Question

Exercise 26. Job costs in a service organization. Loomis and Associates, a CPA firm, uses job costing. During January, the firm provided audit services for two clients and billed those clients for the services performed. Springsteen Productions was billed for 4,000 hours at $100 per hour, and RCI Records was billed for 2,00 hours at $100 per hour. Direct labor costs were $60 per hour. Of the 6,400 hours worked in January, 400 hours were not billable. The firm assigns overhead to jobs at the rate of $20 per billable hour. During January, the firm incurred actual overhead of $140,000. The firm incurred marketing and administrative costs of $20,000. All transactions were on account.

a. Show hoe Loomis and Associates’ accounting system would record these revenues and costs using journal entries.

b. Prepare an income statement for January like the one in Exhibit 2.5.

Answer 1

a.  Journal Entries:

        (1)     Work in Process-Springsteen Produc-

                       tions..................................................................        240,000

                 Work in Process-RCI Records.............................        120,000

                 Direct Labor-Unbillable.......................................          24,000

                     Wages Payable...................................................                           384,000

        (2)     Work in Process-Springsteen Produc-

                       tions..................................................................          80,000

                 Work in Process-RCI Records.............................          40,000

                     Overhead (Applied)...........................................                           120,000

                        (3)     Overhead                                                                        140,000

                     Wages and Accounts Payable............................                           140,000

       

        (4)     Marketing and Administrative Costs                               20,000

                       Wages and Accounts Payable...........................                             20,000

        (5a)   Accounts Receivable                                                      600,000

                       Revenue............................................................                           600,000

        (5b)   Cost of Services Billed                                                   480,000

                     Work in Process-Springsteen Produc-

                           tions..............................................................                           320,000

                     Work in Process-RCI Records........................                           160,000

b.                                        LOOMIS AND ASSOCIATES

                                                      Income Statement

                                        For the Month Ending January 31

        Revenue from Services .....................................................................    $   600,000

        Less Cost of Services Billed..............................................................         480,000

        Gross Margin.....................................................................................    $   120,000

        Less:

            Direct Labor-Unbillable..............................................................           24,000

            Overhead-Underapplied.............................................................           20,000a

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

        Operating Profit.................................................................................    $     56,000

        a$140,000 actual - $120,000 applied.