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.

Instructions

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.

b. 1. Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). 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.

2. Prepare a schedule assigning each activity's overhead cost pool to each accounting service based on the use of the cost drivers.

c. Comment on the comparative overhead cost for the two services under both traditional costing and ABC.

Transcribed Image Text:

Activity Cost Pools Employee training Typing and secretarial Computing Facility rental Travel Cost Drivers Direct labor dollars Number of reports/ forms Number of minutes Number of employees Per expense reports Estimated Overhead $216,000 76,200 204,000 142,500 81,300 $720,000 Estimated Use of Cost Drivers $1,800,000 2,500 60,000 40 Trace directly Use of Cost Drivers per Service Audit $1,100,000 800 27,000 22 56,000 Tax $700,000 1,700 33,000 18 25,300