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.
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?