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		$198,000		$1,800,000		$1,168,000		$632,000
Typing and secretarial		Number of reports/forms		76,400		2,500		800		1,700
Computing		Number of minutes		216,600		60,000		27,000		33,000
Facility rental		Number of employees		148,000		40		22		18
Travel		Per expense reports		81,000		Direct		56,000		25,300
				$720,000

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		$		$

eTextbook and Media

  

  

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
		$

eTextbook and Media

  

  

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

a) 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		$ $1,168,000		$ $632,000
percentage assigning overhead		40%		40%
cost of assigning overhead		467200		252800

b) Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver

Computation of Activity rates
Activity cost pool	Estimated Overhead	Expected use of cost drivers	Activity based overhead rates
Employees Training	$198000	18,00,000	Direct Labor dollars	0.11	Per DL Dollar
Typing and secretarial	$76400	2500	no. of Reports/ Forms	30.56	Per report/ Form
Computing	$216600	60000	no. of Minutes	3.61	Per minute
Facility rental	$148000	40	no. of Employees	3700	Per employee
Travel	$ 81000		Direct		direct
Total	$720000

c)Prepare a schedule assigning each activity’s overhead cost pool to each service based on the use of the cost drivers

Computation of Overhead allocated
	Audit	Tax
Activity cost pool	Expected use of Cost driver	Activity based overhead rate	Cost assigned	Expected use of Cost driver	Activity based overhead rate	Cost assigned
Employees Training	$1168000	0.11	$128480	$632000	0.11	$ 69520
Typing and secretarial	800	30.56	$24,448	1700	30.56	$51952
Computing	27000	3.61	$97470	33000	3.61	$1,19,130
Facility rental	22	3700	$81400	18	3700	$6,6600
Travel	56000	Direct	$56,000	25300	Direct	$25,300
Total Overhead cost assined		$3,87798			$33,2502