EXERCISE 10-3 Variable Overhead Variances LO10-3 0% Logistics Solutions provides

Question

EXERCISE 10-3 Variable Overhead Variances LO10-3 0% 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 usesa predetermined variable overhead rate based on direct labor-hours. In the most recent month, 120,000 items were shipped to customers using 2,300 direct labor-hours. The company incurred a total of $7,360 in variable overhead costs According to the company's standards, 0.02 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $3.25 per direct labor-hour. Required: 1. What is the standard labor-hours allowed (SH) to ship 120,000 items to customers? 2. What is the standard variable overhead cost allowed (SH x SR) to ship 120,000 items to customers? 3. What is the variable overhead spending variance? . What is the variable overhead rate variance and the variable overhead efficiency variance?

Explanation / Answer

Req 1. Std labour hour per unit of item shipped   0.02 hr per item Actual items shipped 120,000 units Std labour hours required for actual activity ( 120000*.02) = 2400 labour hours Req 2: Std labour hours allowed   2400 hours Std variable overhead rate per hour $ 3.25 per labour hour Std variable cost for actual activity = 2400 * 3.25 = $ 7800 Req 3: Std variable overhead cost for actual activity   $ 7800 Actual variable overheads cost incurred $ 7360 Variable overhead cost spending variance = Std variable overhead cost - Actual variable overheads                                                                                   7800 -7360 = $ 440 favorable Req 4: Actual labour hours used 2300 labour hours Actual Variable overhead rate per hour (7360 /2300) = $ 3.20 per hour Variable overhead rate variance= Actual hours used(Std rate per hour - Actual rate per hour) 2300 (3.20-3.25)= $115 favorable Variable overhead efficiency variance = Std rate per hour (Std hours allowed- Actual hours used)                                                                                 3.25 ( 2400-2300) = $ 325 favorable

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