Lebowski and Associates is an architectural firm that employs 100 professionals and 15 staff. The firm does design work for small and medium-size companies. The fol- lowing data are provided for the year ended June 30, 2008:

Designs processed                                                                 9,400

Designs in process, June 30, 2007                                     $     900,000

Designs in process, June 30, 2008                                         1,400,000

Cost of services added                                                     13,550,000 Beginning direct materials inventory                                                             200,000

Purchases, direct materials                                                   400,000 Direct labor                                                                               12,000,000

Overhead                                                                      1,100,000

Administrative                                                                  500,000

Selling                                                                            600,000

Required

1. Calculate the direct materials used in the production of services.

2. Prepare a statement of cost of services sold.

3. 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.

4. Assume that the average fee for a design is $1,950. Prepare an income statement for Lebowski and Associates.

5. Discuss four differences between services and tangible products. How do these differences affect the computations in Requirement 1?