Question

Berry Company is an architectural firm located in Toronto, Ontario. The company works with small and medium-size construction businesses to prepare building plans according to client contract. Berry employs 10 professionals and 5 staff. The following data are provided for last year:

Number of designs completed and sold                      700

Beginning inventory of direct materials                $20,000

Beginning inventory of designs in process          $60,000

Ending inventory of direct materials                                 $0

Ending inventory of designs in process                $100,000

Purchases, direct materials                                    $40,000

Direct labour                                                             $800,000

Manufacturing overhead                                         $100,000

Administrative expense                                           $150,000

Selling expense                                                        $60,000

Required:

1. Calculate the cost of services sold.

2. Assume that the average fee for a design is $2,100 Prepare an income statement for Berry Company.

3. Refer to the cost of services sold (calculated in Requirement 1). What is the dominant cost Will this always be true of service organizations? If not, provide an example of an exception

4. Why does Berry Company show zero inventory of finished plans? What change(s) in the company could result in a positive finished goods inventory?

Answer 1

1)

Statement of Cost of Services sold
Beginning WIP		60,000
Direct Material
Material Inventory Beginning	20,000
Plus: Purchases	40,000
Total Material Available	60,000
Minus: Ending Material Inventory	0
Material Consumed	60,000	60,000
Direct labor		800,000
Manufacturing OH		100,000
Total Cost of manufacturing		1,020,000
Minus: Ending WIP		100,000
Cost of Services sold		920,000

2)

Income Statement
Revenue @ $2,100 per design		1,470,000
Minus: Cost of services sold		920,000
Gross Margin		550,000
Other Expenses
Selling expenses	60,000
Administrative expense	150,000
Total expenses		210,000
Net Income		340,000

3) The calculations in Requirement-1 disclose that in the total cost the most dominating cost is direct labor because contributes approximately 80% of the total cost.

No in my opinion this cost will not always be dominant of a service organization. For example in telecom services, majority of the cost would consist of equipment expenditure and thus direct labor may not be be the dominating cost

4) Berry Company reflected zero inventory of finished plans to ensure that it order the exact quantity that will be sold, and receipt items into stock when they it is required. A positive finished goods inventory can be achieved when the closing inventories exceeds the opening inventories thus has more purchases