Variable Overhead Variances [L04] Order-Up Company provides customer help centre
ID: 2399031 • Letter: V
Question
Variable Overhead Variances [L04] Order-Up Company provides customer help centre services for online merchants. The company maintains catalogues and service manuals for stock items carried by its online retail clients. When a client receives a product inquiry or service request from a customer, the request is forwarded to Order-Up, which responds to the customer inquiry on behalf of the online retail client. The company uses a predetermined variable overhead rate based on direct labour-hours. In the most recent month, 35,000 inquiry requests were responded to and solutions provided to customers, using 5,700 direct labour-hours. The company incurred a total of $7,125 in variable overhead costs. According to the company's standards, 0.15 direct labour-hours are required to fulfill a service request for one customer and the variable overhead rate is $1.30 per direct labour-hour Required: 1. What variable overhead cost should have been incurred to fill the service requests for the 35,000 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 spending variance and a variable overhead efficiency variance.Explanation / Answer
.Solution: 1.
Variable overhead cost should have been incurred = 35,000 x SH x SR
= 35,000 x 0.15 x 1.30
= $6,825
Difference from actual variable overhead cost = $7,125- $6,825 = $300
Solution 2
Variable overhead spending variance = AH x AR - AH x SR
= 5,700 x 1.25 - 5,700 x 1.30
= - $285
Variable overhead efficiency variance = AH x SR - SH x SR
= 5,700 x 1.30 - 5,250 x 1.30
= $585
working : Actual Rate (AR) = $7,125 / 5,700 = $1.25
Standared Hours (SH) = 35,000 x 0.15 =5,250 hours
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