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 661 hours for Gigantic Drydocks. AB bills clients at the rate of $514 per hour; labor cost for its professional staff is $210 per hour. Overhead costs in March totaled $40,300. Overhead is applied to clients at $43 per labor-hour. In addition, AB had $200,000 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

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

b. Prepare an income statement for the company for March

Wages Payable Work-In-Process Beg. bal.          Beg. bal.       End. bal. End. bal. Cost of Services Billed Service Overhead Control Beg. bal.    Beg. bal. End. bal. End. bal. Applied Service O.H. Beg. bal. End. bal.

Prepare an income statement for the company for March

ALLOCATION BUSTERS
Income Statement
For the Month Ended March 31

Answer 1

Req A T - Accounts:

WAGES PAYABLE
Beginning balance	0	0
	0	232,890	a(wages incurred)
Ending balance	0	232,890

Work in process
Beginning balance	0	0
a	232,890	280,577	c
b	47,687
Ending balance	0	0

Cost of services billed
Beginning balance	0	0
c	280,577	7387	e
Ending balance	273,190	0

Service overhead control
Beginning balance	0	0
c	40,300	40,300	d
Ending balance	0	0

Applied service OH
Beginning balance	0	0
d	40,300	47,687	b
e	7387
Ending balance	0	0

Explanation:

A) Labor Cost:

448+ 661=1109Hours *210 = $ 232,890

B) Overhead Applied:

= 1109 Hour * $43 = $ 47,687

C) Cost Of Service :

= $ 232,890 + 47,687 = $ 280,577

Req. B

ALLOCATION BUSTERS INCOME STATEMENT FOR THE MONTH ENDED MARCH 31
Revenue (1109 * 514)		570,026
cost of services provided	280,577
Overapplied overhead	(7387)	273,190
Gross margin		$296,837
marketing and administrative cost		(200,000)
Net income		$96,836