Chapter 9, Problem 15E

To determine

Planning budget: A planning budget is based on estimations based on the historical financial information.

Flexible budget:A flexible budget is based on the actual performance of the company.

The preparation of planning budget, flexible budget and flexible budget performance report

Answer to Problem 15E

Solution:

1.

Packaging Solutions Corporation Planning Budget For the Month
Budgeted labor-hours	8,000
Direct labor ($15.80x8,000)	$126,400
Indirect labor ($8,200+$1.60x8,000)	$21,000
Utilities ($6,400+$0.80x8,000)	$12,800
Supplies ($1,100+$0.40x8,000)	$4,300
Equipment (23,000+$3.70x8,000)	$52,600
Factory rent ($8,400)	$8,400
Property taxes ($2,100)	$2,100
Factory administration ($11,700+$1.90x8,000)	$26,900
Total costs	$254,500

2.

Packaging Solutions Corporation Flexible Budget For the Month
Actual labor-hours	8,400
Direct labor ($15.80x8,400)	$132,720
Indirect labor ($8,200+$1.60x8,400)	$21,640
Utilities ($6,400+$0.80x8,400)	$13,120
Supplies ($1,100+$0.40x8,400)	$4,460
Equipment (23,000+$3.70x8,400)	$54,080
Factory rent ($8,400)	$8,400
Property taxes ($2,100)	$2,100
Factory administration ($11,700+$1.90x8,400)	$27,660
Total costs	$264,180

3.

Packaging Solutions Corporation’s Flexible Budget Performance Report For the Month
	Actual Result	Flexible Budget Variance	Flexible Budget	Sales Volume Variance	Static Budget
Actual labor-hours	8,400		8,400		8,000
Direct labor ($15.80q)	$134,730	$2,010 U	$132,720	$6,320 U	$126,400
Indirect labor ($8,200+$1.60q)	$19,860	$1,780 F	$21,640	$640 U	$21,000
Utilities ($6,400+$0.80q)	$14,570	$1,450 U	$13,120	$320 U	$12,800
Supplies ($1,100+$0.40q)	$4,980	$520 U	$4,460	$160 U	$4,300
Equipment (23,000+$3.70q)	$54,080	0	$54,080	$1,480 U	$52,600
Factory rent ($8,400)	$8,700	$300 U	$8,400	0	$8,400
Property taxes ($2,100)	$2,100	0	$2,100	0	$2,100
Factory administration ($11,700+$1.90q)	$26,470	$1,190 F	$27,660	$760 U	$26,900
Total costs	$265,490	$1,310 U	$264,180	$9,680 U	$254,500

4. The management of Packaging Solutions Corporation should focus on the direct labor cost of the production which has the highest unfavorable variance.

Explanation of Solution

The actual results are the value of costs taken as provided in the exercise which is derive from the actual income statement of the company. The flexible budget shows the value of costs which is based on the actual labor-hours of 8,400 hours and the static budget shows the initial estimated value of costs based on the budgeted labor-hours of 8,000 hours.

Given:

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	$54,080
Factory rent	$8,700
Property taxes	$2,100
Factory administration	$26,470

Conclusion

Since Packaging Solutions Corporation has an unfavorable flexible budget variance of $1,310 and sales volume variance of $9,680, so the company has decreased in the net operating income. The variance analysis of costs helps a management in determining efficiency of the company in controlling their cost and preparing the budget for future period.