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P4.5A (LO 1, 2, 3, 4), AN Service 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. Assign overhead costs to services using traditional costing and ABC; compute overhead rates and unit costs, compare results. Estimated Use of Cost Drivers per Service Estimated Overhead Estimated Use of Cost Drivers $1,800,000 Tax Audit $1,100,000 $216,000 $700,000 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 76,200 204,000 142,500 81,300 $720,000 2,500 60,000 40 Direct 800 27,000 22 56,000 1,700 33,000 18 25,300 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). 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 $57,441

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