Logistics Solutions provides order fulfillment services for dot.com merchants. T

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, 115,000 items were shipped to customers using 3,800 direct labor-hours. The company incurred a total of $10,450 in variable overhead costs. According to the company’s standards, 0.04 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $2.80 per direct labor-hour. Required: 1. What is the standard labor-hours allowed (SH) to ship 115,000 items to customers? 2. What is the standard variable overhead cost allowed (SH × SR) to ship 115,000 items to customers? 3. What is the variable overhead spending variance? 4. What is the variable overhead rate variance and the variable overhead efficienc

Explanation / Answer

(1). Standard labor-hours allowed (SH) to ship 115,000 items to customers = 4600 direct labor hours

Explanation;

Direct labor-hours are required to fulfill an order for one item = 0.04

Total items to be shipped = 115000

Thus, Standard labor-hours allowed (SH) to ship 115,000 items to customers (115000 * 0.04) = 4600 labor hours

(2). Standard variable overhead cost allowed to ship 115,000 items to customers = $12880

Explanation;

Standard labor-hours allowed (SH) to ship 115,000 items = 4600 labor hours

Standard variable overhead rate is given = $2.80

Thus, Standard variable overhead cost allowed to ship 115,000 items to customers (4600 * $2.80) = $12880

(3). Variable overhead variance = $2430 Favourable

Explanation;

Formula of variable overhead spending variance is as follow;

(Actual variable overhead cost - standard variable overhead cost)

Actual variable overhead cost = $10450

Standard variable overhead cost (4600 * $2.80) = $12880

Now’ let’s put the values in above given formula;

Variable overhead variance ($10450 – $12880) = $2430 Favourable

(4).

Variable overhead rate variance = $190 Favourable

Variable overhead efficiency variance = $2240 Favourable

Explanation;

Formula of variable overhead spending variance is as follow;

(Actual overhead rate - standard overhead rate) * Actual hours worked

Standard variable overhead rate is given = $2.80

Actual overhead rate ($10450 / 3800) = $2.75

Actual hours worked = 3800

Now’ let’s put the values in above given formula;

Variable overhead spending variance ($2.75 – $2.80) * 3800 = $190 Favourable

Formula of variable overhead efficiency variance is as follow;

(Actual hours worked - standard hours allowed) * Standard overhead rate

Standard variable overhead rate is given = $2.80

Standard hours allowed = 4600

Actual hours worked = 3800

Now’ let’s put the values in above given formula;

Variable overhead efficiency variance (3800 – 4600) * $2.80 = $2240 Favourable

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