Les and Moore 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.

Instructions

(a) Using traditional product costing as proposed be the tax partners, compute the total overhead cost assigned to both services (audit and tax) of Les and Moore.

(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) Classify each of the activities as a value-added activity or a nonvalue-added activity.

(d) Comment on the comparative overhead cost per unit for the two products under both traditional costing and ABC.

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Expected Expected Use of Cost Drivers Activity Cost Pool Cost Driver Employee training Direct labor dollars Typing and Use of Estimated Cost Overhead Drivers per Service Audit Tax $209,000 $1,900,000 $1,000,000 $900,000 Number of reports/ secretarial forms 76.200 2,500 600 1,900 Computing Number of minutes 204,000 60,000 Facility rental Number of employees 142.500 38 25,000 20 35,000 18 Travel Per expense reports 128,300 Direct 86,800 41,500 $760,000