Income Statement, Direct and Indirect Cost Concepts, Service Company Lakeesha Barnett owns and operates a package mailing store in a college town. Her store, Send It Packing, helps customers wrap items and send them via UPS, FedEx, and the USPS. Send It Packing also rents mailboxes to customers by the month. In May, purchases of materials (stamps, cardboard boxes, tape, Styrofoam peanuts, bubble wrap, etc.) equaled $11,350; the beginning inventory of materials was $1,050, and the ending inventory of materials was $950. Payments for direct labor during the month totaled $25,600. Overhead incurred was $18,200 (including rent, utilities, and insurance, as well as payments of $14,050 to UPS and FedEx for the delivery services sold). Since Send It Packing is a franchise, Lakeesha owes a monthly franchise fee of 5 percent of sales. She spent $2,750 on advertising during the month. Other administrative costs (including accounting and legal services and a trip to Dallas for training) amounted to $3,650 for the month. Revenues for May were $102,100.
1. What was the cost of materials used for packaging and mailing services during May?
$
2. What was the prime cost for May?
$
3. What was the conversion cost for May?
$
4. What was the total cost of services for May?
$
Prepare an income statement for May.
Send it Packing
Income Statement
For the Month Ended May 31
Advertising
Cost of services sold
Operating income
Other administrative expenses
Sales revenues
$
Cost of services sold
Franchise fee
Gross margin
Operating income
Other administrative expenses
Franchise fee
Gross margin
Operating income
Other administrative expenses
Sales revenues
$
Operating expenses:
Advertising
Cost of services sold
Gross margin
Operating income
Sales revenues
Cost of services sold
Franchise fee
Gross margin
Operating income
Sales revenues
Cost of services sold
Gross margin
Operating income
Other administrative expenses
Sales revenues
Operating income
Operating loss
$
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Solution

The cost of material used can be calculated by adding purchases and deducting the closing inventory from the opeining inventory. Prime costs consist of direct material and direct labor. conversion cost includes direct labor and overhead cost.

Requirement 1

Cost of materials used = Opening inventory + purchases of material - Closing inventory

Cost of materials used = $1,050 + $11,350 - $950

Cost of materials used = $11,450

Requirement 2

Prime cost = Direct materials + Direct labor

Prime cost = 11,450 + 25,600

Prime cost = 37,050

Requirement 3

Conversion Cost = Direct labor + Overhead

Conversion cost = 25,600 + 18,200

Conversion cost = 43,800

Requirement 4

Total cost = Material + labor + Overhead

Total cost = 11,450 + 25,600 +18,200

Total cost = 55,250

Requirement 5 Income statement

Sales 102,100

Cost of goods sold (55,250)

Gross profit 46,850

Operating expense

Advertising (2750)

Franchising fee (5% X 102,100) (5,105)

Other administrative expense (3,650)

Operating income 35,345