Question

Chirac & 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. Chirac & Partners employs 10 professionals to perform audit sevices. Budgeted and actual amounts for 2017 are as follows: B Click the icon to view the data.) Read the requirements. Budgeted indirect costs : Budgeted direct labor-hours = Budgeted indirect-cost rate Identify the formula to calculate the budgeted direct-cost rate. Budgeted direct costs / Budgeted direct labor-hours Budgeted direct-cost rate Compute the direct-cost rate and the indirect-cost rate per professional labor-hour for 2017 under each method. (a) Actual Costing 70 Direct-cost rate Indirect-cost rate 46

Answer 1

Answer with working and explanation is given below

Variation from Actual Normal Normal Costing Costing Costing Actual rate Actual rate Budgeted rate Actual rate Budgeted rate Budgeted rate Direct Cost rate Indirect Cost rate Actual Costing Normal Costing Variation from Normal Costing $70 $43 $113 $56 Direct Cost rate Indirect Cost rate Total cost per hour | $56 $45 $101 $43 $99 Working notes: Budgeted indirect -cost rate Budgeted indirect cost Audit Support $688,000 Budgeted Direct labor hours 16,000 Budgeted indirect cost rate $43 Budgeted direct -cost rate Budgeted direct cost $1,120,000 Budgeted Direct labor hours 16,000 Budgeted direct cost rate $70 Professional labor Actual indirect cost rate Actual Indirect cost Professional labor $738,000 Actual Direct labor hours 16,400 Actual indirect cost rate $45 2 Chirac & partners should use normal costing since indirect costs are allocated based on the budgeted overhead rate The total cost per hour is lower under the Normal costing system Actual direct costs can be tracked to the job performed hence actual direct costs should be charged at actual rate. Since indirect costs are not easily traceable it makes sense to calculate a budgeted rate and apply based on professional hours worked Actual Costing $9,520 $7,650 $17,170 Variation from Normal Normal Costing Costing $9,520 $11,900 $7,310 $7,310 $16,830 $19,210 Direct Cost Indirect Cost Total Job Cost Actual Costing Normal Costing Variation from Normal Costing Direct Cost Indirect Cost (170*$56) (170*$45) (170*$56) (170*$43) (170*$70) (170*$43) Actual professional hours of 170 hours is used for charging cost to job The job costs differ under the 3 methods due to the rate of direct cost and indirect cost charged to the job Actual Costing charges cost to job based on actual rates for both direct and indirect cost-Indirect cost is higher than budgeted rate Normal Costing charges direct cost to job based on actual rate and indirect cost based on budgeted rate Variation from Normal costing charges both direct cost and indirect cost based on budgeted rate-Budgeted direct cost rate is higher