Required: 1. Prepare the Production Department’s planning budget for the month. 2. Prepare the Production Department’s flexible budget for the month. 3. Calculate the spending variances for all expense items.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Exercise 9-16 (Static) Flexible Budgets in a Cost Center [LO9-1, LO9-2]
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:
| Cost Formulas | |
|---|---|
| Direct labor | $15.80q |
| Indirect labor | $8,200 + $1.60q |
| Utilities | $6,400 + $0.80q |
| Supplies | $1,100 + $0.40q |
| Equipment |
$23,000 + $3.70q |
| Factory rent | $8,400 |
| Property taxes | $2,100 |
| Factory administration | $11,700 + $1.90q |
The Production Department planned to work 8,000 labor-hours in March; however, it actually worked 8,400 labor-hours during the month. Its actual costs incurred in March are listed below:
| Actual Cost Incurred in March | |
|---|---|
| Direct labor | $ 134,730 |
| Indirect labor | $ 19,860 |
| Utilities | $ 14,570 |
| Supplies | $ 4,980 |
| Equipment depreciation | $ 54,080 |
| Factory rent | $ 8,700 |
| Property taxes | $ 2,100 |
| Factory administration | $ 26,470 |
Required:
1. Prepare the Production Department’s planning budget for the month.
2. Prepare the Production Department’s flexible budget for the month.
3. Calculate the spending variances for all expense items.
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