ark 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. Assign overhead costs to services using traditional costing and ABC; compute overhead rates and unit costs; compare results. Activity Cost Pools
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.
Assign overhead costs to services using traditional costing and ABC; compute overhead rates and unit costs; compare results.
Activity Cost Pools
Employee training Typing and
Secretarial
Computing
Facility rental
Travel
Cost Drivers
Direct labor dollars Number of reports/
forms Number of minutes Number of employees Per expense reports
Estimated Overhead
$216,000
76,200
204,000
142,500
81,300
$720,000
Expected Use of Cost Drivers
$1,800,000
2,500
60,000
40
Direct
Expected Use of Cost Drivers per Service
Audit
$1,100,000
800
27,000
22
56,000
Tax
$700,000
1,700
33,000
18
25,300
a. 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.
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.
c.Comment on the comparative overhead cost for the two services under both traditional costing and ABC.
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