Question

Job Order Cost Accounting for a Service Company

The law firm of Furlan and Benson accumulates costs associated with individual cases, using a job order cost system. The following transactions occurred during July:

July 3.	Charged 700 hours of professional (lawyer) time to the Obsidian Co. breech of contract suit to prepare for the trial, at a rate of $190 per hour.
10.	Reimbursed travel costs to employees for depositions related to the Obsidian case, $17,000.
14.	Charged 280 hours of professional time for the Obsidian trial at a rate of $290 per hour.
18.	Received invoice from consultants Wadsley and Harden for $74,500 for expert testimony related to the Obsidian trial.
27.	Applied office overhead at a rate of $70 per professional hour charged to the Obsidian case.
31.	Paid administrative and support salaries of $48,700 for the month.
31.	Used office supplies for the month, $16,500.
31.	Paid professional salaries of $189,400 for the month.
31.	Billed Obsidian $426,500 for successful defense of the case.

a. Provide the journal entries for each of these transactions. If an amount box does not require an entry, leave it blank.

July 3	Work in Process
	Salaries Payable
July 10	Work in Process
	Cash
July 14	Work in Process
	Salaries Payable
July 18	Work in Process
	Consultant Fees Payable
July 27	Work in Process
	Office Overhead
July 31 Admin. sal.	Office Overhead
	Cash
July 31 Supplies	Office Overhead
	Supplies
July 31 Prof. sal.	Salaries Payable
	Cash
July 31 Billed	Accounts Receivable
	Fees Earned
July 31 Cost	Cost of Services
	Work in Process

Feedback

a. Record the direct costs in Work in Process.
Apply the overhead based on professional hours.
Record actual overhead in the Office Overhead account. For cases completed, move the costs from Work in Process to Cost of Services.

b. How much office overhead is over- or underapplied? Enter your answer as a positive number.
$  

c. Determine the gross profit on the Obsidian case, assuming that over- or underapplied office overhead is closed monthly to cost of services.
$

Answer 1

Answer :-

a) Journal entries to record the transaction are as follows :-

Date	Account Title and Explanation	Debit	Credit
July 3	Work in Process	$133,000
	Salaries Payable		$133,000
	(700 hours of professional time × $190 per hour)
July 10	Work in Process	$17,000
	Cash		$17,000
July 14	Work in Process	$81,200
	Salaries Payable		$81,200
	(280 hours of professional time × $290 per hour )
July 18	Work in Process	$74,500
	Consultant Fees Payable		$74,500
July 27	Work in Process	$68,600
	Office Overhead		$68,600
	( Total Professional time = 700 hours + 280 hrs = 980 hrs Overhead = 980 hrs × $70 per professional hrs )
July 31 Admin. sal.	Office Overhead	$48,700
	Cash		$48,700
July 31 Supplies	Office Overhead	$16,500
	Supplies		$16,500
July 31 Prof. sal.	Salaries Payable	$189,400
	Cash		$189,400
July 31 Billed	Accounts Receivable	$426,500
	Fees Earned		$426,500
July 31 Cost	Cost of Services	$374,300
	Work in Process		$374,300
	(Cost of Services = $133,000 + $17,000 + $81,200 + $74,500 + $68,600 )

b) Applied overhead = $68,600

Actual Overhead = Administrative and support salaries + Office supplies

Actual Overhead = $48,700 + $16,500 = $65,200

When Actual overhead is less than Applied overhead , then overhead is overapplied overhead.

Over applied Overhead = $ 68,600 - $65,200

Over Applied overhead = $3,400

c) Gross Profit = Service fee earned - ( Cost of Service - Over Applied Overhead)

Gross Profit = $426,500 - ( $374,300 - $3,400)

Gross Profit = $55,600