question archive Al Sherif Contracting Company assembles residential houses
Al Sherif Contracting Company assembles residential houses
Subject:AccountingPrice:4.87 Bought7
Al Sherif Contracting Company assembles residential houses . It uses a job costir mark up for pricing the job. Direct labor hour is the allocation base for indirect ca December 2019 Al Sherif budgets 2020 indirect costs to be $10,000,000 and 2 direct labor hours to be 175,000 . At the end of 2020 , Al Sherif was comparing of several jobs that were started and completed during 2020 : Al Jurf Pearl RAK Appex Construction Period 1/2 - 18/7 / 2 4/3 - 8/10 / 2020 Direct Material cost $ 480,000 $520,000 Direct Labor Cost 68,00072,000 Direct labor Hours 1,020 1,220 The 2020 actual indirect costs were $12,614,000 and the actual direct labor were 190,000.
Required:
(A) Compute the budgeted and actual indirect cost rates and provide an explar the variations (if any)
(B) What are the job costs of Al Jurf Pearl and RAK Appex under? i. normal costing, and ii. Actual costing.
(C) What is the suitable pricing of both jobs under actual costing, provided that mark - up was 18 %?
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Answer:
Requirement (A)
Budgeted indirect cost rate = budgeted indirect cost / budgeted direct labor hours
= $10,000,000 / 175,000 hours = $ 57 per direct labor hours.
Actual indirect cost rate = actual indirect cost / actual direct labor hours
= $ 12,614,000 / 190,000 hours = $ 66 per direct labor hour.
Both the budgeted indirect cost rate and actual indirect cost rate differs because both the numerators and denominators in the two calculations are different. In case of budgeted indirect cost rate it is based on budgeted labor rates whereas in case of actual indirect cost rate it is based upon actual labor rates.
Requirement (B)
i. Job costs of Al Jurf Pearl and RAK Appex using normal costing is as follow :-
| Particulars | Al Jurf Pearl | RAK Appex |
| Direct material cost | $ 480,000 | $ 520,000 |
| Direct labor cost | $ 68,000 | $ 72,000 |
| Total of direct cost | $ 548,000 | $ 592,000 |
| Indirect costs | $ 58,140 ($ 57 X 1020) | $ 69,540 ($ 57 X 1220) |
| Total costs as per normal capacity | $ 606,140 | $ 661,540 |
ii. Job cost of Al Jurf Pearl and RAK Appex using actual costing is as follows :-
| Particulars | Al Jurf Pearl | RAK Appex |
| Direct material cost | $ 480,000 | $ 520,000 |
| Direct labor cost | $ 68,000 | $ 72,000 |
| Total of direct cost | $ 548,000 | $ 592,000 |
| Indirect costs | $ 67,320 ($ 66 X 1020) | $ 80,520 ($ 66 X 1220) |
| Total costs as per normal capacity | $ 615,320 | $ 672,520 |
Requirement (C)
Normal costing enabled Al Sherif to report a job cost as soon as the job is completed, assuming that both the direct material and direct labor cost is known at the time of use. Once the 1020 direct labor hours are known for Al Jurf Pearl , Al Sherif can compute the $ 606,140 cost figure using normal costing. Al Sherif can use the information to bid on similar jobs later in the year. On the other hand Al Sherif has to wait till the end of the year to compute the cost of $ 615,320 for Al Jurf Pearl using actual costing. Hence the suitable pricing method will be normal costing method.
