Problem:
The accounting firm of Lawton and Smith provides tax preparation services for its clients. Secretaries typically contact the client to schedule an appointment. When a client arrives at firm’s office, a partner conducts an interview and collects documentation supporting the information for the tax return. A staff accountant is given the interview notes and supporting documents, such as Form W-2 and cancelled checks, and enters the data into a computer program. The partner is responsible for reviewing the accuracy of the return before a sectary duplicates and packages it.
During the month of March, Lawton and Smith incurred revenue and costs as follows:
Revenues $95,000
Product Costs
Secretaries salaries $4,000
Partner salaries $15,000
Various Overhead Accounts $5,000
Professional accountant salaries $30,000
Computer supplies purchases and consumed $2,000
Period Expenses
Building rent (administrative portion) $3,000
Utilities (administrative portion) $700
Depreciation on furniture (administrative portion) $7,000
The company maintained insignificant balances of supplies that can be ignored, but reported work-in-process and finished services inventories on March 1st as $20,000 and $5,000, respectively.
On March 31st, the company reported work-in-process and finished services inventories as $15,000 and $7,000, respectively.
Questions:
A) Identify each product cost as direct materials, direct labor, or overhead.
B) Calculate the cost of services provided (cost of goods sold) during March.
C) Calculate cost of services sold percentage and the gross margin percentage as percentage of revenues.
D) How might your analysis support partners in decisions concerning the firm?