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17/11/2017 09:44:25 PM

Normal Costing for A Service-Sector

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 budgetedrates 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.

To illustrate this for Dona and Associates, a public accounting firm. For 2017, Dona 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.

Budgeted direct-labor cost rate

=

Budgeted total direct labor costs

Budgeted total direct labor hours

 

Budgeted direct-labor cost rate

=

$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
 

At the end of the fiscal year, the direct costs traced to jobs using budgeted rates will generally not equal actual direct costs because the actual rate and the budgeted rate are developed at different times using different information. End-of-year adjustments for under- or overallocated direct costs would need to be made in the same way that adjustments are made for under- or overallocated indirect costs.

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