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Logistics solutions provide order fulfillment services for dot.com merchants. The company...

Question:

Logistics solutions provide order fulfillment services for dot.com merchants. The company maintains warehouse that stock items carried by its dot.com clients. When a client receives an order from a customer the order is forwarded to Logistics solutions. Which pulls the item from storage, packs it, and ships it to the customer the company uses a predetermined variable overhead rate based on direct labor-hours. In the most recent month. 120,000 items were shipped to customers using 2,300 direct labor hours. The company incurred a total of $7,360 in variable overheads costs. Hours the company incurred a total of $ 7,360 in variables overheads costs. According to the company standars 0.02 direct labor hours are required to fulfil an order for one item and the variable overhead rate is $3.25 per direct labor-hour.

Required:

1. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 120,000 items? How much does this differ from the actual variable overhead cost?

2. Break down the difference computed in (1) above into a variable overhead rate variance and a variable overhead efficiency variance.

Variable overhead Rate Variance:

Variable overhead rate variance means the actual variable overhead is compared with the standard variable overhead when the actual is less it means its a favorable.

Answer and Explanation:

1
Numbers of items shipped 120000
Standard direct labor hour per item 0.02
Total direct labor hours allowed 2400
Standard variable overhead cost per hour $3.25
Total Standard variable overhead cost $7,800
Actual variable overhead cost incurred $7,360
Total Standard variable overhead cost $7,800
Total variable overhead variance $440F
2
Variable overhead rate variance = (3.35- 3.20) * 2300 $345F
Variable overhead efficiency variance = (2230 - 2300 ) *3.35 $235F


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