Question

Job costing, normal and actual costing. Atkinson Construction assembles residential houses. It uses a job-costing system with two direct-cost categories (direct materials and direct labor) and one indirect-cost pool (assembly support). Direct labor-hours is the allocation base for assembly support costs. In December 2016, Atkinson budgets 2017 assembly-support costs to be $ 8,800,000 and 2017 direct labor-hours to be 220,000.

At the end of 2017, Atkinson is comparing the costs of several jobs that were started and completed in 2017 .

	Laguna Model	Mission Model
Construction period	Feb-June 2017	May-0ct 2017
Direct material costs	$106,550	$127,450
Direct labor costs	$36,250	$41,130
Direct labor-hours	970	1,000

Direct materials and direct labor are paid for on a contract basis. The costs of each are known when direct materials are used or when direct labor-hours are worked. The 2017 actual assembly-support costs were $ 8,400,000, and the actual direct labor-hours were 200,000.

Required

1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ?

2. What are the job costs of the Laguna Model and the Mission Model using (a) normal costing and (b) actual costing?

3. Why might Atkinson Construction prefer normal costing over actual costing?

Answer 1

1 . Budgeted indirect cost rate = budgeted indirect cost (assembly support)/budgeted direct labour hours

= $8800000/220000 hours = $40 per direct labour hours.

Actual indirect cost rate = actual indirect cost (assembly support)/actual direct labour hours

= $8400000/200000 hours = $42 per direct labour hour.

Note that both the rates i.e. budgeted I direct cost rate and actual indirect cost rate differs because both the numerators and denominators in the two calculations are different. In case of budgeted indirect cost rate it is based on budgeted numbers whereas in case of actual indirect cost rate it is based upon actual numbers.

2. (a). Job costs of Laguna model and the mission model using normal costing is as follow :-

Particulars	Laguna model	mission model
Direct cost
- direct material	$106550	$127450
- direct labor	$36250	$41130
Total of direct cost	$142800	$168580
Indirect costs : assembly support	$38800 ($40x970)	$40000 ($40x100)
Total costs as per normal capacity	$181600	$208580

2 . (b) . Job cost of laguna model and the mission model using actual costing is as follows :-

Particulars	Laguna model	mission model
Direct cost
- direct material	$106550	$127450
- direct labor	$36250	$41130
total of direct cost	$142800	$168580
Indirect cost : assembly support	$40740 (42x970)	$42000 (42x1000)
Total cost using actual costing	$183540	$210580

3 . Normal costing enabled Atkinson to report a job cost as soon as the job is completed, assuming that both the direct material and direct labor cost is known at the time of use. Once the 970 direct labor hours are known for the laguna model, atkinson can compute the $181600 cost figure using normal costing. Atkinson csn use the information to manage the cost of lagun model job as well as to bid on similar jobs later in the year. On the other hand Atkinson has to wait till the end of the year to compute the cost of $183540 of Laguna model using actual costing. That's why Atkinson construction might prefer normal costing per actual costing