P4 5A Asstgn overheaa costs to ser aces usantraattional cos

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 $57,441

Solution

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	$720,000.00