Expected Use of Cost Drivers per Service Activity Cost Pools Cost Drivers Estima
ID: 2431054 • Letter: E
Question
Expected Use of Cost
Drivers per Service
Activity Cost Pools
Cost Drivers
Estimated Overhead
Expected Use of
Cost Drivers
Audit
Tax
$254,800
$1,820,000
$1,157,000
$663,000
76,100
2,500
800
1,700
171,800
60,000
27,000
33,000
144,000
40
22
18
81,300
Direct
56,000
25,300
$728,000
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
Employee training Direct labor dollars$254,800
$1,820,000
$1,157,000
$663,000
Typing and secretarial Number of reports/forms76,100
2,500
800
1,700
Computing Number of minutes171,800
60,000
27,000
33,000
Facility rental Number of employees144,000
40
22
18
Travel Per expense reports81,300
Direct
56,000
25,300
$728,000
Explanation / Answer
Under traditional product cost, overheads are 40% of labour cost Total overhead cost assigned to Audit = 40% * $728000 = $291200 Total overhead cost assigned to Tax = 40% * $728000 = $291200 Schedule showing activity based overhead rate per cost driver Activity cost pools Estimated overheads Expected use of cost drivers per activity Activity based overhead rate Employee training 254800 1820000 Direct labour dollars 0.14 per DL dolar Typing and secretarial 76100 2500 Reports/ forms 30.44 per report/ form Computing 171800 60000 Minutes 2.86 per minute Facility Rental 144000 40 Employees 3,600.00 per employee Travel 81300 Direct Direct 728000 Schedule assigning each activity's overhead cost pool to each service based on use of cost drivers Audit Tax Activity cost pools Expected use of cost drivers Activity based overhead rate Cost Assgined Expected use of cost drivers Activity based overhead rate Cost Assgined Employee training 1157000 0.14 1,61,980 663000 0.14 92,820 Typing and secretarial 800 30.44 24,352 1700 30.44 51,748 Computing 27000 2.86 77,310 33000 2.86 94,490 Facility Rental 22 3,600.00 79,200 18 3,600.00 64,800 Travel 56,000 25,300 Overhead cost assigned 3,98,842 3,29,158
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