I have to know how to compute a budgeted indirect cost rate. I have no clue what they are talking about. Can someone just show me how a budgeted indirect cost rate goes? I have the other information but just need to know how to put it together. Thanks~

First separate all costs into either direct or indirect costs. The indirect costs become part of a "pool" to be allocated based on a set proportion or rate.

This is commonly done based on the direct costs. For example, it one dept/program/etc has $2000 in direct costs, another has $1000, and the indirect costs are $600, the indirect cost rate is set at 600/3000 to find the rate.

Job costing, normal and actual costing. Anderson Construction assembles residential houses. It uses a job-costing system with two direct-cost categories (direct materials and direct labor) and one indirect-cost pool (assembly support). Direct labor-hours is the allocation base for assembly support costs. In December 2006, Anderson budgets 2007 assembly-support costs to be $8,000,000 and 2007 direct labor-hours to be 160,000.
At the end of 2007, Anderson is comparing the costs of several jobs that were started and completed in 2007.

Laguna Model Mission Model
Construction period Feb–June 2007 May–Oct 2007
Direct materials $106,450 $127,604
Direct labor $36,276 $41,410
Direct labor-hours 900 1,010

Direct materials and direct labor are paid for on a contract basis. The costs of each are known when direct
materials are used or when direct labor-hours are worked. The 2007 actual assembly-support costs were $6,888,000, and the actual direct labor-hours were 164,000.

1. Compute the (a) budgeted indirect-cost rate
Budgeted indirect cost rate




Indirect Costs (Pool):

Labor costs- $36,276 + $41,410=

Direct materials costs-$106,450 +127,604=



Total Services: $






(b) actual indirect-cost rate.
Why do they differ?

The budgeted indirect cost rate is 8,000,000/160,000 or $50 per hour. In other words, for every hour of direct labor on a project's budget, those hours times $50/hour are allocated to the project's budget in indirect costs. At the time this was established, this was the company's best estimate of how many hours it would take to produce the estimated amount of work. They would base this on previous history and estimates of jobs they might do in the current year.

In actuality, they had a cost of 6,888,000/164,000 hours or a rate of $42.

For whatever reasons they did not do as much work as estimated or the costs were less than expected. This is very common right now as construction has slowed down and costs have become more competitive. It appears they did the work very efficiently, compared to their expected budget. You can see this by noticing that 160,000 hours were expected to correlate to $8,000,000 in costs, but instead 164,000 hours (higher number of hours) correlated to $6,888,000 (a lower cost).

Am I answering your question for you? If not, please ask. I've done a lot of construction accounting in my career.

That does make sense. Thank you so much for taking the time to help me. I totally get it now~