Order Up, Inc., provides order fulfillment services for dot.com merchants. The c

Question

Order Up, Inc., provides order fulfillment services for dot.com merchants. The company maintains warehouses that stock items carried by its dot.com clients. When a client receives an order from a customer, the order is forwarded to Order Up, 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, 140,000 items were shipped to customers using 6,900 direct labor-hours. The company incurred a total of $23,805 in variable overhead costs. According to the company’s standards, 0.05 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $3.50 per direct labor-hour.

Required:

1a. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 140,000 items?

1b. How much does this differ from the actual variable overhead cost?

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

I came up with 24500 for 1a and 695 for 1b. I feel these are correct but can not figure out 2. Please explain how you arrive at the answer.

Explanation / Answer

1a. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 140,000 items?

Ans) = 140,000*0.05*3.50

=$24,500

..

1b. How much does this differ from the actual variable overhead cost?

Ans) = $24,500 - $23,805

= $$695

..

..

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

Ans)Standard cost per labor hour = $3.50

Actual COst per labor hour = 23,805/6900

= $3.45

Variable overhead rate variance = (3.50-3.45)*6900

= $345 F

..

Stamdard Hours required to fulfill 140,000 units of order = 0.05*140,000

= 7000 hrs

Actual hours used to fulfill 140,000 units of order = 6900 hrs

Therefore,  variable overhead efficiency variance = (7000-6900)*3.50

= $350

..

..

Total Labor Variance = 345+350

= $695 F (24,500 - 23,805)

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