Income Statement, Cost of Services Provided, Service Attributes

Mason, Durant, and Santos (MDS) is a tax services firm. The firm is located in Oklahoma City and employs 15 professionals and eight staff. The firm does tax work for small businesses and well-to-do individuals. The following data are provided for the last fiscal year. (The Mason, Durant, and Santos fiscal year runs from July 1 through June 30.)

Returns processed	$3,000
Returns in process, beginning of year	43,000
Returns in process, end of year	14,000
Cost of services sold	1,575,000
Beginning direct materials inventory	20,000
Purchases, direct materials	40,000
Direct labor	1,400,000
Overhead	100,000
Administrative expenses	258,000
Selling expenses	65,000

Required:

1. Prepare a statement of cost of services sold.

Mason, Durant, and Santos
Statement of Cost of Services Sold
For the Year Ended June 30
Direct materials used	$fill in the blank 7b574609203dffd_2
Direct labor	fill in the blank 7b574609203dffd_4
Overhead	fill in the blank 7b574609203dffd_6
Total service costs added	$fill in the blank 7b574609203dffd_8
Add: Beginning work in process	fill in the blank 7b574609203dffd_10
Less: Ending work in process	fill in the blank 7b574609203dffd_12
Cost of services sold	$fill in the blank 7b574609203dffd_13

2. Refer to the statement prepared in Requirement 1. What is the dominant cost?

Direct labor

Will this always be true of service organizations?

No

The situation above might be the case because:

Service organizations may have large overhead

3. Assuming that the average fee for processing a return is $840, prepare an income statement for Mason, Durant, and Santos.

Mason, Durant, and Santos
Income Statement
For the Year Ended June 30
Sales		$fill in the blank 65ee11019064fb2_2
Cost of services sold		fill in the blank 65ee11019064fb2_4
Gross margin		$fill in the blank 65ee11019064fb2_6
Less operating expenses:
Selling expenses	$fill in the blank 65ee11019064fb2_8
Administrative expenses	fill in the blank 65ee11019064fb2_10	fill in the blank 65ee11019064fb2_11
Operating income		$fill in the blank 65ee11019064fb2_13

4. Calculate the average cost of preparing a tax return for last year. When required, round your answer to the nearest dollar.

$fill in the blank b69243054046fc5_1 per return

How do the differences between services and tangible products affect the ability of MDS to use the last year's average cost of preparing a tax return in budgeting the cost of tax return services to be offered next year?

Changes in tax law may affect some returns more than others