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, 120,000 items were shipped to customers using 4,100 direct labor-hours. The company incurred a total of $11,480 in variable overhead costs.

According to the company’s standards, 0.03 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $2.85 per direct labor-hour.

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?

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 incurred     

Standard variable overhead cost     

Spending variance—Unfavorable     

2.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).)

Explanation / Answer

Variable Overhead Number of Items Shipped 120000 Standard Direct Labour Hours per item 0.03 Total Direct Labour Hours Allowed (SH) (120000*0.03) 3600 Standard Variable Overhead Cost per Hour (SR) 2.85 Total Standard Variable Overhead Cost (SR*SH): (3600*2.85) 10260 Actual variable Overhead Cost incurred: (AR*AH) 11480 Direct Labour Hours Used Actual (AH) 4100 1 Spending Variance Overhead Cost: (SR*SH)-(AR*AH): 10260-11480 -1220 Unfavourable 2 Variable Overhead Rate Variance: (SR*AH)-(AR*AH) : (2.85*4100)-(11480) 205 Favourable Variable Overhead Efficiency Variance (SR*SH)-(SR*AH) : (10260)-(2.85*4100) -1425 Unfavourable Spending Variance Overhead Cost: (205-1425) -1220 Unfavourable

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