Question

Problem 5-41A (Part Level Submission)

Hy and van Lamsweerde 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 regarding 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 labour dollars, while the audit partners argue for implementing activity-based costing. The partners agree to use next year’s budgeted data for analysis and comparison. The following overhead data are collected:

													Expected Use of Cost Drivers per Service
Activity Cost Pools		Cost Drivers			Estimated Overhead				Expected Use of Cost Drivers				Audit		Tax
Employee training		Direct labour dollars				$224,730				$1,872,753			$996,000		$876,753
Typing and secretarial		Number of reports and forms				82,795				2,900			700		2,200
Computing		Number of minutes				212,936				61,900			26,000		35,900
Facility rental		Number of employees				145,740				42			22		20
Travel		Per expense reports				82,900				Direct			56,700		26,200
						749,101

Classify each of the activities as a value-added activity or a non–value-added activity.

Employee training		Non-Value-Added or Value-Added
Typing and secretarial		Value-Added or Non-Value-Added
Computing		Non-Value-Added or Value-Added
Facility rental		Non-Value-Added or Value-Added
Travel		Value-Added or Non-Value-Added

Answer 1

Hy and van Lamsweerde Requirement a a.Overhead costs assigned to Auditing and Tax using Traditional product costing Overhead costs Assigned to: Audit = 40% x $996,000 = $398,400 Tax = 40% x $876,753 = $350,701 Requirement b.1 Activity-based overhead rates= Budgeted overheads / Budgeted cost drivers Employee Training = $224,730/ $1,872,753 = 0.12 Typing & Secretarial = $82,795/2,900 = $28.55 per report Computing = $212,936/61,900 = $3.44 per minute Facility rental = $145,740/42 = $3,470 Requirement b.2 Assigning overheads Audit Rates Cost Drivers 0.12 996000 28.55 700 3.44 26000 3470 Employee Training Typing & Secretarial Computing Facility rental Travel(direct) Total Total 119520 19985 89440 76340 56700 361985 Tax Cost Drivers 876753 2200 35900 Rates 0.12 28.55 3.44 3470 Total 105210.4 62810 123496 69400 26200 387116 22 20 Requirement Value added activities: Employee Training and Typing & Secretarial Non Value added activities: Computing, Facility rental and Travel Requirement d There is a difference in overhead assigned to both services using traditional costing and ABC because traditional costing results in inaccurate allocation as it arbitrary allocates overheads while ABC is more accurate. ABC is more accurate because it attempts to show the relationship between overhead costs and the activities that causes the overheads.