Anderson 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 Anderson budgets 2017 assembly-support costs to be

comma $8,500,000 and 2017 direct labor-hours to be comma 170,000. At the end of 2017, Anderson is comparing the costs of several jobs that were started and completed in

2017

Requirement 1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ?

		Laguna Model	Mission Model
Construction period		Feb-June 2017	May-Oct 2017
Direct materials costs		$106,570	$127,125
Direct labor costs		$36,475	$41,650
Direct labor-hours		960	1,040

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

$8,316,000,

and the actual directlabor-hours were

154,000.

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 (b) actual costing?
3.	Why might AndersonAnderson Construction prefer normal costing over actual costing?

Identify the formula to calculate the budgeted indirect cost rate and then calculate the rate.

Budgeted direct costs

/

Budgeted direct labor hours

=

Budgeted indirect cost rate

8500,000

/

170,000

=

per DLH

Identify the formula to calculate the actual indirect cost rate and then calculate the rate.

Actual direct costs

/

Actual direct labor hours

=

Actual indirect cost rate

8,316,000

/

154,000

=

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)

x

=

Indirect costs

Laguna		per DLH	x		=
Mission		per DLH	x		=

Now calculate the total costs using normal costing for each model.

	Laguna	Mission
Normal costing	model	model
Total costs

(b) Identify the formula to calculate the indirect costs under actual costing and then calculate the indirect costs for each model.

(Actual costing)

x

=

Indirect costs

Laguna		per DLH	x		=
Mission		per DLH	x		=

Now calculate the total costs using actual costing for each model.

	Laguna	Mission
Actual Costing	Model	Model
Total costs

Requirement 3. Why might

AndersonAnderson

Construction prefer normal costing over actual costing?

AndersonAnderson

Construction might prefer normal costing over actual costing because normal costing

enables Anderson to report a job cost as soon as the job is completed.

provides more accurate cost data.

results in higher profits.

AndersonAnderson

can use this information to

evaluate previous years earnings.

manage the cost of their current jobs and bid on similar jobs later in the year.