Question

Characteristics of Production Process, Cost Measurement

Vince Melders, of EcoScape 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. EcoScape estimated the following for the year:

Number of direct labor hours	6,720
Direct labor cost	$67,200
Overhead cost	$50,400

During the year, the following actual amounts were experienced:

Number of direct labor hours	6,045
Direct labor incurred	$66,495
Overhead incurred	$50,500

Vince Melders, owner of EcoScape, noticed that the watering systems for many houses in a local subdivision had the same layout and required virtually identical amounts of prime cost. Vince met with the subdivision builders and offered to install a basic watering system in each house. The idea was accepted enthusiastically, so Vince created a new company, Irrigation Specialties, to handle the subdivision business. In its first three months in business, Irrigation Specialties experienced the following:

June	July	August
Number of systems installed	48	68	88
Direct materials used	$14,976	$21,216	$27,456
Direct labor incurred	$9,984	$14,144	$18,304
Overhead	$8,985.60	$9,900.80	$10,982.40

Required:

1. Should Irrigation Specialties use process costing or job-order costing?

2. If Irrigation Specialties uses an actual costing system, what is the cost of a single system installed in June? In July? In August? Round your answers to the nearest dollar.

June	$ per system
July	$ per system
August	$ per system

3. Now assume that Irrigation Specialties uses a normal costing system. Estimated overhead for the year is $47,500, and estimated production is 500 watering systems. What is the predetermined overhead rate per system?

$ per system installed

What is the cost of a single system installed in June? In July? In August?

June	$ per system
July	$ per system
August	$ per system

Answer 1

1. Irrigation Specialties should use Job costing rather than process costing because through job costing, cost of completion of each job can be calculated and accordingly pricing can be done for each job.

2. Computation of Cost per System
Particular	June	July	August
Direct Material	$14,976.00	$21,216.00	$27,456.00
Direct Labour	$9,984.00	$14,144.00	$18,304.00
Overhead	$8,985.60	$9,900.80	$10,982.40
Total Cost (a)	$33,945.60	$45,260.80	$56,742.40
No. of System installed (b)	48	68	88
Cost per System (a/b)	$707.20	$665.60	$644.80

3. Predetermined Overhead Rate = Estimated Manufacturing Overhead/ Allocation Base

'47500/ 500= $95 per Watering System

Computation of Cost per System
Particular	June	July	August
Direct Material	$14,976.00	$21,216.00	$27,456.00
Direct Labour	$9,984.00	$14,144.00	$18,304.00
Overhead *	$4,560.00	$6,460.00	$8,360.00
Total Cost (a)	$29,520.00	$41,820.00	$54,120.00
No. of System installed (b)	48	68	88
Cost per System (a/b)	$615.00	$615.00	$615.00
*	(48*95)	(68*95)	(88*95)