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4-8Two reasons for using an annual budget period are4-1
4-9Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates:ActualCostingNormalCostingDirect-cost ratesIndirect-cost ratesActual ratesActual ratesActual ratesBudgeted ratesEach costing method uses the actual quantity of the direct-cost input and the actual quantity ofthe cost-allocation base.4-10A house construction firm can use job cost information (1) to determine the profitabilityof individual jobs, (2) to assist in bidding on future jobs, and (3) to evaluate professionals whoare in charge of managing individual jobs.4-11The statement is false. In a normal costing system, the Manufacturing Overhead Controlaccount will not, in general, equal the amounts in the Manufacturing Overhead Allocatedaccount. The Manufacturing Overhead Control account aggregates the actual overhead costsincurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basisof a budgeted ratetimes the actual quantity of the cost-allocation base.Underallocation or overallocation of indirect (overhead) costs can arise because of (1) theNumerator reason––the actual overhead costs differ from the budgeted overhead costs, or (2) theDenominator reason––the actual quantity used of the allocation base differs from the budgetedquantity.4-12Debit entries to Work-in-Process Control represent increases in work in process.Examples of debit entries under normal costing are (1) direct materials used (credit to MaterialsControl), (2) direct manufacturing labor billed to job (credit to Wages Payable Control), and (3)manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).4-13Alternative ways to make end-of-period adjustments to dispose of underallocated oroverallocated overhead are as follows:(i)Proration based on the total amount of indirect costs allocated (before proration) inthe ending balances of work in process, finished goods, and cost of goods sold(ii)Proration based on total ending balances (before proration) in work in process,finished goods, and cost of goods sold(iii)Year-end write-off to Cost of Goods Sold(iv)The adjusted allocation rate approach that restates all overhead entries using actualindirect cost rates rather than budgeted indirect cost rates4-14A company might use budgeted costs rather than actual costs to compute direct laborrates because it may be difficult to trace direct labor costs to jobs as they are completed (forexample, because bonuses are only known at the end of the year).