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 Mode
Construction period Feb-June 2017 May-0ct 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.
Required:
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 Atkinson Construction prefer normal costing over actual costing?

Explanation:

Normal costingActual costing

Assembly support cost$8,800,000$8,400,000

Direct labor hours220,000200,000

Indirect Cost Rate$40 per DLH$42 per DLH

2.

Normal CostingLaguna ModelMission Model

Construction periodFeb-June 2017May-0ct 2017

Direct material costs$106,550$127,450

Direct labor costs$ 36,250$41,130

Direct labor-hours9701,000

Assmebly support cost$38,800

($40 x 970)$40,000

Total job cost$181,600$208,580

Actual CostingLaguna ModelMission Model

Construction periodFeb-June 2017May-0ct 2017

Direct material costs$106,550$127,450

Direct labor costs$ 36,250$41,130

Direct labor-hours9701,000

Assmebly support cost$40,740

($42 x 970)$42,000

Total job cost$183,540$210,580

Companies now do prefer normal costing than the actual costing, reasons are that the overhead rates are been known from the beginning of the year which is important for giving price estimates and checking the profitability of jobs.

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- rich people tend to have more capital in their disposal. this would benefit them in business since it is far easier for them to fund their business operation compared to poor people.