Jeff Boyer, of Rainking 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. Rainking estimated the following for the year:
Number of installations ........ 250
Number of direct labor hours ....... 5,000
Direct materials cost ......... $60,000
Direct labor cost ............ $75,000
Overhead cost ............. $65,000
During the year, the following actual amounts were experienced:
Number of installations ....... 245
Number of direct labor hours ..... 5,040
Direct materials used ........ $59,350
Direct labor incurred ........ $75,600
Overhead incurred ......... $64,150
Required:
1. Should Rainking use process costing or job-order costing? Explain.
2. If Rainking uses a normal costing system and overhead is applied on the basis of direct labor hours, what is the cost of an installation that takes $3,500 of direct materials and 50 direct labor hours?
3. Explain why Rainking would have difficulty using an actual costing system.