4,000)
	Utilities	$5,100 + ($0.70*4,200)	$5,100 + ($0.70*4,000)
	Supplies	$1,800 + ($0.20*4,200)	$1,800 + ($0.20*4,000)
	Equipment depreciation	$18,800 + ($2.60*4,200)	$18,800 + ($2.60*4,000)
	Factory rent	$8,000	$8,000
	Property taxes	$3,000	$3,000
	Factory administration	$13,300 + ($0.80*4,200)	$13,300 + ($0.80*4,000)
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	4000			4000			4200
	Direct labor	$66,780	$1,580	U	$65,200	$3,260	F	$68,460
	Indirect labor	$12,500	$400	F	$12,900	$420	F	$13,320
	Utilities	$8,430	$530	U	$7,900	$140	F	$8,040
	Supplies	$2,850	$250	U	$2,600	$40	F	$2,640
	Equipment depreciation	$29,200	$0	none	$29,200	$520	F	$29,720
	Factory rent	$8,400	$400	U	$8,000	$0	none	$8,000
	Property taxes	$3,000	$0	none	$3,000	$0	none	$3,000
	Factory administration	$15,890	$610	F	$16,500	$160	F	$16,660
	Total expenses	$147,050	$1,750	U	$145,300	$4,540	F	$149,840
	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.