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, 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.

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? (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 favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

     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.

Explanation / Answer

Answer: Direct labour Actual Cost Difference Flexible Budget Difference Standard Cost Actual hours Actual Rate Actual Cost Actual hours Standard rate Standard hours Standard rate Standard cost                                               4,100 $                    2.80 $            11,480.00          4,100.00 $                    2.85 $             11,685.00                       3,600 $                 2.85 $            10,260.00 ($11,480/4,100) $         205.00 $       (1,425.00) (120,000*0.03) Labour price variance $                205.00 ($11,685-11,480) Favourable Labour efficiency variance $          (1,425.00) ($10,260-11,685) Unfavourable Labour cost variance $          (1,220.00) ($10,260-11,480) Unfavourable

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