Anderson Construction assembles residential homes. It uses a job-order costing system with two direct cost categories (direct materials and direct labor) and one indirect cost group (assembly support). Direct labor hours are the allocation basis for assembly support costs. In December 2006, Anderson budgets $8,000,000 of assembly support costs for 2007 and 160,000 direct labor hours for 2007 as well.

At the end of 2007, Anderson compares the costs of various jobs that were started and completed that year.

Construction period Direct materials

Direct labour

Direct labor hours

Laguna Model

February-June 2007

$106.450 $36.276 900

Are you a model?

May-October 2007

$127.604 $41.410 1.010

Direct materials and direct labor are paid on a contract basis. The costs of each of these items are known when direct materials are used or when direct labor hours are worked. Assembly support costs in 2007 were $6,888,000, and direct manufacturing labor hours were 164,000.

Requirements:

1. Calculate the budgeted overhead rate.
2. What is the cost of the work for the Laguna model and the Mission Model according to normal cost?
3. Why would Anderson Construction prefer normal costing, rather than actual costing?