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Jo Company: Prime cost of boat, normal cost, actual cost, di

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Jo Company builds boats, including the "Ark Royal", a fishing boat which required $100,000 of materials and 450 hours of direct labor at $20 per hour. During the period the boat was built, Jo paid $400,000 to rent the shipyard where the boats, and others, were built and paid or incurred $100,000 in other production cost. At the beginning of the period, Jo estimated total factory overhead for the period as $450,000 and estimated 8,000 total direct labor hours would be worked during the period.

What is the prime cost of the boat?
What is the normal cost of the boat?
What is the actual cost of the boat?
Why is the normal cost different from the actual cost ?
Why is normal cost instead of actual cost used to record the sale of the boat?

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Each question is answered in everyday language with a sentence or two.

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What is the prime cost of the boat?

Prime costs are direct costs - that is, direct material and direct labor. So, the prime costs are the $100,000 plus the 450 x $20 of labor costs = $9,000 for a total of $109,000.

What is the normal cost of the boat?

Normal cost uses the predetermined overhead rate, that is, the expected overhead at the beginning of the period. The rate ...

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