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: During the year, the following actual amounts were experienced:

Number of direct labor hours = 6720

Direct labor cost = 67,200

Overhead cost = 50,400

During the year the following actual amounts were experienced

number of direct labor hours = 6045

Direct labor incurred = 66,495

Overhead incurred = 50,500

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 $3,500 of direct materials and 20 direct labor hours?

$

Answer 1

Solution 1:

As EcoScape Company, designs and installs custom lawn and garden irrigation systems for homes and businesses throughout the state and each job is different, requiring different materials and labor for installing the systems, therefore Ecoscape should use Job order costing rather than process costing. As each job requries different labor and material therefore job pricing should be done on the basis of estimated cost to be incurred on particular job. Therefore job order costing should be used.

Solution 2:

Overhead rate = Estimated overhead / Estimated direct labor hours

= $50,400 / 6720 = $7.50 per hour

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

= $66,495 / 6045 = $11 per hour

Cost of an installation = Direct material cost + Direct labor cost + Applied overhead

= $3,500 + 20*$11 + 20*$7.50

= $3,870