Question

Logistics Solutions provides order fulfillment services for dot merchants. The company maintains warehouses that stock items carried by its dot 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.
1. 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?
2. Break down the difference computed (1) above into a variable overhead rate variance and a variable overhead efficiency variance.

Answer 1

Part 1.1  - Variable overhead cost incurred to fill the order for the 120,000 items is $7,800.

Part 1.2  - Difference between standard and actual variable overhead cost is $440.

Part 3 - Difference between standard and actual variable overhead cost is $440.

Explanation:

It is given that the number of order is 120,000 items and calculated standard variable overhead cost per order for one item is $0.065. Variable overhead cost incurred to fill the order for the 120,000 items can be calculated by multiplying the number of order of the items with the calculated standard variable overhead cost per order for one item. Hence, the variable overhead cost incurred to fill the order for the 120,000 items is $7,800.

It is given that the actual variable overhead cost is $7,360 and calculated standard variable overhead cost is $7,800. Difference in standard and actual variable overhead cost can be calculated by deducting the actual variable overhead cost from the standard variable overhead cost. Hence, the difference between standard and actual variable overhead cost is $440.

Calculated variable overhead rate variance is $115 favorable and the variable overhead efficiency variance is $325 favorable. Difference between standard and actual variable overhead cost is the total of variable overhead rate variance and variable overhead efficiency variance. Hence, the difference between standard and actual variable overhead cost is $440.