Question

Andrews 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, Andrews budgets 2017 assembly-support costs to be $ 8,000,000 and 2017 direct labor-hours to be 160,000 . At the end of 2017 , Andrews is comparing the costs of several jobs that were started and completed in 2017 .

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 $ 8,316,000, and the actual direct labor-hours were 154,000 .

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

(a) Identify the formula to calculate the indirect costs under normal costing and then calculate the indirect costs for each model.

(b) Identify the formula to calculate the indirect costs under actual costing and then calculate the indirect costs for each model.

Answer 1

Budgeted indirect cost rate = Budgeted indirect costs / Budgeted direct labor hours
Budgeted indirect cost rate = $ 8,000,000 / 160,000 direct labor hours
Budgeted indirect cost rate = $ 50 per direct labor hour
Actual indirect cost rate = Actual indirect costs / Actual direct labor hours
Actual indirect cost rate = $ 8,316,000 / 154,000 direct labor hours
Actual indirect cost rate = $ 54 per direct labor hour

Requirement 2 :
2)a) Identify the formula to calculate the indirect costs under normal costing and then calculate the indirect costs for each model :

Normal costing	Budgeted indirect cost rate	*	Actual direct labor hours	=	Indirect costs
Laguna	$ 50 per DLH	*	950	=	$ 47,500 {$ 50*950}
Mission	$ 50 per DLH	*	1070	=	$ 53,500 {$ 50 *1070 }

Now calculate the total costs using normal costing for each model

Normal costing	Laguna Model	Mission Model
Direct cost (material cost +labor costs)	$ 142,755       {$106,430 +$36,325 }	$ 169,100 {$127,970+$41,130}
Indirect cost (see above )	$ 47,500	$ 53,500
Total costs	$ 190,255	$ 222,600

2)b) Identify the formula to calculate the indirect costs under Actual costing and then calculate the indirect costs for each model :
Actual costing	Actual indirect cost rate	*	Actual direct labor hours	=	Indirect costs
Laguna	$ 54 per DLH	*	950	=	$ 51,300 {$ 54*950}
Mission	$ 54 per DLH	*	1070	=	$ 57,780 {$ 54 *1070 }

Now calculate the total costs using Actual costing for each model
Actual costing	Laguna Model	Mission Model
Direct cost (material cost +labor costs)	$ 142,755       {$106,430 +$36,325 }	$ 169,100 {$127,970+$41,130}
Indirect cost (see above )	$ 51,300	$ 57,780
Total costs	$ 194,055	$ 226,880