II. Liberty Tax Service LIBERTY TAX SERVICE Liberty Tax Service's University City franchise provides tax preparation and tax consulting services. They divide their clients into those with simple returns and those with complex returns (and make no distinction among clients within each of these two groups). Liberty has two departments, a preparation department and a consulting department. All clients first have their returns prepared. Those who are interested are then transferred to the consulting department, which provides tax advice on ways to save tax in the following year. Liberty views each client as a unit of production, so a client with a complex preparation and consulting is viewed as a single output, and no revenue is recognized until BOTH services have been performed. A client whose return has been prepared, but whose consulting services have not yet been completed is thought of as work-in-process inventory. Liberty uses a normal costing system, with weighted average cost flow assumption for all inventories, and closes all over and under-applied overhead directly to cost of goods sold. As of January 1, Liberty has no work-in-process (i.e., no clients for whom service has been started, but not completed). Preparation Department: All clients begin in the preparation department. There are no direct costs in the preparation department. Conversion costs (overhead) are added evenly during the process. Each complex return requires four labor hours, while each simple return requires only two labor hours, so preparation department conversion costs are allocated based on labor hours. The actual cost of the preparation department conversion costs during the month of January was $39,000, and actual labor hours were 2,600. During January, Liberty actually started 700 simple returns and 300 complex returns in the preparation department. All thousand returns were fully prepared during the month. Two hundred simple returns and 180 complex returns were transferred to the consulting department, while the remainder (500 simple and 120 complex returns) were completed. Consulting Department: Conversion costs in the consulting department are added evenly during the process, which can take several days. The consulting process is the same for simple and complex returns, so consulting department conversion costs (overhead) are allocated based on the number of returns. The actual cost of the consulting department conversion cost during the month of January was $19,800. At the end of January, the consulting department had 50 complex returns, which are 60% through the consulting process. All other returns were completed. Other than the 50 complex returns still considered to be work-in-process in the consulting department, all returns are completed and revenue is recognized at the following rates: Preparation Only $100/return Preparation and Consulting $140/return PRICES Simple Complex $150/return $200/return Budget Liberty's budget for the month of January is based on completing all returns (i.e., there is NO budgeted inventory): Simple 345 130 Complex 100 150 Total Returns Prepared Only Returns Prepared and Consulted Total Returns 445 280 475 250 725 Preparation Department Labor Hours (1) 950 1,000 1,950 Revenue 52,700 (2) 45,000 (3) 97,700 Cost of goods sold: Preparation Overhead Consulting Overhead Total Cost of Goods Sold Gross Margin (1) Each simple return prepared requires 2 labor hours and each complex return prepared requires 4 labor hours. (2) 345 preparation only x $100/return + 130 preparation and consulting x $140/return (3) 100 preparation only x $150/return + 150 preparation and consulting x $200/return 39,000 15,120 54,120 43,580 1. What is the average total cost of one simple return that was prepared only? (15 points) 2. What is the average total cost of one complex return which was prepared and consulted on (and completed) during January? (15 points)