Question

Allocation Busters (AB) is a dispute mediation firm offering services to firms in disputes about cost allocations with government agencies. For March, AB worked 448 hours for Massive Airframes and 666 hours for Gigantic Drydocks. AB bills clients at the rate of $500 per hour; labor cost for its professional staff is $210 per hour. Overhead costs in March totaled $40,890. Overhead is applied to clients at $40 per labor-hour. In addition, AB had $198,800 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

Journals
	Particulars		Debit	Credit
a) i)	Labor Payroll		233940
	To Accounts Payable			233940
ii)	Work in Process		233940
	To Labor Payroll			233940
b)	Work in Process		44560
	To Service Overhead			44560
c)	Accounts Receivable		557000
	To Service Revenue			557000
d)	Service Overhead		40890
	To Accounts Payable			40890

Labor Payroll

Work in Process

Service Overhead

a) i)

233940

a) ii)

233940

a) ii)

233940

d)

40890

b)

44560

b)

44560

Accounts Payable

Accounts Receivable

Service Revenue

d)

40890

a) i)

233940

c)

557000

c)

557000

	Cost of services billed		Applied service OH
					Beginning balance	0	0
Beginning balance	0	0			d	44560	48230	b
c	278500	3670	e		e	3670
					Ending balance	0	0
Ending balance	274830	0

	Income Statement
Particulars	Massive Airframes	Gigantic Drydocks	Total
Hours worked	448	666	1114
Bill Revenue/ hour	500	500	500
Revenue	224000	333000	557000
Labour Cost	210	210	210
Total Labour cost	94080	139860	233940
Overhead	40	40	40
Total Overhead applied	17920	26640	44560
Marketing and Admin			1,98,800
Cost of services billed		4,77,300
Profit			79,700
Add: Over absorption
Actual Service overheads	16444	24446	40890
Overheads absorbed	17920	26640	44560
Over absorption	1476	2194	3670
Profit to company			83,370