Problem - Jeff Boyer, of Rainking company designs and installs custom lawn and garden irrigation systems for homes and businesses throughout the state; each job is different, requiring different materials and labor for installing the systems. Rainking estimated the following for the year:
Number of installations 250
Number of direct labor hours 5,000
Direct materials cost $60,000
Direct labor cost $75,000
Overhead cost $65,000
During the year, the following actual amounts were experienced:
Number of installations 245
Number of direct labor hours 5040
Direct materials used $59,350
Direct labor incurred $75,600
Overhead incurred $64,150
1. Should Rainking use the process costing or job-order costing? Explain.
2. If Rainking uses a normal costing system and overhead is applied on the basis of direct labor hours, what is the cost of an installation that takes $3,500 of direct material and 50 direct labor hours?
3. Explain why Rainking would have difficulty using an actual costing system?