Cost Accounting (14th Edition)

122 CHAPTER 4 JOB COSTING
because goods are often made in response to customer orders. Consequently, as is true in
our Robinson example, writing off, instead of prorating, under- or overallocated overhead
is unlikely to result in significant distortions in financial statements.
The Robinson Company illustration assumed that a single manufacturing overhead cost
pool with direct manufacturing labor-hours as the cost-allocation base was appropriate for
allocating all manufacturing overhead costs to jobs. Had Robinson used multiple costallocation
bases, such as direct manufacturing labor-hours and machine-hours, it would have
created two cost pools and calculated two budgeted overhead rates: one based on direct manufacturing
labor-hours and the other based on machine-hours to allocate overhead costs to
jobs. The general ledger would contain Manufacturing Overhead Control and Manufacturing
Overhead Allocated amounts for each cost pool. End-of-year adjustments for under- or overallocated
overhead costs would then be made separately for each cost pool.
Variations from Normal Costing:
A Service-Sector Example
Learning
Objective 8
Apply variations from
normal costing
. . . variations from
normal costing use
budgeted directcost
rates
Job costing is also very useful in service industries such as accounting and consulting
firms, advertising agencies, auto repair shops, and hospitals. In an accounting firm, each
audit is a job. The costs of each audit are accumulated in a job-cost record, much like the
document used by Robinson Company, based on the seven-step approach described earlier.
On the basis of labor-time sheets, direct labor costs of the professional staff—audit
partners, audit managers, and audit staff—are traced to individual jobs. Other direct
costs, such as travel, out-of-town meals and lodging, phone, fax, and copying, are also
traced to jobs. The costs of secretarial support, office staff, rent, and depreciation of furniture
and equipment are indirect costs because these costs cannot be traced to jobs in an
economically feasible way. Indirect costs are allocated to jobs, for example, using a costallocation
base such as number of professional labor-hours.
In some service organizations, a variation from normal costing is helpful because
actual direct-labor costs—the largest component of total costs—can be difficult to trace to
jobs as they are completed. For example, in our audit illustration, the actual direct-labor
costs may include bonuses that become known only at the end of the year (a numerator
reason). Also, the hours worked each period might vary significantly depending on the
number of working days each month and the demand from clients (a denominator reason).
In situations like these, a company needing timely information during the progress
of an audit (and not wanting to wait until the end of the fiscal year) will use budgeted
rates for some direct costs and budgeted rates for indirect costs. All budgeted rates are calculated
at the start of the fiscal year. In contrast, normal costing uses actual cost rates for
all direct costs and budgeted cost rates only for indirect costs.
The mechanics of using budgeted rates for direct costs are similar to the methods
employed when using budgeted rates for indirect costs in normal costing. We illustrate
this for Donahue and Associates, a public accounting firm. For 2011, Donahue budgets
total direct-labor costs of $14,400,000, total indirect costs of $12,960,000, and total
direct (professional) labor-hours of 288,000. In this case,
Budgeted direct-labor
cost rate
Budgeted total direct-labor costs
=
Budgeted total direct-labor hours
=
$14,400,000
= $50 per direct labor-hour
288,000 direct labor-hours
Assuming only one indirect-cost pool and total direct-labor costs as the cost-allocation base,
Budgeted indirect
cost rate
Budgeted total costs in indirect cost pool
=
Budgeted total quantity of cost-allocation base (direct-labor costs)
= $12,960,000 = 0.90, or 90% of direct-labor costs
$14,400,000
Suppose that in March 2011, an audit of Hanley Transport, a client of Donahue, uses
800 direct labor-hours. Donahue calculates the direct-labor costs of the Hanley Transport
audit by multiplying the budgeted direct-labor cost rate, $50 per direct labor-hour, by