Mason, Durant, and Westbrook (MDW) 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 Westbrook fiscal year runs from July 1 through June 30.)
Returns processed ............... 3,000
Returns in process, beginning of year ......... $ 44,000
Returns in process, end of year ......... 13,000
Cost of services sold ..............1,577,500
Beginning direct materials inventory ......... 20,000
Purchases, direct materials ......... 40,000
Direct labor ................1,400,000
Overhead ................ 100,000
Administrative expenses .......... 257,000
Selling expenses ............. 65,000
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 return is $850, prepare an income statement for Mason, Durant, and Westbrook.
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 MDW 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?