Order Up, Inc., provides order fulfillment services for dot.com merchants. The c

Question

Order Up, Inc., 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 Order Up, 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 5,900 direct labor-hours. The company incurred a total of $19,175 in variable overhead costs. According to the company's standards, 0.05 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $3.30 per direct labor-hour. 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 Break down the difference computed in (1) above into a variable overhead efficiency variance and a variable overhead rate variance.

Explanation / Answer

1.a. Total labor hours for 120,000 items: 120,000 * 0.05 Direct labor Hours = 6,000 Labor Hours

Hence, Total Standard Variable Overhead cost= Total Labor hours * Variable Overhead rate per hour

= 6,000 * $ 3.30 per direct labor hour

= $ 19,800

1.b. Actual Variable Overhead cost = $ 19,175

Standard Variable Overhead cost = $ 19,800

Spending Variance = Standard Variable Overhead cost - Actual Variable Overhead Cost

= 19,800 - 19,175 = 625 ( F ) ( This is favorable since Actual Variable Overhead cost is    less than Standard Variable Overhead Cost )

2.a. Variable Overhead Rate Variance = ( Standard Rate per Hour - Actual Rate per hour ) * Actual Hours

   Actual Rate per hour = Actual Variable Overhead Cost/ Actual Hours = 19,175/ 5,900 = 3.25 per hour

Hence, Variable Overhead Rate Variable = ( 3.30 - 3.25 ) * 5,900 = 0.05 * 5,900 = 295 ( F )

2.b. Variable Overhead Effiiciency Variance = ( Standard Hours - Actual Hours ) * Standard Rate per hour

   = ( 6,000 - 5,900 ) * 3.30 = 330 ( F )

Hence, Variable Overhead Efficiency Variance + Variable Overhead Rate Variance = Variable Spending Variance

295 (F) + 330 (F) = 625 (F)

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