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Li and Wu is an accounting firm that offers two primary services, auditing and tax-return preparation. A controversy has developed between the partners of the
Li and Wu is an 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 pounds, 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. Using activity-based costing, show the computations of the activity-based overhead rates. Cost Drivers Activity Cost Pools Estimated Overhead Estimated Use of Cost Drivers Estimated Use of Cost Drivers Iper Service Audit Tax Direct labor pounds 216,000 1,800,000 1,100,000 Employee training 700,000 76,200 2,500 1800 Typing and secretarial 1,700 Number of reports/forms Computing 204,000 60,000 27,000 Number of minutes 33,000 Facility rental 142,500 40 22 18 Number of employees Travel 81,300 Direct 156,000 25,300 Per expense reports 720,000
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