Question

Exercise 8-16 Flexible Budgets in a Cost Center [LO8-1, LO8-2]

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:

Direct labor				$	16.20	q
Indirect labor	$	4,500	+	$	1.60	q
Utilities	$	5,400	+	$	0.40	q
Supplies	$	1,400	+	$	0.40	q
Equipment depreciation	$	18,800	+	$	2.40	q
Factory rent				$	8,600
Property taxes				$	2,600
Factory administration	$	13,200	+	$	0.60	q

  

The actual costs incurred in March in the Production Department are listed below:

  

	Actual Cost Incurred in March
Direct labor	$	63,120
Indirect labor	$	10,080
Utilities	$	7,390
Supplies	$	3,210
Equipment depreciation	$	27,920
Factory rent	$	9,000
Property taxes	$	2,600
Factory administration	$	14,830

Required:
1.	The company had budgeted for an activity level of 4,000 labor-hours in March. Complete the Production Department’s planning budget for the month.

     

2.	The company actually worked 3,800 labor-hours in March. Complete the Production Department’s flexible budget for the month.

     

3.	Calculate the spending variances for all expense items. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

     

Answer 1

1. Planning Budget for the month of March for a budgeted activity level of 4,000 labor-hours is as follows:

The above numbers are calculated by placing 4,000 hours in the place of 'q' given in the question.

2. Flexible Budget for the month of March for actual worked 3,800 labor hours is as follows:

The above numbers are calculated by placing 3,800 hours in the place of 'q' given in the question.

3. Spending Variance:

Spending variance is the difference between the amounts in flexible budget and the actual amount incurred, the above table shows the spending variance.

Few expenses are having adverse variance, while few are with a favorable variance and few with no variance.

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Hope it is helpful!!