Problem 17-5A

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.

Activity Cost Pools	Cost Drivers	Estimated Overhead	Expected Use of Cost Drivers	Audit	Tax
Employee Training	Direct labor dollars	$254,800	$1,820,000	$1,157,000	$663,000
Typing and Secretarial	Number of reports/forms	$76,100	$2,500	$800	$1,700
Computing	Number of minutes	$171,800	$60,000	$27,000	$33,000
Facility Rental	Number of employees	$144,000	$40	$22	$18
Travel	Per expense reports	$81,300	Direct	$56,000	$25,300
		$728,000

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 rate to 2 decimal places, e.g. 12.25.)

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 activitys overhead cost pool to each service based on the use of the cost drivers. (Round overhead rate to 2 decimal places, e.g. 12.25 and cost assigned to 0 decimal places, e.g. 2,500

	Audit				Tax
Activity Cost Pool	Expected Use of Cost Drivers	Activity - Based Overhead Rates	Cost Assigned	Expected Use of Cost Drivers	Acitivity- Based Overhead Rates	Cost Assigned
Employee Training				$
Typing and secretarial		$			$
Computing		$			$
Facility rental		$			$
Travel		Direct	_______		Direct	_______
Overhead cost assigned			$______			$______