Wednesday, 1 April 2015

Logistics Solutions provides order fulfillment services for dot.com merchants. The company maintains warehouses that stock items carried by its dot.com clients.

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, 120,000 items were shipped to customers using 4,100 direct labor-hours. The company incurred a total of $11,480 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 $2.85 per direct labor-hour.


Required:
1.
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?
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Explanation:
2.

Actual Hours of
Input, at the
Actual Rate
  Actual Hours of Input, at the Standard Rate   Standard Hours
Allowed for Output, at the Standard Rate
(AH × AR)
 
(AH × SR)
 
(SH × SR)
4,100 hours ×
$2.80 per hour*
  4,100 hours ×
$2.85 per hour
  3,600 hours ×
$2.85 per hour
= $11,480   = $11,685   = $10,260
  Variable Overhead

Rate Variance,
$205 F
Variable Overhead

Efficiency Variance,
$1,425 U
 
 
Spending Variance,
$1,220 U
 
  
*$11,480 ÷ 4,100 hours = $2.80 per hour

Alternatively, the variances can be computed using the formulas:

Variable overhead rate variance:
AH(AR – SR) = 4,100 hours ($2.80 per hour – $2.85 per hour)
= $205 F

Variable overhead efficiency variance:
SR(AH – SH) = $2.85 per hour (4,100 hours – 3,600hours)
= $1,425 U