Jarman consulting inc. provides financial and estate planning services on a retainer basis for the executive officers of is corporate clients. it incurred the following labor costs on services for three corporate clients during march 2006.
Driect labor
contract 1 $12,000
contact 2 $7,200
contract 3 28,800
Total $48,000
Jarman allocated March overhead costs of $21,600 to the contracts based on the amount of direct labor costs incurred on each contract.
A. assuming the revenue from contract 3 was $65,600 what amount of income did Jarman earn from this contract?
B. based on the preceding information, will Jarman report finished goods inventory on its balance sheet for contract 1? if so, what is the amount of this inventory? if not, explain why not.
To determine the amount of income earned from Contract 3, we need to calculate the overhead allocation rate and multiply it by the direct labor cost of Contract 3.
Step 1: Calculate the overhead allocation rate
The overhead allocation rate is calculated by dividing the total overhead costs incurred by the total direct labor costs incurred.
Overhead allocation rate = Total overhead costs / Total direct labor costs
Overhead allocation rate = $21,600 / $48,000 = 0.45
Step 2: Calculate the overhead allocated to Contract 3
Overhead allocated to Contract 3 = Overhead allocation rate * Direct labor cost of Contract 3
Overhead allocated to Contract 3 = 0.45 * $28,800 = $12,960
Step 3: Calculate the income earned from Contract 3
Income earned from Contract 3 = Revenue from Contract 3 - Overhead allocated to Contract 3
Income earned from Contract 3 = $65,600 - $12,960 = $52,640
Therefore, the amount of income earned from Contract 3 is $52,640.
Moving on to question B, to determine whether Jarman Consulting Inc. will report finished goods inventory on its balance sheet for Contract 1, we need to consider the nature of the services provided.
Based on the given information, Jarman Consulting Inc. provides financial and estate planning services on a retainer basis. These types of services are not typically considered as finished goods, which are tangible products waiting to be sold. Instead, they are considered as services rendered.
Therefore, Jarman Consulting Inc. will not report finished goods inventory on its balance sheet for Contract 1 because the services provided are not considered as finished goods.