Order Up, Inc., provides order fulfillment services for dot.com merchants. The c
ID: 2451801 • Letter: O
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, 145,000 items were shipped to customers using 5,600 direct labor-hours. The company incurred a total of $17,080 in variable overhead costs.
According to the company’s standards, 0.04 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $3.10 per direct labor-hour.
According to the standards, what variable overhead cost should have been incurred to fill the orders for the 145,000 items? How much does this differ from the actual variable overhead cost?
number of items shipped:
standard direct labor-hours per item:
total direct labor hours allowed:
standard variable overhead cost per hour:
total standard variable overhead cost
actual variable overhead cost
spending variance
Break down the difference computed in (1) above into a variable overhead rate variance and a variable overhead efficiency variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
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.
Explanation / Answer
Answer-1:
Number of items shipped:
145000
Standard direct labor-hours per item:
0.04
Total direct labor hours allowed = 145000*0.04
5800
Hours
Standard variable overhead cost per hour:
$ 3.10
Total standard variable overhead cost =5800 hours *$3.10
$ 17,980
Actual variable overhead cost
$ 17,080
Spending variance = 17980 - 17080=
$ 900
Favorable
Answer-2:
Calculation of Variances:
Variable overhead rate variance = (Actual Rate - Standard rate)*Actual Hours
Actual rate = (17080/5600) =
3.05
Variable overhead rate variance = (3.05 - 3.10)*5600
280
Favorable
Variable overhead efficiency variance = (Actual hours - Standard hours)*Standard rate
Variable overhead efficiency variance = (5600 - 5800)*3.10
620
Favorable
Spending variance = 280 +620 =
900
Favorable
Answer-1:
Number of items shipped:
145000
Standard direct labor-hours per item:
0.04
Total direct labor hours allowed = 145000*0.04
5800
Hours
Standard variable overhead cost per hour:
$ 3.10
Total standard variable overhead cost =5800 hours *$3.10
$ 17,980
Actual variable overhead cost
$ 17,080
Spending variance = 17980 - 17080=
$ 900
Favorable
Answer-2:
Calculation of Variances:
Variable overhead rate variance = (Actual Rate - Standard rate)*Actual Hours
Actual rate = (17080/5600) =
3.05
Variable overhead rate variance = (3.05 - 3.10)*5600
280
Favorable
Variable overhead efficiency variance = (Actual hours - Standard hours)*Standard rate
Variable overhead efficiency variance = (5600 - 5800)*3.10
620
Favorable
Spending variance = 280 +620 =
900
Favorable
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