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, 110,000 items were shipped to customers using 3,500 direct labor-hours. The company incurred a total of $9,450 in variable overhead costs.

According to the company’s standards, 0.03 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $2.75 per direct labor-hour.

Required:

1. What is the standard labor-hours allowed (SH) to ship 110,000 items to customers?

2. What is the standard variable overhead cost allowed (SH × SR) to ship 110,000 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?

Answer 1

Answer 1)

Calculation of standard labour-hours allowed to ship 110,000 items to customers

Standard Labour-hours allowed = Standard labour hours allowed per item X number of items

                                                          = 0.03 direct labour hours per item X 110,000 items

                                                          = 3,300 direct labour hours

Therefore, standard labour hours allowed to ship 110,000 items are 3,300.

Answer 2)

Calculation of standard variable overhead cost allowed to ship 110,000 items to customers

Standard variable overhead cost allowed = Standard labour hours allowed to ship 110,000 items X Standard variable overhead rate per hour

                                                          = 3,300 direct labour hours per item X $ 2.75 per direct labour hour

                                                          = $ 9,075

Therefore, standard variable overhead cost allowed to ship 110,000 items is $ 9,075.

Answer 3)

Calculation of variable overhead spending variance

Variable overhead spending variance = Standard variable overhead cost allowed for actual output –Actual variable overhead cost for Actual output

                                         = $ 9,075 - $ 9,450

                                        = $ 375 (Unfavourable)

Therefore variable overhead spending variance is $ 375 (Unfavourable)

Answer 3)

Calculation of variable overhead rate variance

Variable overhead rate variance = (Standard Variable overhead rate – Actual variable overhead rate) X Actual direct labour hours

                                                      = ($ 2.75 - $ 2.70) X 3,500 labour hours

                                                     = $ 0.05 X 3,500 labour hours

                                                        = $ 175 (Favourable)                                  

Therefore, variable overhead rate variance is $ 175 (Favourable)

Working Note:

Calculation of Actual variable overhead rate

Actual Variable overhead rate = Actual Variable overhead cost/Actual direct-labour hours

                                                       = $ 9,450/3,500 labour hours

                                                      = $ 2.70 per direct labour hour

Therefore actual variable overhead rate is $ 2.70 per direct labour hour.

Calculation of variable overhead Efficiency variance

Variable overhead Efficiency variance = (Standard Labour hours allowed for Actual output – Actual labour hours for actual output) X Standard variable overhead rate per hour

                                  = (3,300 direct labour hours – 3,500 direct labour hours) X $ 2.75 per direct labour hour

                                  = $ 550 (Unfavourable)                                  

Therefore, variable overhead efficiency variance is $ 550 (unfavourable)