Problem 4-5A a, b1-b2 (Video)

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.

Estimated Use of Cost Drivers per Service Estimated Use of Cost Drivers $1,825,000 2,500 Activity Cost Pools Employee training Typing and secretarial Computing Facility rental Travel Estimated Overhead $200,750 76,300 224,400 147,000 81,550 Cost Drivers Direct labor dollars Number of reports/forms Number of minutes Number of employees Per expense reports Audit Tax $1,104,000 $721,000 800 1,700 27,000 33,000 22 18 56,000 25,300 60,000 40 Direct $730,000 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 rates to 2 decimal places, e.g. 12.25.) Activity Cost Pools Estimated Overhead Expected Use of Cost Drivers 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 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 $