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.
In the most recent month, 120,000 items were shipped to customers using 2,300 direct labor-hours. The company incurred a total of $7,360 in variable overhead costs. According to the company's standards, 0.02 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 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

Answer:

The correct answers are as follows:

Numbers of items shipped 140000

Standard Direct labor-hours 0.03

Total direct labor- hours allowed 140000*0.03

= 4200

Standard direct labor cost per hour $3.05

Total standard direct labor cost 3.05*4200

=$12810

Actual cost incurred $15900

total standard direct labor cost $12810

Total direct labor variance = $15900-12810

$3090 F

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2. Labor rate variance = (Actual rate - Standard rate) x Actual hours worked

((15900/5300)-3.05)*5300

265 U

Labor efficiency variance = (Actual hours - Standard hours) x Standard rate

(5300-140000*0.03)*3.05

3355 F