Young, Coopers, and Touche (YCT) is a tax services firm. The firm is located in San Diego and employs 10 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. (YCT’s fiscal year runs from July 1 through June 30.)

Returns processed ............... 2,000

Returns in process, beginning of year ........$ 78,000

Returns in process, end of year ......... 134,000

Cost of services sold .............. 890,000

Beginning direct materials inventory ....... 20,000

Purchases, direct materials ........... 40,000

Direct labor ................. 800,000

Overhead .................... 100,000

Administrative .................. 69,000

Selling ................... 53,000

Required:

1. Prepare a statement of cost of services sold.

2. Refer to the statement prepared in Requirement 1. What is the dominant cost? Will this always be true of service organizations? If not, provide an example of an exception.

3. Assuming that the average fee for processing a tax return is $650, prepare an income statement for YCT.

4. Discuss three differences between services and tangible products. Calculate the average cost of preparing a tax return for last year. How do the differences between services and tangible products affect the ability of YCT 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?