Question

Exercise 5.8 (Algorithmic) 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 68 88 108 Direct materials used $21,216 $27,456 $33,696 Direct labor incurred $14,144 $18,304 $22,464 Overhead $12,729.60 $12,812.80 $13,478.40 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 $46,800, and estimated production is 520 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. Job Order Costing because it's possible to identiify the cost incurred on particular Job

2. Computation of Cost per Job
Particular	June	July	Aug
Direct Material	21,216.00	27,456.00	33,696.00
Direct Labour	14,144.00	18,304.00	22,464.00
Overhead	12,729.60	12,812.80	13,478.40
Total Cost (a)	48,089.60	58,572.80	69,638.40
No. of System installed (b)	68	88	108
Cost per System (a/b)	707.20	665.60	644.80

3. Predetermied Overhead Rate= Estimated Manufacturing OH/ Estimated No. System

=$46800/520= $90 per System

4. Compuation of Cost per Job
Particular	June	July	Aug
Direct Material	21,216.00	27,456.00	33,696.00
Direct Labour	14,144.00	18,304.00	22,464.00
Overhead(68X 90), (88X90), (108X90)	6,120.00	7,920.00	9,720.00
Total Cost (a)	41,480.00	53,680.00	65,880.00
No. of Systme installed (b)	68	88	108
Cost per System (a/b)	610.00	610.00	610.00