Question

Chico & Partners, a Quebec based public accounting oartnership, specializes in audit services. Its job costing system has a single direct cost category (professional labor) and a single indirect cost pool (audit support, which contains all costs if the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor hours. Chico &Partners employs 10 professionals to perform audit services. Budgeted and actual amounts for 2017 are shown in the photo attached.

specializes m audits using actual professio x -) and a single indirect cost pool (audit es Budgeted and actual amounts for 2 © Data Table rate per professione fion from normal costing that uses bur rate Chico & Partners Budget for 2017 Professional labor compensation Audit support department costs Professional labor-hours billed to clients $1,120,000 $688,000 16,000 hours Actual results for 2017 Audit support department costs Professional labor-hours billed to clients Actual professional labor cost rate $738,000 16,400 hours $55 per hour Print Done

1. Compute the direct cost rate and the indirect cost rate per professional labor hour for 2017 under (a) actual costing, (b( normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs.
2. Which job costing system would you reccomend Chico &Partners use? Explain
3. Chiro's 2017 audit if Pierre & Co was budgeted to take 139 hours of professional labor time. The actual professional labor time spent on the audit was 140 hours. Compute the cost I'd the Pierre & Co audit using (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs Explain any differences in the job cost.

Answer 1

Chico & Partners Requirement 1 Actual direct cost rate for professional labor = $55 per professional labor-hour Actual indirect cost rate = $738000 / 16400 hours = $45 per professional labor hour Budgeted direct cost rate for professional labor = $1120000 / 16000 hours = $70 per professional labor-hour Budgeted indirect cost rate = $688000 / 16000 hours = $43 per professional labor-hour Actual Costing Normal Variation of Costing Normal Costing 55 43 55 Direct-Cost Rate Indirect-Cost Rate 70 45 43 Requirement 2 Chiro & Partners should choose a job-costing system based on the direct cost information available to them. If Chiro knows direct costs as the jobs are being done, I would recommend Chiro use normal costing over actual costing by calculating a budgeted indirect cost rate to cost jobs.Normal costing enables Chiro to use the budgeted indirect cost rate calculated at the beginning of the year to estimate the cost of a job as soon as the job is completed. Chiro can use knowledge of job costs for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the success of the job, learning about what did and did not work, bidding on new jobs, and preparing interim financial statements. Under actual costing, Chiro Would only determine the cost of a job at the end of the year when actual indirect costs are known. To be useful, of course, the budgeted indirect cost rate and the allocated costs need to reasonably approximate the actual indirect cost rate and the actual costs. If Chiro does not know direct costs as the jobs are being completed, I would recommend that Chiro use the variation of normal costing that calculates a budgeted direct cost rate. This would allow Chiro to estimate costs on a more-timely basis and gain all the benefits discussed earlier in the context of indirect costs. However, if Chiro does use the variation of normal costing, it needs to do a better job of estimating the budgeted direct cost rate. Currently, the budgeted direct cost rate ($70) is much greater than the actual rate of $55 per professional labor hour. If the difference is too large, the budgeted costs allocated to jobs will not approximate the actual costs incurred causing Chiro to misunderstand its costs before actual costs are known. Requirement 3 Actual Costing $55 x 140 hours = $ 45 x 140 hours = Normal Costing $ 55 x 140 hours = $ 43 x 140 hours = Direct Costs Indirect Costs Costing 9800 7700 6300 14000 Variation of Normal Costing $ 70 x 140 hours = $ 43 x 140 hours = 6020 15820 7700 6020 13720 All three costing systems use the actual professional labor time of 140 hours. The budgeted 139 hours for the Pierre & Co. audit job is not used in job costing. However, Chiro may have used the 139 hour number in bidding for the audit. The actual costing figure of $14,000 is greater than the normal costing figure of $13,720 because the actual indirect-cost rate ($45) is more than the budgeted indirect-cost rate ($45). The normal costing figure of $13,720 is less than the variation of normal costing (based on budgeted rates for direct costs) figure of $15,820 because the actual direct-cost rate ($55) is less than the budgeted direct-cost rate ($70).