4-18 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 2006, Anderson budgets 2007 assembly-support costs to be $8,000,000 and 2007 direct labor-hours to be 160,000.

At the end of 2007, Anderson is comparing the costs of several jobs that were started and completed in 2007.

Laguna Model Mission Model

Construction period: Feb–June 2007 May–Oct 2007

Direct materials: $106,450 $127,604

Direct labor: $36,276 $41,410

Direct labor-hours: 900 1,010

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 2007 actual assembly-support costs were $6,888,000, and the actual direct labor-hours were 164,000.

ASSIGNMENT

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?

4-18 Job costing, normal and actual costing.

1. = =

= $50 per direct labor-hour

= =

= $42 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
Model / Mission
Model
Normal costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($50 ´ 900; $50 ´ 1,010)
Total costs / $106,450
36,276
142,726
45,000
$187,726 / $127,604
41,410
169,014
50,500
$219,514
2b. Actual costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($42 ´ 900; $42 ´ 1,010)
Total costs / $106,450
36,276
142,726
37,800
$180,526 / $127,604
41,410
169,014
42,420
$211,434

3. Normal costing enables Anderson 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 900 direct labor-hours are known for the Laguna Model (June 2007), Anderson can compute the $187,726 cost figure using normal costing. Anderson 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, Anderson has to wait until the December 2007 year-end to compute the $180,526 cost of the Laguna Model using actual costing.