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.) Number of items shipped Standard direct labor-hours per item Total direct labor-hours allowed Standard variable overhead cost per hour Total standard variable overhead cost Actual variable overhead cost incurred Total standard variable overhead cost Total variable overhead variance 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).) Variable overhead rate variance Variable overhead efficiency variance

Answer 1

Answer to Requirement 1:

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

Answer to Requirement 2:

Variable overhead rate variance = Actual variable overhead cost - Standard variable overhead rate per direct-labor hour * Actual direct labor-hours worked
Variable overhead rate variance = $27,600 - $3.50 * 8,000
Variable overhead rate variance = $400 Favorable

Variable overhead efficiency variance = Standard variable overhead rate per direct-labor hour * (Actual direct labor-hours worked - Standard direct labor-hours allowed)
Variable overhead efficiency variance = $3.50 * (8,000 - 7,400)
Variable overhead efficiency variance = $2,100 Unfavorable