Question

Why might a company use budgeted costs rather than actual costs to compute direct labor rates?

1) Because it may be difficult to trace direct labor costs to jobs as they are completed
2) Because bonuses are only known at the end of the year
3) Because budgeted costs are more accurate than actual costs
4) Because budgeted costs are easier to calculate than actual costs

Answer 1

A company might use budgeted costs rather than actual costs to compute direct labor rates for several reasons. First, 1) it may be difficult to trace direct labor costs to jobs as they are completed.

Step-by-step explanation:

A company might use budgeted costs rather than actual costs to compute direct labor rates for several reasons.

First, it may be difficult to trace direct labor costs to jobs as they are completed. Actual costs can be complex and time-consuming to allocate accurately to specific projects or products. Budgeted costs, on the other hand, are estimated in advance and can provide a more straightforward basis for calculating direct labor rates.

Second, bonuses are typically determined at the end of the year based on the company's overall performance. Using budgeted costs allows the company to calculate direct labor rates in a way that aligns with their annual bonus structure.

Third, budgeted costs can be more reliable and accurate than actual costs. Actual costs may be subject to variances due to factors such as unexpected changes in labor or materials prices. Budgeted costs, based on careful planning and forecasting, can provide a more stable foundation for calculating direct labor rates.