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 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? (Round labor-hours per item and overhead cost per hour to 2 decimal places.)

Answer 1

Solution:

Number of items shipped                                          120,000          

Standard direct labor-hours per item                         x 0.03

Total direct labor-hours allowed                                3,600

Standard variable overhead cost per hour               x 2.85

Total standard variable overhead cost                     10,260

Actual variable overhead cost incurred                     11,480          

Total standard variable overhead cost (above)      10,260

Total variable overhead variance                              1220 (Favourable)