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.

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, 160,000 items were shipped to customers using 6,500 direct labor-hours. The company incurred a total of $20,800 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 $3.25 per direct labor-hour.

Required:

1. What is the standard labor-hours allowed (SH) to ship 160,000 items to customers?

2. What is the standard variable overhead cost allowed (SH × SR) to ship 160,000 items to customers?

3. What is the variable overhead spending variance?

4. What is the variable overhead rate variance and the variable overhead efficiency variance?

Explanation

1.

Number of items shipped (a)	160,000
Standard labor-hours per item (b)	0.03
Standard quantity of labor-hours allowed (a) × (b)	4,800

2.

Standard quantity of labor-hours allowed (a)		4,800
Standard variable overhead cost per hour (b)	$	3.25
Standard variable overhead cost allowed (a) × (b)	$	15,600

3.

Actual variable overhead cost incurred (a)	$	20,800
Standard variable overhead cost allowed (b)	$	15,600
Variable overhead spending variance (a) – (b)	$	5,200	U

4.

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)
6,500 hours × $3.20 per hour*				6,500 hours × $3.25 per hour			4,800 hours** × $3.25 per hour
= $20,800				= $21,125			= $15,600
	Variable overhead rate variance, $325 F				Variable overhead efficiency variance, $5,525 U
		Spending Variance, $5,200 U

*$20,800 ÷ 6,500 hours = $3.20 per hour

** 160,000 items × 0.03 hours per unit = 4,800 hours

Thanks