Question

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	6,870
Direct labor cost	$82,440
Overhead cost	$55,647

During the year, the following actual amounts were experienced:

Number of direct labor hours	6,130
Direct labor incurred	$79,690
Overhead incurred	$54,134.03

Required:

1. Should EcoScape use process costing or job-order costing?

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 $3,390 of direct materials and 10 direct labor hours?

$_____

Answer 1

1.

Since Each job is different, requiring different materials and labor for installing the systems, hence EcoScape should use job-order costing.

2.

Overhead rate = Estimated overhead cost/Estimated direct labor hours

= 55,647/6,870

= $8.1 per direct labor hour

3.

average actual wage rate = Direct labor incurred/Number of direct labor hours

= 79,690/6,130

= $13

4.

Overhead applied to the job = Actual direct labor hours used x Overhead rate

= 10 x 8.1

= $81

Direct materials	3,390
Direct labor cost (10 x 13)	130
Applied overhead	81
Total cost	$3,601

cost of installation = $3,601