Polk and Stoneman 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.

Expected Expected Use Use of of Cost Drivers Estimated Cost Per Service Activity Cost Pools Cost Drivers Overhead Drivers Audit Tax Employee training Direct labor dollars $216,000 $1,800,000 $1,050,000 $750,000 Typing and Number of reports/

secretarial forms 76,200 2,500 800 1,700 Computing Number of minutes 204,000 60,000 25,000 35,000 Facility rental Number of employees 142,500 40 22 18 Travel Per expense reports 81,300 Direct 56,000 25,300

$720,000 Instructions

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

(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.

AppendixLO1