Logistics Solutions provides order fulfillment services for dot.com merchants. T

Question

Logistics Solutions 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 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, 190,000 items were shipped to customers using 8,300 direct labor-hours. The company incurred a total of $29,050 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 $3.55 per direct labor-hour Required: 1. What is the standard labor-hours allowed (SH) to ship 190,000 items to customers? 2, what is the standard variable overhead cost allowed (SH × SR) to ship 190,000 items to customers? 3. What is the variable overhead spending variance? 4. What is the variable overhead rate variance and the variable overhead efficiency variance? (For requirements 3 and 4, indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Do no round intermediate calculations.) 1. Standard quantity of labor-hours allowed 2. Standard variable overhead cost allowed 3. Variable overhead spending variance 4. Variable overhead rate variance Variable overhead efficiency variance

Explanation / Answer

Solution:

Part 1 – Standard quantity of labor hours allowed

Standard quantity of labor hours allowed = Actual Items produced x Per Item direct labor hour required

= 190,000 items x 0.03 DLH

= 5,700 Direct labor hours

Part 2 – Standard Variable overhead cost allowed

Standard Variable overhead cost allowed = Total Direct labor hours allowed for 190,000 Items as calculated in part 1 x Variable Overhead rate per DLH

= 5,700 DLH x $3.55

= $20,235

Part 3 --- Variable Overhead Spending Variance = (Actual Hours x Actual Rate) – (Actual Hour x Std Rate)

= $29,050 – (8,300 hours x $3.55)

= $29,050 - $29,465

= $415 Favorable

Part 4 –

Variable Overhead Rate Variance = Actual Hours worked (Actual Rate – Std Rate)

= (Actual Hours Worked x Actual Rate) – (Actual Hours Worked x Std Rate)

= $29,050 - $29,465

= $415 favorable

Variable Overhead Efficiency Variance = Std Rate (Actual Hours worked – Std hours allowed for actual production)

= $3.55 (8,300 – 5,700)

= $9,230 Unfavorable

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