Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 24

Cost Accumulation: Service

Youth Athletic Services (YAS) provides adult supervision for organized youth athletics. It has a president, William Mayes, and five employees. He and one of the other five employees manage all marketing and administrative duties. The remaining four employees work directly on operations. YAS has four service departments: managing, officiating, training, and dispute resolution. A time card is marked, and records are kept to monitor the time each employee spends working in each department. When business is slow, there is idle time, which is marked on the time card. (It is necessary to have some idle time because some direct labor-hours must be available to accommodate fluctuating peak demand periods throughout the day and the week.) Some of the July operating data are as follows:

	Idle Time	Managing	Officiating	Training	Dispute Resolution
Sales revenue		$6,950	$7,900	$3,000	$1,000
Direct labor (in hours)	25	320	80	125	90
Direct overhead traceable to departments
Equipment		$ 950	$ 875	$ 700	$ 10
Supplies		200	300	250	200
Transportation		375	1,000	150	50

Other Data

• The four employees working in the operating departments all make $15 per hour.

• The fifth employee, who helps manage marketing and administrative duties, earns $2,250 per month, and William earns $3,000 per month.

• Indirect overhead amounted to $768 and is assigned to departments based on the number of direct labor-hours used. Because there are idle hours, some overhead will not be assigned to a department.

• In addition to salaries paid, marketing costs for items such as advertising and special promotions totaled $600.

• In addition to salaries paid, other administrative costs were $225.

• All revenue transactions are cash; all others are on account.

Required

Management wants to know whether each department is contributing to the company’s profit. Prepare an income statement for July that shows the revenue and cost of services for each department. Write a short report to management about departmental profitability. No inventories are kept.

Step 1 of 2

Income statement

A statement that shows the revenue and expenses of a specific period is known as income statement. The difference between the revenues and the expenses are termed as net income for the period.

Prepare an income statement for July that shows the revenue and cost of services for each department as follows:

Working notes:

Calculate the amount of direct labor for department M as follows:

Hence, the amount of direct labor for department M is $4,800.

Calculate the amount of direct labor for department O as follows:

Hence, the amount of direct labor for department O is $1,200.

Calculate the amount of direct labor for department T as follows:

Hence, the amount of direct labor for department T is $1,875.

Calculate the amount of direct labor for department D as follows:

Hence, the amount of direct labor for department D is $1,350.

Calculate the amount of indirect overhead for department M as follows:

Hence, the amount of indirect overhead for department M is $384.