Job

costing, normal and actual costing. 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 2013, Anderson budgets 2014
assembly-support costs to be $8,000,000 and 2014 direct laborhours to be 160,000. At the
end of 2014, Anderson is comparing the costs of several jobs that were started and
completed in 2014.

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 2014
actual assembly-support costs were $7,614,000, and the actual direct labor-hours were
162,000. 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 Anderson Construction
prefer normal costing over actual costing?

:: Solution ::
step: 1 of 14
Predetermined Overhead rate:

Predetermined overhead rate is used to apply manufacturing overhead to work in process

inventory. Usually this predetermined overhead rate will be calculated at the beginning of
the period. This rate is used to charge overhead costs to a job. It is calculated by dividing
the overhead cost with the labor hours or machine hours as per the policy adapted by a
company.

Predetermined overhead rate will calculate by using following formula:

step: 2 of 14
Normal costing and actual costing:

Under normal costing, manufacturing overhead rate is calculated by dividing budgeted

manufacturing overhead cost with budgeted cost allocation base. Under actual costing,
manufacturing overhead rate is calculated by dividing actual manufacturing overhead cost
with actual cost allocation base.

The applied manufacturing overheads are calculated by multiplying the actual hours with
the manufacturing overhead rate. If actual overheads are greater than applied overheads
then the overheads are said to be under allocated. If actual overheads are lower than
applied overheads, then the overheads are said to be overallocated.

step: 3 of 14
(1)

(a) Computation of budgeted indirect cost rate:

In the given scenario, the indirect cost is assembly support cost. The budgeted indirect cost
rate is calculated by dividing the budgeted assembly support costs with the budgeted direct
labor hours as shown below:

step: 4 of 14

Hence, the budgeted indirect cost rate is .

step: 5 of 14
(b) Computation of actual indirect cost rate:
The actual indirect cost rate is calculated by dividing the actual assembly support cost with
the actual direct labor hours as shown below:

step: 6 of 14

Hence, the actual indirect cost rate is .

step: 7 of 14
Budgeted Indirect cost rate and Actual Indirect cost rate differ because budgeted indirect
cost rate is calculated by taking budgeted assembly support cost and budgeted direct
labour hours in numerator and denominator while actual indirect cost rate is calculated by
taking actual assembly support cost and actual direct labour hours in numerator and
denominator.

step: 8 of 14
(2)

(a) Computation of job costs of the L Model and M Model using Normal Costing:

L Model:

It is given that:

Direct Material Cost = $ 106,650

Direct Labour Cost = $ 36,276

The indirect cost for L Model under normal costing is calculated by multiplying the
budgeted indirect cost rate with the direct labor hours as shown below:
The total job cost is the sum of direct materials, direct labor and indirect cost as shown
below:

step: 9 of 14

Hence, the total job cost of for L Model is .

step: 10 of 14
Mission Model:

It is given that:

Direct Material Cost = $ 127,970

Direct Labour Cost = $ 41,750

The indirect cost for M Model under normal costing is calculated by multiplying the
budgeted indirect cost rate with the direct labor hours as shown below:

The total job cost is the sum of direct materials, direct labor and indirect cost as shown
below:
step: 11 of 14

Hence, the total job cost of for M Model is .

step: 12 of 14
(b) Computation of job costs of the L Model and M Model using Actual Costing:

L Model:

It is given that:

Direct Material Cost = $ 106,650

Direct Labour Cost = $ 36,276

The indirect cost for L Model under normal costing is calculated by multiplying the
budgeted indirect cost rate with the direct labor hours as shown below:

The total job cost is the sum of direct materials, direct labor and indirect cost as shown
below:

Hence, the total job cost of for L Model is .

step: 13 of 14
M Model:

It is given that:
Direct Material Cost = $ 1 27,970

Direct Labour Cost = $ 41,750

The indirect cost for M Model under normal costing is calculated by multiplying the
budgeted indirect cost rate with the direct labor hours as shown below:

The total job cost is the sum of direct materials, direct labor and indirect cost as shown
below:

Hence, the total job cost of for M Model is .

step: 14 of 14
(3)

Explanation:

- construction prefers normal costing over actual costing as in the case of actual costing, the
costs are calculated at the end of the accounting period i.e., when the job is completed.
However, managers require to calculate the cost at various intervals and not just at the end
of completion of job.

- They need to know manufacturing cost at various intervals to price the jobs, evaluate the
success and failure of jobs, to bid for the new jobs and to prepare interim financials
required for various purposes