Question

Atkinson 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, Atkinson budgets 2017 assembly-support costs to be $8,800,000 and 2017 direct labor hours to be 220,000. At the end of 2017, Atkinson is comparing the costs of several jobs that were started and completed in 2017. Laguna Model Mission Model Construction period Feb–June 2017 May–Oct 2017 Direct material costs $106,550 $127,450 Direct labor costs $ 36,250 $ 41,130 Direct labor-hours 970 1,000 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 2017 actual assembly-support costs were $8,400,000, and the actual direct labor-hours were 200,000. MyAccountingLab Required assignment material 141 1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ

Answer 1

Answer:

a) Budgeted indirect cost rate is $40 per direct labor- hour.

b) Actual indirect cost rate is $42 per direct labor hour.

The two indirect cost rate per direct labor hour differs because, for the calculation of budgeted indirect cost rate both the budgeted direct labor-hours and indirect cost are considered. While calculating actual indirect cost rate both actual direct labor-hours and indirect cost are considered.

Explanation:

Actual Costing:

In actual costing, product cost is calculated considering actual cost of material, actual cost of labor and actual overhead incurred which is allocated using the allocation base for incurred cost during the period.

Normal Costing:

In normal costing, product cost is calculated considering actual cost of material, actual cost of labor and overhead are calculated using a standard overhead rate which is applied to actual usage of allocation base.

a.

Compute budgeted indirect cost rate:

Budgeted indirect cost rate = Budgeted indirect cost ÷ budgeted direct labor hour

= 8,800,000 ÷ 220,000

= 40 per direct labor hour

Therefore, budgeted indirect cost rate is $40 per direct labor- hour.

b.

Compute actual indirect cost rate:

Actual indirect cost rate = Actual indirect cost ÷ Actual direct labor hour

= $8400,000 ÷ 200,000 Hours

= $42 per direct labor hour

Therefore, actual indirect cost rate is $42 per direct labor hour.