Lewis and Stark is a public accounting firm that offers two primary services, au

Question

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.

Expected Use of Cost
Drivers per Service

Activity Cost Pools

Cost Drivers

Estimated Overhead

Expected Use of
Cost Drivers

Audit

Tax

$219,900

$1,832,500

$1,143,000

$689,500

76,800

2,500

800

1,700

205,000

60,000

27,000

33,000

150,000

40

22

18

81,300

Direct

56,000

25,300

$733,000Using traditional product costing as proposed by the tax partners, compute the total overhead cost assigned to both services (audit and tax) of Polk and Stoneman.
Overhead assigned to audit $

Overhead assigned to tax $

Using activity-based costing compute the activity-based overhead rates (per cost driver).
(2) Complete the schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Round the activity-based overhead rates to 3 decimal places, e.g. 2.250 and cost assigned to 0 decimal places, e.g. 12,500. Note due to rounding total cost assigned may be slightly different than from above.)

Classify each of the activities as a value-added activity or a non-value-added activity.
Activity

Expected Use of Cost
Drivers per Service

Activity Cost Pools

Cost Drivers

Estimated Overhead

Expected Use of
Cost Drivers

Audit

Tax

Employee training Direct labor dollars

$219,900

$1,832,500

$1,143,000

$689,500

Typing and secretarial Number of reports/forms

76,800

2,500

800

1,700

Computing Number of minutes

205,000

60,000

27,000

33,000

Facility rental Number of employees

150,000

40

22

18

Travel Per expense reports

81,300

Direct

56,000

25,300

$733,000Using traditional product costing as proposed by the tax partners, compute the total overhead cost assigned to both services (audit and tax) of Polk and Stoneman.
Overhead assigned to audit $

Overhead assigned to tax $

Using activity-based costing compute the activity-based overhead rates (per cost driver).
(2) Complete the schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Round the activity-based overhead rates to 3 decimal places, e.g. 2.250 and cost assigned to 0 decimal places, e.g. 12,500. Note due to rounding total cost assigned may be slightly different than from above.)

Classify each of the activities as a value-added activity or a non-value-added activity.
Activity

Explanation / Answer

Traditional method-Overhead assigned at 40% of direct labour cost

   AUDIT TAX TOTAL DIRECT LABOUR DOLLARS A 1179000 626000 1805000 40% IS ASSIGNED AS OVERHEAD { 40% *A} 471600 252400 722000

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