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 885 hours to clients and worked a total of 940 hours (the difference includes time for training, preparing bids, and so on, which are considered administrative costs). TechMaster bills clients at the rate of $220 per hour; labor cost for its IT professionals is $85 per hour. Overhead costs in August totaled $37,000. Overhead is applied to clients at $47 per labor-hour. In addition, TechMaster had $57,000 in marketing and administrative costs (including labor time as described above). 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.

Answer 1

Answer

A.labor and overhead cost flows through T-accounts:

Wages Payable $85*885 =$75225

                                               Wages Payable

		opening Balance
Ending bal.	75225	Work in progress	75225

Work­ In­ Process= $47*875

                                                   Work­ In­ Process

Wages payable	75225	Cost of services billed	116350
Applied Service O.H	41125

Cost of services billed =41125-37000 = 4125

                                                      Cost of services billed

Work in progress	116350	Service OH control	4125
		Closing Balance	112225

                                         Service Overhead control

Cost of services billed	37000	Closing balance	37000

   Applied Service Overhead

Cost of service billed	41125	Work in progress	41125

B.Income statement for the company for August.

Particulars	Amount
Sales ($220*885)	$194700
Cost of service billed, less:Over applied service Overhead ($116350-$4125)	($112225)
Gross margin	$82475
marketing and administrative costs	($57000)
Operating Profit	$25475