P4 5A \" Asstgn overheaa costs to ser aces usan?traattional costing and ABC ; co
ID: 2408094 • Letter: P
Question
P4 5A " Asstgn overheaa costs to ser aces usan?traattional costing and ABC ; compute overhead rates and unit costs: compare results. L01. 2. 3.4 AN Lewis and Stark is a public accounting firm that offers two primary se audng and tax-return preparation A controversy has developed between the partners of the two service lines as to who is contributing the preater amount to the bottoni e T e area o con entati is le assi l lnen of overhead he ax partners argue or assi rans overhead on the basis o 4 % of dnect labor dollars, w ale e audit partiers a eu n luplementmx activ tv-based cost 112 T e partners agree to usc next ycar's budgeted data for purposcs of analysis and comparison. The following overhcad data are collected to develop the comparison. Expected Use of Cost Drivers Expected Use of Cost Drivers by Service Estimated Overhead Activity Cost Pools Employee training Typing and secretariaNub Computing Facility rental Trarel Cost Drivers Audit S216,000 S1,800,000 $1,100,000 ST00,000 1,700 33,000 Direct labor dollars 76,200 204,000 142,500 81.300 S720,000 of reports forns 2.500 800 27,000 Number of minutes Number of employees Per expense reports 40 Direct 56,000 25,300 a Using traditioal produet costing as paoposed by the tax partnets, cpute the total overhead cost assigned to both sevices (audit and tax) ofLewis and Stark. (b) 1. Using activity-based coeting, prepare a schedule showing the computations of the activity-based overhead rates (per cost drier). 2. Prepare a schedule assigning each activity's overhead cost pool to each 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. ?. (b) (2) Cost assigned Tax $337,441 (c) Difference Audit $57,441Explanation / Answer
Solution a:
Overhead rate (Traditional costing) = $0.40 per direct labor dollar
Overhead cost assigned to Audit Services = $1,100,000 * $0.40 = $440,000
Overhead cost assigned to tax services = $700,000 * 0.4 = $280,000
Solution b-1:
Solution b2:
Solution 3:
Difference - Overhead cost assigned under traditional costing and ABC:
Audit Services = $440,000 - $382,559 = $57,441 Decrease
Tax Services = $337,441 - $280,000 = $57,441 increase
Under activity based costing, various activities are identified and overhead cost divided across the activites and overhead cost assiged to services on the basis of use of activity base in that particulars activity. In traditional costing overhead cost assigned on the basis of single plant wide overhead rate. Thus ABC costing assign cost to product/services on actual basis and represent true cost of product/services.
Determination of activity rate for each activity - Lewis and Stark Activity cost pools Estimated Overhead Cost Cost Driver Expected use of cost drivers Activity Rate Employee Training $216,000.00 Direct labor dollars 1800000 $0.12 Typing and Secretarial $76,200.00 Nos of reports/forms 2500 $30.48 Computing $204,000.00 Nos of minutes 60000 $3.40 Facility Rental 142500.00 Nos of employees 40 $3,562.50 Travel $81,300.00 Per Expense Reports Direct Direct Total $720,000.00Related Questions
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