Question

TechMaster is an information technology (IT) consulting company offering services to small firms. TechMaster bills clients for its various services based on the hours its professionals spend. In August, IT professionals billed 930 hours to clients and worked a total of 1,030 hours (the difference includes time for training, preparing bids, and so on, which are considered administrative costs). TechMaster bills clients at the rate of $210 per hour; labor cost for its IT professionals is $65 per hour. Overhead costs in August totaled $46,000. Overhead is applied to clients at $56 per labor-hour. In addition, TechMaster had $66,000 in marketing and administrative costs (including labor time as described). 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 August.

A.

Wages Payable

Beg. Bal
End. bal

Work in Process

Beg. bal
End. bal

Cost of Services Billed

Beg. bal
End, bal

Service Overhead Control

Beg. bal
End. bal

Applied Service O.H.

Beg. bal
End. Bal

B.

Techmaster

Income Statement

For the Month Ended August 31

Answer 1

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

Wages payable

	$ 60,4501

1. 930 hrs × $65 per hour = $60,450.

Work in process

$ 60,4501	$ 112,5303
$ 52,0802

2. 930 hrs × $56 per hour = $52,080.

3. Sum of work done during August, all billed to clients.

Cost of Services Billed

$ 112,5303.	$ 6,0804

4. Closing entry to record overapplied overhead of $6,080 (= $52,080 applied - $46,000 actual).

Service Overhead Control

$46,000.	$ 46,000

Applied Service Overhead

$ 52,0802 $ 52,0802

b. Prepare an income statement for the company for August.

	TechMaster Income Statement For the Month Ended August 31
	Sales revenue...............................................................			$195,300	*
	Cost of services billed...................................................................	$112,530
	Subtract: Overapplied service overhead.............................................................	6,080		106,450
	Gross margin.................................................................			$88,850
	Marketing and administration.....................................................			66,000
	Operating profit...................................................................			$22,850

*$195,300 = 930 hours x $210