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 459 hours for Massive Airframes and 667 hours for Gigantic Drydocks. AB bills clients at the rate of $518 per hour; labor cost for its professional staff is $210 per hour. Overhead costs in March totaled $41,860. Overhead is applied to clients at $43 per labor-hour. In addition, AB had $198,500 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

Required:

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

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

Answer 1

a.

WAGES PAYABLE
Beginning balance	-	-
	-	236,460.00	a (wages incurred)
Ending balance	-	236,460.00
Work in process
Beginning balance	-	-
a	236,460.00	284,878.00	c
b	48,418.00
Ending balance	-	-
Cost of services billed
Beginning balance	-	-
c	284,878.00	6,558.00	e
Ending balance	278,320.00	-
Service overhead control
Beginning balance	-	-
c	41,860.00	41,860.00	d
Ending balance	-	-
Applied service OH
Beginning balance	-	-
d	41,860.00	48,418.00	b
e	6,558.00
Ending balance	-	-

b.

ALLOCATION BUSTERS
INCOME STATEMENT
FOR THE MONTH ENDED MARCH 31
Revenue (1,126 x 518)		583,268.00
cost of services provided	284,878.00
Overapplied overhead	-      6,558.00	- 278,320.00
Gross margin		304,948.00
marketing and administrative cost		- 198,500.00
Net income		106,448.00