Allocation Busters (AB) is a dispute mediation firm offering services to firms i

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 440 hours for Massive Airframes and 670 hours for Gigantic Drydocks. AB bills clients at the rate of $516 per hour; labor cost for its professional staff is $200 per hour. Overhead costs in March totaled $40,130. Overhead is applied to clients at $42 per labor-hour. In addition, AB had $198,800 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.

Explanation / Answer

Answer a Recording of transactions Event No. Account Titles Debit Credit a Work in process - Massive Airframes $88,000 Work in process - Gigantic Drydocks $134,000 Wages Payable $222,000 b Work in process - Massive Airframes $18,480 Work in process - Gigantic Drydocks $28,140 Overheads $46,620 c Cost of service billed $268,620 Work in process - Massive Airframes $106,480 Work in process - Gigantic Drydocks $162,140 d-1 Overheads $40,130 Accounts Payable $40,130 d-2 Overheads $6,490 Cost of service billed $6,490 (recording of overapplied overheads) Answer b Income statement Service Revenue - Massive Airframes (440 hours * $516) $227,040 - Gigantic Drydocks (670 hours * $516) $345,720 $572,760 Less : Cost of service billed $262,130 Gross Margin $310,630 Less : Marketing and administrative costs $198,800 Net Operating Income $111,830

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