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. Activity Cost Pools Cost Drivers Employee training Direct labor dollars Typing and secretarial Number of reports/forms Computing Number of minutes Facility rental Number of employees Travel Per expense reports Estimated Overhead $202,400 76,400 232,200 144.000 81.000 $736,000 Estimated Use of Cost Drivers per Service Estimated Use of Cost Drivers Audit Tax $1,840,000 $1,191,000 $649,000 2,500 800 1,700 60,000 27,000 33,000 40 22 18 Direct 56,000 25,300 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 $

Answer 1

Solution a:

Using traditional costing:

Total overhead assigned To Audit = $1191000*40% = $476,400

Total overhead assigned To Tax = $649000*40% = $259,600

Solution b:

Computation of Activity rates
Activity cost pool	Estimated Overhead	Expected use of cost drivers		Activity based overhead rates
Employees Training	$2,02,400	1840000	Direct Labor dollars	0.11	Per DL Dollar
Typing and secretarial	$76,400	2500	Reports/ Forms	30.56	Per report/ Form
Computing	$2,32,200	60000	Minutes	3.87	Per minute
Facility rental	$1,44,000	40	Employees	3600.00	Per employee
Travel	$81,000	Direct		Direct
Total	$7,36,000

Solution c:

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	$11,91,000	0.11	$1,31,010	$6,49,000	0.11	$71,390
Typing and secretarial	800	30.56	$24,448	1700	30.56	$51,952
Computing	27000	3.87	$1,04,490	33000	3.87	$1,27,710
Facility rental	22	3600.00	$79,200	18	3600.00	$64,800
Travel	56000	Direct	$56,000	25300	Direct	$25,300
Total Overhead cost assined			$3,95,148			$3,41,152