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 443 hours for Massive Airframes and 666 hours for Gigantic Drydocks. AB bills clients at the rate of $510 per hour; labor cost for its professional staff is $220 per hour. Overhead costs in March totaled $40,390. Overhead is applied to clients at $44 per labor-hour. In addition, AB had $199,100 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.

Wages Payable Work-In-Process Beg. bal. Beg. bal. End. bal. 0 End. bal. 0 Cost of Services Billed Service Overhead Control Beg. bal. Beg. bal. End. bal. 0 End. bal. 0 Applied Service O.H. Beg. bal. End. bal. 0

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

ALLOCATION BUSTERS Income Statement For the Month Ended March 31

Answer 1

Income Statement
Sr No	Particulars	Massive Airframes	Gigantic Drydocks	Total
	Hours worked	443	666	1,109
	Bill Revenue/ hour	510	510	510
	Revenue	225,930	339,660	565,590
	Labour Cost	220	220	220
a	Total Labour cost	97,460	146,520	243,980
	Overhead	44	44	44
b	Total Overhead applied	19,492	29,304	48,796
	Marketing and Admin			199,100
c	Cost of services billed			491,876
	Profit			73,714
	Add: Over absorption
d	Actual Service overheads	16,134	24,256	40,390
	Overheads absorbed	19,492	29,304	48,796
	Over absorption	3,358	5,048	8,406
	Profit to company			82,120

	Labour Cost A/c
Particulars	Dr	Particulars	Cr
To Bank A/c	243,980	By Work in Progress A/c	243,980
	243,980		243,980
	Overhead Cost A/c
Particulars	Dr	Particulars	Cr
To Bank A/c	40,390	By Work in Progress A/c	48,796
To Profit and Loss A/c	8,406
	48,796		48,796