Question

i already completed part 1 and part 2.

i need help and explanation on part 3.

4-33 Job costing; actual, normal, and variation from normal costing. Cheney & 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 con- tains all costs of the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor-hours. Cheney & Partners employs 10 professionals to perform audit services. ASSIGNMENT MATERIAL Budgeted and actual amounts for 2017 are as follows: Home Insert Page Layout Formulas в Data с Cheney & Partners Budget for 2017 Professional labor compensation Audit support department costs Professional labor-hours billed to clients $960,000 720,000 16,000 hours 7 8 Actual results for 2017 Audit support department costs Professional labor-hours billed to clients Actual professional labor cost rate $744,000 15,500 hours $ 53 per hour 10 Required 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 Cheney & Partners use? Explain. 3. Cheney's 2017 audit of Pierre & Co. was budgeted to take 170 hours of professional labor time. The actual professional labor time spent on the audit was 185 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.

Answer 1

Solution to part 3.

	Actual costing (a)	Normal Costing (b)	Variation of normal costing (c)
Direct costs	$ 53 x 185 = $9,805	$53 x 185 = $9,805	$60 x 185 = $11,100
Indirect costs	$48 x 185 = $8,880	$45 x 185 = $8,325	$45 x 185 = $ 8,325
Total job costs	$ 18,685	$18,130	$ 19,425

We should keep in mind that budgeted labor hours is not used in job costing. We have to use the actual labor hours spent on the job to allocate costs in each of the three costing systems ( 185 hours). However the use of budgeted hours might be at the beginning of the audit to provide a standard time to client.

The total job costs in actual costing of $ 18,685 exceeds the total job costs in normal costing of $ 18,130 because the actual indirect cost rate ($48) in actual costing is more than budgeted indirect cost rate ($45) used in normal costing.The total job costs in normal costing of 18,130 is less than the total job costs in variation of normal costing of 19,425 because the actual direct cost rate ($ 53) is less that budgeted direct cost rate of ($ 60).

Workings:

Budgeted direct cost rate for professional labor = $ 960,000 / 16,000 = $ 60 per professional labor hour

Budgeted indirect cost rate for professional labor = $ 720,000 / 16,000 = $ 45 per professional labor hour

Actual Indirect cost rate = $ 744,000 / 15,500 = $ 48 per professional labor hour