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 years budgeted data for purposes of analysis and comparison. The following overhead data are collected to develop the comparison.

Problem 17-05A a, b1-b2 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 Tax Audit $1,101,000 Activity Cost Pools Employee training Typing and secretarial Computing Facility rental Travel 800 Estimated Use of Cost Drivers $1,840,000 2,500 60,000 40 Cost Drivers Direct labor dollars Number of reports/forms Number of minutes Number of employees Per expense reports Estimated Overhead $220,800 76,700 208,200 149,000 81,300 $736,000 27,000 22 56,000 $739,000 1,700 33,000 18 25,300 Direct 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 $ $ 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.) Estimated Overhead Activity Cost Pools 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 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 $ Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers. (Round overhead rates to 2 decimal places, e.g. 12.25 and cost assigned to 0 decimal places, e.g. 2,500.) Audit Estimated Use of Activity-Based Cost Drivers Overhead Rates Cost Assigned Tax Estimated Use of Activity-Based Cost Drivers Overhead Rates Cost Assigned Activity Cost Pool Employee training $ $ $ $ $ Typing and secretarial $ $ Computing $ $ Facility rental $ $ Travel Direct Direct Overhead costs assigned $