Question

5.  Allocation Busters (AB) is a dispute mediation firm offering services to firms in disputes about cost allocations with government agencies. For March, AB worked 445 hours for Massive Airframes and 661 hours for Gigantic Drydocks. AB bills clients at the rate of $503 per hour; labor cost for its professional staff is $220 per hour. Overhead costs in March totaled $40,370. Overhead is applied to clients at $44 per labor-hour. In addition, AB had $199,800 in marketing and administrative costs. All transactions are on account. All services were billed.

Transaction	Description
(a)	Record Labor cost
(b)	Record Applied Service Overhead
(c)	Record Cost of services billed
(d)	Record Actual Service Overhead

Required:

a. Show labor and overhead cost flows through T-accounts.

b. Prepare an income statement for the company for March.

Answer 1

Solution a:

Labor Cost
Particulars	Debit	Particulars	Credit
To Wages Payable [(445+661) * $220]	$243,320.00	Cost of services	$243,320.00
Total	$243,320.00	Total	$243,320.00

Overhead
Particulars	Debit	Particulars	Credit
To Accounts payable (Overhead incurred)	$40,370.00	Cost of services (Overhead applied) (1106*$44)	$48,664.00
Cost of services (Overapplied overhead)	$8,294.00
Total	$48,664.00	Total	$48,664.00

Cost of Services
Particulars	Debit	Particulars	Credit
Labor Cost	$243,320.00	Overapplied overhead	$8,294.00
Overhead applied	$48,664.00	Income Summary	$283,690.00
Total	$291,984.00	Total	$291,984.00

Solution b:

Income Statement
Particulars	Amount
Service revenue (1106 * $503)	$556,318.00
Cost of services	$283,690.00
Gross Margin	$272,628.00
Marketing and administrative cost	$199,800.00
Net Income	$72,828.00