Question

Crafty ideas, an advertising firm, uses job costing. During March, the firm designed ads for two clients and billed those clients for the services performed. Crafty ideas billed Franklin groceries for $100,000 and Truman Trust for $200,000. Direct labor costs were $50 per hour. Crafty ideas worked 1,000 hours on the Franklin job and 2,000 hours on the truman trust job. The firm could not charge 300 hours to either job. The firm assigns overhead to jobs at the rate of $20 per billable hour. During March, the firm incurred actual overhead of $70,000. The firm incurred marketing and administrative costs of $20,000. All transactions were on account.

a. Show the flow of of these revenues and costs through T-accounts.

b. Prepare an income statement for March

c. Were these two jobs profitable?

Answer 1

Solution:

Entries: (1) Labor costs at $50 per hour.

(2) Overhead at $20 per billable hour.

(3) Overhead actually incurred in March.

(4) Marketing and administrative costs.

(5)

(5a) Franklin Groceries billed for $100,000 and Truman Trust billed for $200,000.

(5b) Cost of services billed: Franklin--$70,000; Truman-- $140,000

b. CRAFTY IDEAS

Income Statement

For the Month Ending March 31

Revenue from Services ................................................................. $ 300,000

Less Cost of Services Billed ............................................................. 210,000

Gross Margin................................................................................... $ 90,000

Less: Direct Labor—Unbillable......................................................... 15,000

Overhead—Under-applied............................................................... 10,000a

Marketing and Administrative............................................................ 20,000

Operating Profit.............................................................................. $ 45,000

a$10,000 = $70,000 actual overhead incurred – $60,000 applied to jobs and expensed as part of the cost of services billed.

c. Franklin has a gross margin of $30,000 and Truman has a gross margin of $60,000. Since they seems to be equally profitable, the ratio of gross margin to revenue is the same 30% for both. If we had to choose between Franklin and Truman, we would choose Truman because it generates the highest total gross margin.