Question

Exercise 11-3 Variable Overhead Variances [LO11-3] 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, 205,000 items were shipped to customers using 9.200 direct labor-hours. The company incurred a total of $33,580 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 $3.70 per direct labor-hour. Required: 1. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 205,000 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

Required 1 :
Number of items shipped	205000
Standard direct labor hours per item	0.02
Total direct labor hours allowed	4100
Standard variable overhead cost per hour	3.70
Total standard variable overhead cost	15170
Actual variable overhead cost incurred	33580
Total standard variable overhead cost	15170
Total variable overhead variance	18410	U

Required 2 :
Actual variable overhead rate = Actual variable overhead cost / Actual direct labor hours = 33580 / 9200	3.65
Variable overhead rate variance = ( Actual rate - Standard rate ) * Actual hours = ( 3.65 - 3.70 ) * 9200	460	F
Variable overhead efficiency variance = ( Actual hours - Standard hours ) * Standard rate = ( 9200 - 4100 ) * 3.70	18870	U