Question

Lewis and Stark is a public accounting firm that offers two primary services, auditing and tax-return preparation. A controversy has developed between the partners of the two service lines as to who is contributing the greater amount to the bottom line. The area of contention is the assignment of overhead. The tax partners argue for assigning overhead on the basis of 40% of direct labor dollars, while the audit partners argue for implementing activity-based costing. The partners agree to use next year’s budgeted data for purposes of analysis and comparison. The following overhead data are collected to develop the comparison.

								Estimated Use of Cost Drivers per Service
Activity Cost Pools		Cost Drivers		Estimated Overhead		Estimated Use of Cost Drivers		Audit		Tax
Employee training		Direct labor dollars		$217,800		$1,815,000		$1,153,000		$662,000
Typing and secretarial		Number of reports/forms		76,300		2,500		800		1,700
Computing		Number of minutes		210,600		60,000		27,000		33,000
Facility rental		Number of employees		140,000		40		22		18
Travel		Per expense reports		81,300		Direct		56,000		25,300
				$726,000

Using traditional product costing as proposed by the tax partners, compute the total overhead cost assigned to both services (audit and tax) of Lewis and Stark.

		Audit		Tax
Total overhead cost assigned		$		$

  Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). (Round overhead rates to 2 decimal places, e.g. 12.25.)

Activity Cost Pools		Estimated Overhead		Expected Use of Cost Drivers per Activity				Activity-Based Overhead Rates
Employee training		$		$		Direct labor dollars		$	per DL dollar
Typing and secretarial						Reports/forms		$	per report/form
Computing						Minutes		$	per minute
Facility rental						Employees		$	per employee
Travel				Direct				Direct
		$

Prepare a schedule assigning each activity’s overhead cost pool to each service based on the use of the cost drivers. (Round overhead rates to 2 decimal places, e.g. 12.25 and cost assigned to 0 decimal places, e.g. 2,500.)

Audit

Tax

Activity Cost Pool

Estimated Use of Cost Drivers

Activity-Based Overhead Rates

Cost Assigned

Estimated Use of Cost Drivers

Activity-Based Overhead Rates

Cost Assigned

Employee training

$

$

$

$

$

Typing and secretarial

$

$

Computing

$

$

Facility rental

$

$

Travel

Direct

Direct

Overhead costs assigned

Answer 1

					Audit	Tax
a)	total overhead cost assigned				461200	264800
			Estimated	Expected			Activity
b-1)			overhead	use of			based
	Activity cost pools			cost dr			overhead
				per activity			rates
	Employee training		217,800	1,815,000	Direct labor dollars		0.12	per DL dollar
	Typing and secretarial		76,300	2,500	Report/forms		30.52	per report/form
	computing		210,600	60,000	Minutes		3.51	per minute
	Facility rental		140,000	40	Employees		3500	per employee
	Travel		81,300	Direct				Direct
			726,000
b-2)		Audit				Tax
			Expected	Activity	Cost	Expected	Activity	Cost
			use of	based	Assigned	use of	based	Assigned
	Activity cost pools		cost dr	overhead		cost dr	overhead
			per activity	rates		per activity	rates
	Employee training		1,153,000	0.12	138360	662,000	0.12	79440
	Typing and secretarial		800	30.52	24416	1,700	30.52	51884
	computing		27,000	3.51	94770	33,000	3.51	115830
	Facility rental		22	3500	77000	18	3500	63000
	Travel		56,000	Direct	56000	25,300	Direct	25300
	overhead costs assigned				390546			335454