Question

P4-5A Lewis and'Stark is tilm that offers two primary services, audit- least On taetest a public décounting Assign overhead costs to ing 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 over- head on the basis of 40) of direct labor dollars, while the audit partners argue for imple- menting 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. services using traditional costing and ABC; compute overhead rates and unit costs compare results. (LO 1, 2, 3, 4), AN Expected Use of Expected Use of Cost Drivers per Service Audit $216,000 $1,800,0001,100,000 700,000 Estimated Overhead Cost Drivers Activity Cost Pools Cost Drivers Тах Employee training Typing and secretarial 10 Direct labor dollars Number of reports/ forms Number of minutes Number of employees Per expense reports 76,200 204,000 142,500 81,300 $720,000 2,500 60,000 40 Direct 800 Computing Facility rental Travel 1,700 33,000 18 25,300 27.000 22 56,000 Instructions (a) Using traditional product costing as proposed by the tax partners, compute the total1cfal overhead ctwity (b) (2) Cost assigned-Tax $337,441 overhead cost assigned to both services (audit and tax) of Lewis and Stark. (b) (1) Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). (2) Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers. Comment on the comparative overhead cost for the two services under both (c) Difference-Audit (c) traditional costing and ABC. $57,441

Answer 1

Lewis and Stark Requirement a Total overhead cost assigne Audit 4,40,000.0 1100000 x 40% Tax 2,80,000.0 700000 x 40% Requirement b Activity Cost Pools Employee training Typing and secretarial Computing Facility rental Travel Estimated Overhead 216000 76200 204000 142500 81300 720000 Expected Use of Cost Drivers per Activity 18,00,000 Direct labor dolla 2,500 Reports/forms 60,000 Minutes 40 Employees Direct Direct Activity-Based Overhead Rates 0.12 per DL dollar 30.48 per report/form 3.40 per minute 3,562.50 per employee Requirement c Cost Assigned Cost Assigned Audit Activity Cost Pool Expected Use of Activity-Based Cost Drivers Overhead Rates Employee training 11,00,000 0.12 Typing and secretarial 800 30.48 Computing 27,000 3.40 Facility rental 3,562.50 Travel 56,000 Direct Overhead costs assigned 1,32,000 24,384 91,800 78,375 56,000 3,82,559 Tax Expected Use Activity-Based Cost Drivers Overhead Rates 7,00,000 0.12 1,700 30.48 33,000 3.40 18 3,562.50 25,300 Direct 84,000 51,816 1,12,200 64,125 25,300 3,37,441