Question

Chirko & 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. Chirko & Partners employs 10 professionals to perform audit services. Budgeted and actual amounts for 2017 are as follows: (Click the icon to view the data.) Data Table Requirements Chirko & Partners Budget for 2017 Professional labor compensation Audit support department costs $990,000 $774,000 18,000 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 Chirko & Partners use? Explain. Chirko's 2017 audit of Pierre & Co. was budgeted to take 140 hours of professional labor time. The actual professional labor time spent on the audit was 160 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. Professional labor-hours billed to clients Actual results for 2017 Audit support department costs Professional labor-hours billed to clients Actual professional labor cost rate $735,000 17,500 hours $59 per hour Print Done

Answer 1

1.

Actual direct cost rate for professional labor = 59 per professional labor-hour

Actual indirect cost rate = 735000/17500 = 42 per professional labor-hour

Budgeted direct cost rate for professional labor = 990000/18000 = 55 per professional labor-hour

Budgeted indirect cost rate = 774000/18000 = 43 per professional labor-hour

	(a) Actual Costing	(b) Normal Costing	(c) Variation of Normal Costing
Direct-Cost Rate	59	59	55
	(Actual Rate)	(Actual Rate)	(Budgeted Rate)
Indirect-Cost Rate	42	43	43
	(Actual Rate)	(Budgeted Rate)	(Budgeted Rate)

2. Chirko & Partners need to choose a job-costing system based on the direct cost information which is available to them. If Chirko knows direct costs as the jobs are being done, Chirko could use normal costing over actual costing by calculating budgeted indirect cost rate to cost jobs.

Normal costing helps Chirko to use budgeted indirect cost rate calculated at the beginning of year to find the cost of a job in no time the job is completed. Chirko can use knowledge of job costs for coming uses, which consists of pricing, monitoring & managing costs, evaluating the success of the job, understanding what did work and what did not work, bidding on new jobs, preparing interim financial statements etc.

Under actual costing, Chirko would only determine cost of a job at the end of the year, when actual indirect costs are known. So, budgeted indirect cost rate and allocated costs should be reasonably approximate the actual cost and the actual indirect cost rate

If Chirko don't know direct costs when the jobs are being completed, they could use the difference of normal costing that calculates a budgeted direct cost rate. This helps Chirko to find costs on a timely basis and gain all the benefits. Though, if Chirko does use the difference of normal costing, it should do a better job of finding the budgeted direct cost rate.

3.

		(a) Actual Costing		(b) Normal Costing		(c) Variation of Normal Costing
Direct-Costs	59*160=	9,440	59*160=	9,440	55*160=	8,800
Indirect-Costs	42*160=	6,720	43*160=	6,880	43*160=	6,880
Total Job Costs		16,160		16,320		15,680

All three costing systems use the actual professional labor time of 160 hours. The budgeted 140 hours for the Pierre &Co. audit job is not used in job costing. The actual costing figure of $16,160 is less than the normal costing figure of $16,320 because the actual indirect-cost rate ($42) is less than the budgeted indirect-cost rate ($43). The normal costing figure of $16,320 is greater than the variation of normal costing (based on budgeted rates for direct costs) figure of $15,680 because the actual direct-cost rate ($59) is more than the budgeted direct-cost rate ($55).