Question

Craden Solutions designs Web pages for clients in the education sector. The company's job-costing system has a single direct cost category (Web-designing labor) and a single indirect cost pool composed of all overhead costs. Overhead costs are allocated to individual jobs based on direct labor-hours. The company employs six Web designers. Budgeted and actual information regarding Craden Solutions follows: (Click the icon to view the data.) Read the requirements. Requirement 1. Compute the direct-cost rate and the indirect-cost rate per Web-designing 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. Begin by identifying the formula to calculate the actual indirect-cost rate. Actual indirect-cost rate Identify the formula to calculate the budgeted indirect-cost rate. = Budgeted indirect-cost rate Identify the formula to calculate the budgeted direct-cost rate. = Budgeted direct-cost rate Compute the direct-cost rate and the indirect-cost rate per labor hour under: (a) (b) Normal (c) Variation of Actual costing costing normal costing Direct-cost rate Indirect-cost rate

Answer 1

Craden Solutions Requirement 1 Actual direct-labor hour rate = $200000 / 20000 hours = $10 per direct labor-hour Actual indirect cost rate = $180000 / 20000 hours = $9 per direct labor-hour Budgeted direct labor hour rate = $240000 / 20000 hours = $12 per direct labor hour Budgeted indirect cost rate = $140000 / 20000 hours = $7 per direct labor hour Direct-Cost Rate Indirect-Cost Rate Actual Costing 10 9 Normal Variation of Costing Normal Costing 10 12 7 7 Requirement 2 Craden Solutions should choose a job-costing system based on the direct cost information available to them. If Craden Solutions knows direct costs as the jobs are being done, I would recommend Craden Solutions use normal costing over actual costing by calculating a budgeted indirect cost rate to cost jobs. Normal costing enables Craden Solutions 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. Craden Solutions 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, Craden Solutions 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 Craden Solutions does not know direct costs as the jobs are being completed, I would recommend that Craden Solutions use the variation of normal costing that calculates a budgeted direct cost rate. This would allow Craden Solutions to estimate costs on a more-timely basis and gain all the benefits discussed earlier in the context of indirect costs. However, if Craden Solutions does use the variation of normal costing, it needs estimating the budgeted direct cost rate. Currently, the budgeted direct cost rate ($12) is very close to the actual rate of $10 per direct labor-hour. Requirement 3 Actual Costing $10 x 62 $9 x62 Normal Costing $10 x 79 $7 x 79 Direct Costs Indirect Costs Total Job Costs 620 558 1178 790 553 1343 Variation of Normal Costing $12 x 79 948 $7 x 79 5 53 1501 All three costing systems use the actual direct labor-hours of 62 hours. The budgeted 80 hours for the Greenville Day School job is not used in job costing. However, Craden Solutions may have used the budgeted number of hours in bidding for the job.