Avery Construction assembles residential houses. It uses aâ job-costing system with twoâ direct-cost categoriesâ (direct materials and directâ labor) and oneâ indirect-cost poolâ (assembly support). Directâ labor-hours is the allocation base for assembly support costs. In December 2016â, Avery budgets 2017 âassembly-support costs to be $ 8,000,000 and 2017 directâ labor-hours to be 160,000. At the end of 2017â, Avery is comparing the costs of several jobs that were started and completed in 2017. Laguna Model Mission Model
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:

a. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ?
b. What are the job costs of the Laguna Model and the Mission Model using (a) normal costing and (b) actual costing?
c. Why might Atkinson Construction prefer normal costing over actual costing?