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, 185,000 items were shipped to customers using 8,000 direct labor-hours. The company incurred a total of $27,600 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 $3.50 per direct labor-hour. Required: 1. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 185,000 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.) 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

Solution:-

1. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 185,000 items? How much does this differ from the actual variable overhead cost:-

2. Break down the difference computed in (1) above into a variable overhead rate variance and a variable overhead efficiency variance:-

Variable overhead rate variance: AH(AR – SR)

= 8,000 (3.45 - 3.50)

= $400 F

Variable overhead efficiency variance:-

= SR(AH – SH)

= 3.50 (8,000 - 7,400)

= $ 2,100 U

Please Rate or comment if you have any doubt regarding this solution.

Number of item shipped 185,000 Standard direct labor-hours per item 0.04 Total direct labor-hours allowed 7,400 Standard variable overhead cost per hour 3.50 Total standard variable overhead cost 25,900 Actual variable overhead cost incurred 27,600 Total standard variable overhead cost 25,900 Total variable overhead variance 1,700 Unfavourable

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