Ejercicio #1. Job costing; actual, normal, and variation from normal costing. Ch

Question

Ejercicio #1. Job costing; actual, normal, and variation from normal costing. Cheney & Partners, a Quebec-based public accounting partnership, specializes in audit services. Its job-costing system has a single direct-cost category (professional labor) and a single indirect-cost pool (audit support, which contains all costs of the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor-hours. Cheney & Partners employs 10 professionals to perform audit services.

Budgeted and actual amounts for 2017 are as follows:

Required:

1.   Compute the direct-cost rate and the indirect-cost rate per professional labor-hour for 2017 under (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs.

2.   Which job-costing system would you recommend Cheney & Partners use? Explain.

3.   Cheney’s 2017 audit of Pierre & Co. was budgeted to take 170 hours of professional labor time. The actual professional labor time spent on the audit was 185 hours. Compute the cost of the Pierre & Co. audit using (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs. Explain any differences in the job cost.

Home Insert Page Layout Formulas Data Cheney & Partners 1 2Budget for 2017 3 Professional labor compensation 4 Audit support department costs 5 Professional labor-hours billed to dlients 6 7 Actual results for 2017 8 Audit support department costs 9 Professional labor-hours billed to dlients 10 Actual professional labor cost rate $960,000 720,000 16,000 hours $744,000 15,500 hours $ 53 per hour

Explanation / Answer

1. Actual direct cost rate for professional labor = $53 per professional labor-hour

Actual indirect cost rate = $744000/ 15500 hours = $48 per professional labor-hour

Budgeted direct cost ratefor professional labor = $960000/ 16000 hours = $60 per professional labor-hour

Budgeted indirect cost rate = $720000/ 16000 hours = $45 per professional labor-hour

2. Normal costing must be used by Cheney & Partners. Under normal costing Cheney will be able to use the budgeted indirect cost rate at the beginning of the year to estimate the cost of a job as and when the job is completed. Whereas, under actual costing, the cost of a job will be known only when actual indirect costs are known.

3.

(a)
Actual
Costing (b)
Normal
Costing (c)
Variation of
Normal Costing Direct-Cost Rate $53
(Actual rate) $53
(Actual rate) $60
(Budgeted rate) Indirect-Cost Rate $48
(Actual rate) $45
(Budgeted rate) $45
(Budgeted rate)

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