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Creative Solutions should choose a job-costing system based on the direct cost information available to them.Creative Solutions can use knowledge of job costs for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the success of the job, learning about what did and did not work, bidding on new jobs, and preparing interim financial statements.Normal costing enables Creative Solutions to use the budgeted indirect cost rate calculated at the beginning of the year to estimate the cost of a job as soon as the job is completed.If Creative Solutions does not know direct costs as the jobs are being completed, I would recommend that Creative Solutions use the variation of normal costing that calculates a budgeted direct cost rate.
Creative Solutions should choose a job-costing system based on the direct cost information available to them. If Creative Solutions knows direct costs as the jobs are being done, I would recommend Creative Solutions use normal costing over actual costing by calculating a budgeted indirect cost rate to cost jobs. Normal costing enables Creative Solutions to use the budgeted indirect cost rate calculated at the beginning of the year to estimate the cost of a job as soon as the job is completed. Creative Solutions can use knowledge of job costs for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the success of the job, learning about what did and did not work, bidding on new jobs, and preparing interim financial statements. Under actual costing, Creative Solutions would only determine the cost of a job at the end of the year when actual indirect costs are known. To be useful, of course, the budgeted indirect cost rate and the allocated costs need to reasonably approximate the actual indirect cost rate and the actual costs.
If Creative Solutions does not know direct costs as the jobs are being completed, I would recommend that Creative Solutions use the variation of normal costing that calculates a budgeted direct cost rate. This would allow Creative Solutions to estimate costs on a more-timely basis and gain all the benefits discussed earlier in the context of indirect costs. However, if Creative Solutions does use the variation of normal costing, it needs to continue to do a good job of estimating the budgeted direct cost rate. Currently, the budgeted direct cost rate ($26) is very close to the actual rate of $25 per direct labor-hour.
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