Logistics Solutions provides order fulfilment services for dot.com merchants. Th

Question

Logistics Solutions provides order fulfilment 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 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 labour-hours. In the most recent month, 130,000 items were shipped to customers using 4,700 direct labour-hours. The company incurred a total of $13,630 in variable overhead costs. According to the company's standards, 0.03 direct labour-hours are required to fulfil an order for one item and the variable overhead rate is $2.95 per direct labour-hour. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 130,000 items? How much does this differ from the actual variable overhead cost? (Round labor-hours per item and overhead cost per hour to 2 decimal places.) 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 favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

Explanation / Answer

1) Number of items shipped    130,000 Std direct labor hrs per item           0.03 Total direct labor hrs allowed        3,900 std variable ohs cost per hr           2.95 total stad variable ohs cost      11,505 actual variable ovh cost      13,630 total stnd variable ovh cost      11,505 total variable oveh variance        2,125 U 2) Variable overhead rate variance Variable overhead efficiency variance Labor rate variance= (Actual rate - Standard rate) x Actual hours worked (2.90-2.95)*4700 -235 F Labor effeciency variance= (Actual hours - Standard hours) x Standard rate (4700-3900)*2.95 2360 F actual rate= 13630/4700                                                                        2.90

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