Question

Avery 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, Avery budgets 2017 assembly-support costs to be $8,100,000 and 2017 direct labor-hours to be 135,000. At the end of 2017, Avery is comparing the costs of several jobs that were started and completed in 2017. (Click the icon to view the data.) Read the requirements. Requirement 1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ? Identify the formula to calculate the budgeted indirect cost rate and then calculate the rate. Budgeted indirect cost rate per DLH Identify the formula to calculate the actual indirect cost rate and then calculate the rate. = Actual indirect cost rate per DLH These rates differ because 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. (Normal costing) х Indirect costs Laguna per DLH х Mission per DLH х Choose from any list or enter any number in the input fields and then continue to the next question.

Answer 1

Answer-

1) a) Budgeted Indirect Cost rate = Budgeted Indirect costs/Budgeted Direct Labor hours

Budgeted Indirect costs = $8,100,000

Budgeted Direct Labor hours = 135,000 hours

Budgeted Indirect Cost rate = $8,100,000/135,000 hrs = $60 per DLH

b) Actual Indirect Cost rate = Actual Indirect costs/Actual Direct Labor hours

Actual Indirect costs = $7,470,000

Actual Direct Labor hours = 166,000 hours

Actual Indirect Cost rate = $7,470,000/166,000 hrs = $45 per DLH

These rates differ because both the numerator and the denominator in the two calculations are different - one based on budgeted numbers and the other based on actual numbers.

2) a) In normal costing budgeted rate per hour is used for calculating indirect cost for each job.

(Normal Costing) Indirect costs = Budgeted indirect cost rate*Direct Labor Hours

Laguna Model = $60 per DLH*960 hours = $57,600

Mission Model = $60 per DLH*1,080 hours = $64,800

Calculation of total cost using normal costing for each model (Amount in $)

Normal Costing	Laguna Model	Mission Model
Direct Costs
Direct Materials cost	106,430	127,550
Direct Labor cost	36,875	41,750
Indirect costs
Assembly Support costs	57,600	64,800
Total costs	200,905	234,100

b) In actual costing actual rate per hour is used for calculating indirect cost for each job.

(Actual Costing) Indirect costs = Actual indirect cost rate*Direct Labor Hours

Laguna Model = $45 per DLH*960 hours = $43,200

Mission Model = $45 per DLH*1,080 hours = $48,600

Calculation of total cost using actual costing for each model (Amount in $)

Normal Costing	Laguna Model	Mission Model
Direct Costs
Direct Materials cost	106,430	127,550
Direct Labor cost	36,875	41,750
Indirect costs
Assembly Support costs	43,200	48,600
Total costs	186,505	217,900

3) Avery Construction might prefer normal costing over actual costing because normal costing enables Avery to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use. Once the 960 direct labor hours are known for the Laguna model, Avery can compute the $200,905 cost figure using normal costing. Avery can use this information to manage the costs of the Laguna model job as well as to bid on similar jobs later in the year. In contrast, Avery has to wait until the December 2017 year end to compute the $186,505 cost of the Laguna Model using actual costing.

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