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.

								Estimated Use of Cost Drivers per Service
Activity Cost Pools		Cost Drivers		Estimated Overhead		Estimated Use of Cost Drivers		Audit		Tax
Employee training		Direct labor dollars		$213,600		$1,780,000		$1,106,000		$674,000
Typing and secretarial		Number of reports/forms		76,200		2,500		800		1,700
Computing		Number of minutes		192,000		60,000		27,000		33,000
Facility rental		Number of employees		149,000		40		22		18
Travel		Per expense reports		81,200		Direct		56,000		25,300
				$712,000

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		$ 442,400		$ 269,600

Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). (Round overhead rates to 2 decimal places, e.g. 12.25.)

Activity Cost Pools		Estimated Overhead		Expected Use of Cost Drivers per Activity				Activity-Based Overhead Rates
Employee training		$		$		Direct labor dollars		$	per DL dollar
Typing and secretarial						Reports/forms		$	per report/form
Computing						Minutes		$	per minute
Facility rental						Employees		$	per employee
Travel				Direct				Direct
		$

Answer 1

Answer

• Traditional product costing part is CORRECT.
• Activity based costing asked

Activity Cost Pools	Estimated Overhead	Expected Use of Cost drivers per activity		Activity Based Overhead rates
	[A]	[B]		[C = A/B]
Employee Training	$                                 213,600.00	$            1,780,000.00	direct labor dollars	$                    0.12	per direct labor dollars
Typing & Secretial	$                                   76,200.00	2,500	Report/forms	$                 30.48	per Report/forms
Computing	$                                 192,000.00	60,000	Minutes	$                    3.20	per Minutes
Facility Rental	$                                 149,000.00	40	Employees	$           3,725.00	per Employees
Travel	$                                   81,200.00	Direct		Direct
TOTAL	$                                 712,000.00