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. Use of Cost Drivers per Service Estimated Use of Cost Drivers Activity Cost Pools Cost Drivers Estimated Overhead Audit Tax Direct labor dollars $198,275 $1,802,500 $1,100,000 $702,500 Employee training Typing and secretarial 76,000 2.500 800 1,700 Computing Number of reports/forms Number of minutes Number of employees 225,600 60.000 27,000 33,000 Facility rental 140,000 40 22 18 Travel Per expense reports 81,125 Trace directly 56,000 25.300 $721,000 (a) Your answer is correct. 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 S 440000 $ 281000 Your answer is correct. Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost drive (Hint: As a result of breaking out travel costs as a separate cost pool, travel costs can now be traced directly to services provides Thus, an overhead rate is not needed. (Round overhead rates to 2 decimal places, eg. 12.25.) Activity Cost Pools Estimated Overhead Activity-Based Overhead Rates Expected Use of Cost Drivers per Activity Direct labor 1802500 dollars Employee training $ 198275 $ $ 0.11 Typing and secretarial 76000 2500 Reports/forms $ 30.4 Computing 225600 60000 Minutes S 3.76 Facility rental 140000 40 Employees $ 3500 Travel 81125 Direct Direct S 721000 Prepare a schedule assigning each activity's overhead cost pool to each accounting service based on the use of the cost drivers. (Round overhead rates to 2 decimal places, eg. 12.25 and cost assigned to decimal places, eg. 2,500.) Audit Activity Cost Pool Use of Cost Drivers Activity-Based Overhead Rates Cost Assigned US Cost Driver $ S $ S Employee training Typing and secretarial $ Computing $ Facility rental $ Travel Direct Overhead costs assigned $ Prepare a schedule assigning each activity's overhead cost pool to each accounting service based on the use of the cost drivers. (Round overhead rates to 2 decimal places, eg. 12.25 and cost assigned to decimal places, eg. 2,500.) Tax Use of Cost Drivers per Service Activity-Based Overhead Rates Cost Assigned Cost Assigned $ S $ $ $ $ $ rect Direct $ S
