In: Accounting
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 $64,600, 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 |
Solution 1:
As watering system to be installed at every house is identical and requires same amount of prime cost then Irrigation Specialties should use process costing.
Solution 2:
Computation of cost of single system - Actual Costing - Irrigation Specialities | |||
Particulars | June | July | August |
Direct materials | $14,976.00 | $21,216.00 | $27,456.00 |
Direct labor | $9,984.00 | $14,144.00 | $18,304.00 |
Overhead | $8,985.60 | $9,900.80 | $10,982.40 |
Total Costs | $33,945.60 | $45,260.80 | $56,742.40 |
Nos of system installed | 48 | 68 | 88 |
Cost per system | $707 | $666 | $645 |
Solution 3:
Predetermined overhead rate per system = Estimated overhead / Estimated water system
= $64,600 / 680 = $95 per system
Solution 4:
Computation of cost of single system - Actual Costing - Irrigation Specialities | |||
Particulars | June | July | August |
Direct materials | $14,976.00 | $21,216.00 | $27,456.00 |
Direct labor | $9,984.00 | $14,144.00 | $18,304.00 |
Overhead applied | $4,560.00 | $6,460.00 | $8,360.00 |
Total Costs | $29,520.00 | $41,820.00 | $54,120.00 |
Nos of system installed | 48 | 68 | 88 |
Cost per system | $615.00 | $615.00 | $615.00 |