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	$12,096	$17,136	$22,176
Direct labor incurred	$8,064	$11,424	$14,784
Overhead	$7,257.60	$7,996.80	$8,870.40

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 $57,800, and estimated production is 680 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

Solution 1:

As watering system to be installed in each house is identical, therefore  Irrigation Specialties use process costing.

Solution 2:

Computation of cost of single system - Actual Costing - Irrigation Specialities
Particulars	June	July	August
Direct materials	$12,096.00	$17,136.00	$22,176.00
Direct labor	$8,064.00	$11,424.00	$14,784.00
Overhead	$7,257.60	$7,996.80	$8,870.40
Total Costs	$27,417.60	$36,556.80	$45,830.40
Nos of system installed	48	68	88
Cost per system	$571	$538	$521

Solution 3:

Overhead rate per system = Estimated overhead / Estimated system installed = $57,800 / 680 = $85 per system

Computation of cost of single system - Actual Costing - Irrigation Specialities
Particulars	June	July	August
Direct materials	$12,096.00	$17,136.00	$22,176.00
Direct labor	$8,064.00	$11,424.00	$14,784.00
Overhead applied	$4,080.00	$5,780.00	$7,480.00
Total Costs	$24,240.00	$34,340.00	$44,440.00
Nos of system installed	48	68	88
Cost per system	$505.00	$505.00	$505.00