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

Exercise 16

Job Costing in a Service Organization

Allocation Busters (AB) is a dispute mediation firm offering services to firms in disputes about cost allocations with government agencies. For March, AB worked 440 hours for Massive Airframes and 660 hours for Gigantic Drydocks. AB bills clients at the rate of $500 per hour; labor cost for its professional staff is $200 per hour. Overhead costs in March totaled $42,000. Overhead is applied to clients at $40 per labor-hour. In addition, AB had $200,000 in marketing and administrative costs. All transactions are on account. All services were billed.

Required

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

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

Step 1 of 2

a.	Wages Payable			Work in Process			Cost ofServices Billed
		220,000a		220,000a	264,000c		264,000c	2,000d
				44,000b
	Service Overhead Control			Applied Service O.H.
	42,000	42,000d		44,000d	?44,000b

a$200 per hour x 440 hours for Massive Airframes, and $200 per hour x 660 hours for Gigantic Drydocks.

b$40 per hour x 440 hours for Massive Airframes, and $40 per hour x 660 hours for Gigantic Drydocks Corp.

cSum of work done during March, all billed to clients.

dClosing entry to record overapplied overhead of $2,000 (= $44,000 applied – $42,000 actual)