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, 165,000 items were shipped to customers using 6,800 direct labor-hours. The company incurred a total of $22,100 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 $3.30 per direct labor-hour.

Required:

1. What is the standard labor-hours allowed (SH) to ship 165,000 items to customers?

2. What is the standard variable overhead cost allowed (SH × SR) to ship 165,000 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?

Explanation / Answer

1. standard labor-hours allowed = Production x 0.04 direct labor hours

= 165000 x 0.04 = 6600 hours

2. standard variable overhead cost allowed = SH x SR

= 6600 hours x $3.30 = $21780

3. variable overhead spending variance = standard variable overhead cost allowed - Actual variable overhead cost

= $21780 - $22100 = $320 U

4. variable overhead rate variance = (SR - AR) x AH

= [$3.30 - ($22100/ 6800)] x 6800 = $340 F

variable overhead efficiency variance = (SH - AH) x SR

= (6600 - 6800) x $3.30 = $660 U

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