Question 2 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 Activity Cost Pools Employee training Typing and secretarial Computing Facility rental Cost Drivers Direct labor dollars Estimated Overhead Estimated Use of Cost Drivers Audit Tax $195,525 $1,777,500 $1,150,000 $627,500 Number of reports/forms 76.200 2,500 800 1,700 Number of minutes 216,000 60,000 27,000 33,000 Number of employees 142,000 40 22 18 Travel Per expense reports 81.275 Trace directly 56,000 25,275 $711,000 (a) 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. (b1) Total overhead cost assigned $ Audit $ Tax Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). (Hint: As a result of breaking out travel costs as a separate cost pool, travel costs can now be traced directly to services provided. Thus, an overhead rate is not needed.) (Round overhead rates to 2 decimal places, e.g. 12.25.) Activity Cost Pools Estimated Overhead Employee training $ Typing and secretarial Computing Facility rental Travel $ Expected Use of Cost Drivers per Activity Activity-Based Overhead Rates $ Direct labor dollars $ per DL dollar Direct Reports/forms Minutes $ $ Employees $ Direct per report/form per minute per employee (b2) 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, e.g. 12.25 and cost assigned to O decimal places, e.g. 2,500.) Activity Cost Pool Employee training Typing and secretarial Computing Facility rental Travel Overhead costs assigned $ Use of Cost Drivers $ $ $ $ Audit Activity-Based Overhead Rates Direct $ $ Cost Assigned $ Use of Cost Drivers per Service $ $ $ $ Tax Activity-Based Overhead Rates Direct Cost Assigned $ $