Question

Khadka Manufacturing manufactures work benches for local and domestic markets. Materials and labour used in the manufacturing process are directly allocated to different jobs as the company uses a job costing system. Costs incurred in the manufacturing support department are indirect in nature and allocated to different jobs on the basis of direct labor-hours. Khadka estimates 2019 manufacturing-support costs to be $1,700,000 and 2019 direct labor-hours to be 50,000.

At the end of 2019, Khadka collects the cost-related data of different jobs that were started and completed in 2019 for comparison. They are as follows:

	Iron benches	Wooden benches
Production period	Jan-May 2019	May-Sept 2019
Direct material costs	$39,145	$47,325
Direct labour costs	$12,723	$16,376
Direct labour-hours	420	480

Direct materials and direct labour are paid for on a contractual basis. The costs of each are known when direct materials are used or when direct labour hours are worked. The 2019 actual manufacturing-support costs were $1,785,000 and the actual direct labour-hours were 51,000.

Required:

1. Compute the budgeted indirect-cost rate and the actual indirect-cost rate.
2. What are the job costs of the Iron benches and the Wooden benches using normal costing and actual costing?
3. Why might the managers of Khadka Manufacturing prefer to use normal costing?

Answer 1

a.   ( Values In $ )

Calculation of Indirect Cost Rate
Particulars	Budgted	Actual
Support Cost	1700000	1785000
Labour Hours	50000	51000
Indirect Cost Rate
(Support Cost / Labour Hours)	34	35

b.    ( Values In $ )

Statement of Job Cost ( Iron Benches)
Particulars	Normal Costing	Actual Costing
Direct Material Cost	39145	39145
Direct Labour Cost	12723	12723
Indirect Support Cost	14280	14700
	(420*34)	(420*35)
Total Cost	66148	66568
Statement of Job Cost ( Wooden Benches)
Particulars	Normal Costing	Actual Costing
Direct Material Cost	47325	47325
Direct Labour Cost	16376	16376
Indirect Support Cost	16320	16800
	(480*34)	(480*35)
Total Cost	80021	80501

c. Manager of Khadaka prefer normal costing over actual costing since it is pre determined on the basis of budgted working. Actual cost generally appeared after the production which is not feasible in quoating offer price of product.