Question

need the answers for requirements 1,2, & 3 please! thank you:)

Kirac & Partners, a Quebec-based public accounting partnership, 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 of the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor-hours. Kirac & Partners employs 10 professionals to perform audit services, Budgeted and actual amounts for 2017 are as follows: (Click the icon to view the data.) Read the requirements. Requirement 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. Begin by identifying the formula to calculate the actual indirect-cost rate. - Actual indirect-cost rate i Data Table A Requirements Kirac & 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 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 recommend Kirac & Partners use? Explain 3. Kirac's 2017 audit of Pierre & Co. was budgeted to take 180 hours of professional labor time. The actual professional labor time spent on the audit was 200 hours. Compute the cost of 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. Actual results for 2017 Audit support department costs Professional labor-hours billed to clients Actual professional labor cost rate $738,000 16,400 hours Print Done $59 per hour Print Done

Answer 1

Kirac & Partners Requirement 1 Actual direct cost rate for professional labor = $59 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 Direct-Cost Rate 70 Actual Normal Variation of Costing Costing Normal Costing 59 59 (Actual rate) (Actual rate) (Budgeted rate) 43 43 (Actual rate) (Budgeted rate) (Budgeted rate) Direct-Cost Rate 45 Requirement 2 Kirac & Partners should choose a job-costing system based on the direct cost information available to them. If Kirac knows direct costs as the jobs are being done, I would recommend Kirac use normal costing over actual costing by calculating a budgeted indirect cost rate to cost jobs. Normal costing enables Kirac 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. Kirac 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, Kirac 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 Kirac does not know direct costs as the jobs are being completed, I would recommend that Kirac use the variation of normal costing that calculates a budgeted direct cost rate. This would allow Kirac to estimate costs on a more-timely basis and gain all the benefits discussed earlier in the context of indirect costs. However, if Kirac 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 $59 per professional labor hour. If the difference is too large, the budgeted costs allocated to jobs will not approximate the actual costs incurred causing Kirac to misunderstand its costs before actual costs are known. Requirement 3 Actual Costing 59 x 200 = 45 x 200 = Normal Costing 59 x 200 = 43 x 200 = Direct Costs Indirect Costs Total Job Costs 11800 9000 20800 11800 8600 20400 Variation of Normal Costing 70 x 200 = 14000 43 x 200 = 8600 22600 All three costing systems use the actual professional labor time of 200 hours. The budgeted 180 hours for the Pierre Enterprises audit job is not used in job costing. However, Kirac may have used the 180 hour number in bidding for the audit. The actual costing figure of $18,685 is greater than the normal costing figure of $20,400 because the actual indirect-cost rate ($45) is more than the budgeted indirect-cost rate ($43). The normal costing figure of $20,400 is less than the variation of normal costing (based on budgeted rates for direct costs) figure of $22,600 because the actual direct-cost rate ($59) is less than the budgeted direct-cost rate ($70).