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

(a) Using traditional product costing as proposed by the tax partners, calculate the total overhead cost assigned to both services (audit and tax) of Hy and van Lamsweerde. (Round answers to 0 decimal places, e.g. 1525.) Overhead assigned to audit: $ Overhead assigned to tax: $

Answer 1

(a) Using traditional product costing as proposed by the tax partners, calculate the total overhead cost assigned to both services (audit and tax) of Hy and van Lamsweerde. Overhead assigned to audit: $398,400 Overhead assigned to tax: $350,701 Direct labour dollars Overhead rate Total overhead cost assigned Explanation: Audit $996,000 * 40% of direct labour $398,400 Tax $876,753 * 40% of direct labour $350,701