Question

Budget for date X Professional labor compensation $990.000

Audit support department cost $774.000

Professional labor-hours billed to client 18.000 hours

Actual results for date X

Audit support department costs 735.000

Professional labor hours billed to clients 17.500

Actual professional labor cost rate $59 per hours

Audit of this firm was budgeted to take 150 hours of professional labor time. The actual professional labor time spent 160 hours.Compute the cost of audit using a)actual costing b)normal costing c)the variation from normal costing that uses budgeted rates for direct costs. Explain any differences in the job cost

Answer 1

The cost of audit will be the sum total of direct cost and indirect cost

The following information will be required to calculate the total cost

• The actual direct cost per hour of professional labor is $59
• The actual indirect cost per hour of audit support staff is calculated below

Actual indirect cost = actual Audit support department costs / Professional labor hours billed to clients

= $735000 /17500

=$42 /hour

• The budgeted direct cost per hour of professional labor is calculated below

budgeted direct cost per hour = budgeted Professional labor compensation/ budgeted Professional labor-hours billed to client

=$990000/18000

=$55/hour

• The budgeted indirect cost per hour of audit support staff is calculated below

Budgeted indirect cost = budgeted Audit support department costs / budgeted Professional labor hours billed to clients

=$774000/18000

=$43/hour

• For calculation cost of audit actual time spent is audit is taken which is 160 hours

The cost of audit under three different methods are calculated below

	Actual costing			Normal costing				Variation of normal costing
	actual rate	actual audit hours	amount($)	actual rate	Budgeted rate	actual audit hours	amount($)	Budgeted rate	actual audit hours	amount($)
	A	B	C= A x B					D	E	F=D x E
Direct costs	59	160	9440	59		160	9440	55	160	8800
Indirect costs	42	160	6720		43	160	6880	43	160	6880
Total costs			16160				16320			15680

In calculation in all three methods for cost of audit the actual time spend in audit of 160 hours is taken . in actual costing the actual rate per hour for direct cost is higher than budgeted cost by $4 per hour and indirect cost is taken which is lower than budgeted cost by $1 per hour the total cost is $3 per hour higher than budgeted total cost hence the total cost of audit in actual costing is higher at $16,160 than variation from normal costing which is $15,680

The total cost is highest at normal costing because direct cost rate per hour is taken at actual which are $59/hour and budgeted cost of indirect cost rate at $43 and the total cost is $16,320

It shows that budgeted cost of direct cost per hour is assumed at lower rate per hour and has to looked into further