Order Up, Inc., provides order fulfillment 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 Order Up, which pulls the item from storage, packs it, and ships it to the customer. The company uses a predetermined variable overhead rate bsed on direct labor-hours.
In the most recent month, 140,000 items were shipped to customers using 5,800 direct labor-hours. The company incurred a total of $15,950 in variable overhead costs.
According to the company's standards, 0.04 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $2.80 per direct labor-hour.
What variable overhead cost should have been incurred to fill the orders for the 140,000 items? How much does this differ from the actual variable overhead cost?
Break down the difference computed above into a variable overhead spending variance and a variable overhead efficiency variance.
Excel file shows calculations of variable overhead spending variance and a variable overhead efficiency variance.