At the end of 2012, Acre is comparing the costs of several jobs that were started and completed in 2012 — Construction assembles residential houses uses job- costing system with
General StudiesGeneralWorked Solution
Acre 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 2011, Acre budgets 2012 assembly- support costs to be $ 8,700,000 and 2012 direct labor- hours to be 145,000.
At the end of 2012, Acre is comparing the costs of several jobs that were started and completed in 2012.
.:.
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 2012 actual assembly- support costs were $ 7,470,000, and the actual direct labor- hours were 166,000.
1. Compute the
(a) Budgeted indirect- cost rate and
(b) Actual indirect- cost rate. Why do they differ?
2. What are the job costs of the Laguna Model and the Mission Model using
(a) Normal costing and
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(b) Actual costing?
3. Why might Acre Construction prefer normal costing over actual costing?
SOLUTION:
1.
Budgeted indirect-
=
Budgeted indirect costs (assembly support)
Budgeted indirect costs (assembly support)
=
=
$8,700,000
$8,700,000
$8,700,000
cost rate
Budgeted direct labor-hours
cost rate
Budgeted direct labor-hours
145,000 hours
145,000 hours
145,000 hours
= $60 per direct labor-hour
= $60 per direct labor-hour
Actual indirect-
=
Actual indirect costs (assembly support)
=
$7,470,000
$7,470,000
cost rate
=
Actual direct labor-hours
=
cost rate
=
Actual direct labor-hours
=
166,000 hours
166,000 hours
166,000 hours
166,000 hours
166,000 hours
= $45 per direct labor-hour
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.
2a.
Laguna
Laguna
Laguna
Mission
Mission
Mission
Mission
Mission
Normal costing
Model
Model
Model
Model
Model
Model
Normal costing
Direct costs
$106,440
$106,440
$106,440
$127,625
$127,625
$127,625
$127,625
Direct materials
$106,440
$106,440
$106,440
$127,625
$127,625
$127,625
$127,625
Direct labor
36,325
36,325
36,325
41,750
41,750
41,750
41,750
Indirect costs
142,765
142,765
169,375
169,375
Indirect costs
58,800
58,800
58,800
60,000
60,000
60,000
60,000
60,000
Assembly support ($60 980; $60 1,000)
58,800
58,800
58,800
60,000
60,000
60,000
60,000
60,000
Total costs
$201,565
$201,565
$229,375
$229,375
2b. Actual costing
Direct costs
$106,440
$106,440
$106,440
$106,440
Direct materials
$106,440
$106,440
$106,440
$106,440
$127,625
$127,625
$127,625
$127,625
Direct labor
36,325
36,325
36,325
36,325
41,750
41,750
41,750
41,750
Indirect costs
142,765
142,765
169,375
169,375
Indirect costs
44,100
44,100
44,100
44,100
45,000
45,000
45,000
45,000
Assembly support ($45 980; $45 1,000)
44,100
44,100
44,100
44,100
45,000
45,000
45,000
45,000
Total costs
$186,865
$186,865
$214,375
$214,375
3. Normal costing enables Acre 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 980 direct labor-hours are known for the Laguna Model (June 2012), Acre can compute the $201,565 cost figure using normal costing. Acre 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, Acre has to wait until the December 2012 year-end to compute the $186,865 cost of the Laguna Model using actual costing.
Although not required, the following overview diagram summarizes Acre Construction’s job-costing system.