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	$16.60q
Indirect labor	$4,500 + $2.00q
Utilities	$5,400 + $0.40q
Supplies	$1,300 + $0.20q
Equipment depreciation	$18,800 + $2.90q
Factory rent	$8,600
Property taxes	$2,500
Factory administration	$13,300 + $0.70q

The Production Department planned to work 4,300 labor-hours in March; however, it actually worked 4,100 labor-hours during the month. Its actual costs incurred in March are listed below:

	Actual Cost Incurred in March
Direct labor	$	69,700
Indirect labor	$	12,280
Utilities	$	7,510
Supplies	$	2,370
Equipment depreciation	$	30,690
Factory rent	$	9,000
Property taxes	$	2,500
Factory administration	$	15,540

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	$71,380
Indirect labor	$13,100
Utilities	$7,120
Supplies	$2,160
Equipment Depreciation	$31,270
Factory rent	$8,600
Property taxes	$2,500
Factory administration	$16,310
Total Expenses	$152,440

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Packaging Solutions Corporation
Production Department Flexible Budget [Refer working note 2]
For the Month Ended March 31
Direct labor	$68,060
Indirect labor	$12,700
Utilities	$7,040
Supplies	$2,120
Equipment Depreciation	$30,690
Factory rent	$8,600
Property taxes	$2,500
Factory administration	$16,170
Total Expenses	$147,880

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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	4100			4100			4300
Direct labor	$69,700	$1,640	U	$68,060	$3,320	F	$71,380
Indirect labor	$12,280	$420	U	$12,700	$400	F	13100
Utilities	$7,510	$470	U	$7,040	$80	F	$7,120
Supplies	$2,370	$250	U	$2,120	$40	F	$2,160
Equipment Depreciation	$30,690	$0	None	$30,690	$580	F	$31,270
Factory rent	$9,000	$400	U	$8,600	$0	None	$8,600
Property taxes	$2,500	$0	None	$2,500	$0	None	$2,500
Factory administration	$15,540	$630	F	$16,170	$140	F	$16,310
Total Expenses	$149,590	$1,710	U	$147,880	$4,560	F	$152,440

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Working note 1 - Planning budget
Direct labor                       [Variable cost = 4,300 hours x $16.60]	$71,380
Indirect labor                     [Fixed cost + Variable cost = $4,500 + (4,300 hours x $2)]	$13,100
Utilities                              [Fixed cost + Variable cost = [$5,400 + ($4,300 hours x $0.40)]	$7,120
Supplies                              [Fixed cost + Variable cost = [$1,300 + ($4,300 hours x $0.20)]	$2,160
Equipment depreciation      [Fixed cost + Variable cost = [$18,800 + ($4,300 hours x $2.90)]	$31,270
Factory rent                           [Fixed cost]	$8,600
Property taxes                         [Fixed cost]	$2,500
Factory administration           [Fixed cost + Variable cost = [$13,300 + ($4,300 hours x $0.70)]	$16,310
Total expenses	$152,440

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Working note 2 - Flexible budget
Direct labor                       [Variable cost = 4,100 hours x $16.60]	$68,060
Indirect labor                     [Fixed cost + Variable cost = $4,500 + (4,100 hours x $2)]	$12,700
Utilities                              [Fixed cost + Variable cost = [$5,400 + ($4,100 hours x $0.40)]	$7,040
Supplies                              [Fixed cost + Variable cost = [$1,300 + ($4,100 hours x $0.20)]	$2,120
Equipment depreciation      [Fixed cost + Variable cost = [$18,800 + ($4,100 hours x $2.90)]	$30,690
Factory rent                           [Fixed cost]	$8,600
Property taxes                         [Fixed cost]	$2,500
Factory administration           [Fixed cost + Variable cost = [$13,300 + ($4,100 hours x $0.70)]	$16,170
Total expenses	$147,880

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