Logistics Solutions provides order-fulfillment services for online merchants. The company maintains warehouses that stock items carried by its online 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 labour-hours.

In the most recent quarter, 300,000 items were shipped to customers using 5,800 direct labour-hours. The company incurred a total of $37,860 in variable overhead costs and $23,200 in fixed overhead costs. According to the company’s standards, 0.02 direct labour-hours are required to fulfill an order for one item and the variable overhead rate is $6.25 per direct labour-hour. Total budgeted fixed overhead cost was $23,600 for a planned shipping volume of 295,000 items. Fixed overhead is applied to each item using direct labour-hours.

Required:

1. What variable overhead cost should have been incurred to fill the orders for the 300,000 items? How much does this cost vary from what was incurred?

2. Break the difference computed in part (1) into a variable overhead spending variance and a variable overhead efficiency variance.

3. Compute the predetermined fixed overhead application rate.

4. Compute the fixed overhead budget and the volume variance and assess them.

5. What additional information would you need to conclude that the predetermined rate for fixed cost used by the company is different from the value you calculated in part (3)?