Question

Problem 18-5A (Part Level Submission)

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.

								Expected Use of Cost Drivers per Service
Activity Cost Pools		Cost Drivers		Estimated Overhead		Expected Use of Cost Drivers		Audit		Tax
Employee training		Direct labor dollars		$219,300		$1,827,500		$1,198,000		$629,500
Typing and secretarial		Number of reports/forms		76,100		2,500		800		1,700
Computing		Number of minutes		210,300		60,000		27,000		33,000
Facility rental		Number of employees		144,000		40		22		18
Travel		Per expense reports		81,300		Direct		56,000		25,300
				$731,000 1. 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. 2. Using activity based costing, prepare a schedule showing the computations of the activity based overhead rates (per cost driver). 3. Prepare a schedule assigning each acitivity's overhead cost pool to each service based on the use of the cost drivers.

Answer 1