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 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. 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 meal and labor 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

1.

Particulars	Amount
Number of items shipped	120,000
Standard Direct Labour Hours Per Item	$ 0.02
Total direct Labour Hours Allowed	$ 2,400
Standard Variable Overhead Cost Per Hour	$ 3.25
Total Standard Variable Overhead Cost	$ 7,800
Actual Variable Overhead Cost Incured	$ 7,360
Total Standard Variable Overhead Cost (Above)	$ 7,800
Total Variable Overhead Variance	$ 440 Favourable

The standard cost is more than Actual cost so Overhead Variance is Favourable

2.

Actual Hours of Input at the Actual Rate	Actual Hours of Input at the Standard Rate	Standard Hours Allowed for output at the standard rate
( AH * AR)	( AH * SR)	(SH * SR)
2300 Hours * 3.20 Per Hour #	2300 Hours * 3.25 Per Hours	2400 Hours * 3.25 Per Hour
$ 7,360	$ 7,475	$ 7,800

Variable Overhead Rate Variance = $ 7360 - $ 7475 = 115 Favourable

Variable Overhead Efficiency Variance = $7,475 - $ 7,800 = 325 Favourable

Explanation;

# $ 7,360 ÷ 2300 Hours = $ 3.20 Per Hour

Variable Overhead Rate Variance = AH (AR - SR)

= 2300 Hours ( $ 3.20 Per Hours - 3.25 Per Hours)

= $ 115 Favourable

Variable Overhead Efficiency Variances = SR (AH - SH)

= $3.25 Per Hour (2,300 Hours - 2,400 Hour)

= 325 Favourable