Question

Exercise 5.7 (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 6,710 Direct labor cost $87,230 Overhead cost $50,325 During the year, the following actual amounts were experienced: Number of direct labor hours 6,030 Direct labor incurred $84,420 Overhead incurred $50,049.00 Required: 1. Should EcoScape use process costing or job-order costing? - Select your answer -Process costingJob-order costingItem 1 2. If EcoScape uses a normal costing system and overhead is applied on the basis of direct labor hours, What is the overhead rate? Round your answer to the nearest cent. $  per direct labor hour What is the average actual wage rate? $  per direct labor hour What is the cost of an installation that takes $3,240 of direct materials and 20 direct labor hours? $

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1. Job-order costing system accumulates costs by job. The key feature of this costing system is that the cost of one job differs from that of another job and must be monitored separately. Process costing system is used when units are homogenous, or massed produced.

2. Predetermined OH rate = budgeted OH costs ÷ budgeted amount of driver

Average wage rate = Direct labor used ÷ direct labor hours

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Answer 1

(1). EcoScape should use job-order costing because in case of job-order costing costs can be specifically identified with each job and it is given in the question that EcoScape Company, designs and installs custom lawn and garden irrigation systems for homes and businesses throughout the state that is why this company should use job-order costing and not should use process costing.

(2).

Predetermined overhead rate = Total estimated overhead costs / Estimated direct labor hours

Total estimated overhead costs = $50325

Estimated direct labor hours = 6710

Thus, Predetermined overhead rate ($50325 / 6710) = $7.50 per direct labor hour

(3).

Average actual wage rate = Actual labor costs / Actual direct labor hours

Actual labor costs = $84420

Actual direct labor hours = 6030

Thus, Average actual wage rate ($84420 / 6030) = $14 per direct labor hour

(4). Cost of installation = $3670

Explanation;

Cost of installation will be calculated as follow;

Direct material costs	$3240
Direct labor costs (20 * $14)	$280
Overhead costs (20 * $7.50)	$150
Cost of installation	$3670