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Problem 17-05A a, b1-b2 (Video)

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 years budgeted data for purposes of analysis and comparison. The following overhead data are collected to develop the comparison.

Problem 17-05A a, b1-b2 (Video) 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. Cost Drivers Direct labor dollars Activity Cost Pools Employee training Typing and secretarial Computing Facility rental Travel Estimated Use of Cost Drivers per Service Estimated Use of Cost Drivers Audit Tax $1,800,000 $1,100,000 $700,000 2,500 800 1,700 60,000 27,000 33,000 40 22 18 Direct 56,000 25,300 Estimated Overhead $216,000 76,200 204,000 142,500 81,300 $720,000 Number of reports/forms Number of minutes Number of employees Per expense reports 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. Audit Tax Total overhead cost assigned Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). (Round overhead rates to 2 decimal places, e.g. 12.25.) Estimated Overhead Expected Use of Cost Drivers per Activity Activity-Based Overhead Rates Activity Cost Pools Employee training Direct labor dollars per DL dollar $ Typing and secretarial Reports/forms $ per report/form Computing Minutes $ per minute Facility rental Employees per employee $ Travel Direct Direct Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers. (Round overhead rates to 2 decimal places, e.g. 12.25 and cost assigned to 0 decimal places, e.g. 2,500.) Audit Estimated Use of Activity-Based Cost Drivers Overhead Rates Cost Assigned Tax Estimated Use of Activity-Based Cost Drivers Overhead Rates Cost Assigned Activity Cost Pool Employee training $ ta Typing and secretarial $ $ Computing $ $ Facility rental $ $ Travel Direct Direct Overhead costs assigned

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