Lewis and Stark is a public accounting firm that offers two primary services, au
ID: 2332519 • Letter: L
Question
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 Expected Use Estimated Overhead Audit Activity Cost Pools Employee training Typing and secretari Number of reports/forms Computing Facility rental Cost Drivers Direct labor dollars Cost Drivers Tax $237,250 76,400 186,050 149,000 81,300 $730,000 $1,825,000 $1,146,000 $679,000 1,700 27,000 33,000 18 25,300 800 2,500 60,000 Number of minutes Number of employees Per expense reports Direct 56,000 (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. Audit Tax Total overhead cost assigned sExplanation / Answer
Answers
Working
Audit
Tax
A
Direct Labor dollars
$ 1,146,000.00
$ 679,000.00
B = A x 40%
Total Overhead cost assigned [40% of above]
$ 458,400.00
$ 271,600.00
Activity Cost Pools
Estimated Overhead
Expected Use of Cost drivers per activity
Activity Based Overhead rates
[A]
[B]
[C = A/B]
Employee Training
$ 237,250.00
$ 1,825,000.00
direct labor dollars
$ 0.13
per direct labor dollars
Typing & Secretial
$ 76,400.00
2,500
Report/forms
$ 30.56
per Report/forms
Computing
$ 186,050.00
60,000
Minutes
$ 3.10
per Minutes
Facility Rental
$ 149,000.00
40
Employees
$ 3,725.00
per Employees
Travel
$ 81,300.00
Direct
Direct
TOTAL
$ 730,000.00
AUDIT
TAX
Activity Cost Pool
Expected Use of Cost drivers
Activity Based Overhead rates
Cost Assigned
Expected Use of Cost drivers
Activity Based Overhead rates
Cost Assigned
[A]
[B]
[C = A x B]
[D]
[E = B]
[F = D x E]
Employee Training
$ 1,146,000.00
$ 0.13
$ 148,980.00
$ 679,000.00
$ 0.13
$ 88,270.00
Typing & Secretial
800
$ 30.56
$ 24,448.00
1,700
$ 30.56
$ 51,952.00
Computing
27,000
$ 3.10
$ 83,700.00
33,000
$ 3.10
$ 102,300.00
Facility Rental
22
$ 3,725.00
$ 81,950.00
18
$ 3,725.00
$ 67,050.00
Travel
56,000
Direct
$ 56,000.00
25,300
Direct
$ 25,300.00
Overhead costs assigned
$ 395,078.00
$ 334,872.00
Working
Audit
Tax
A
Direct Labor dollars
$ 1,146,000.00
$ 679,000.00
B = A x 40%
Total Overhead cost assigned [40% of above]
$ 458,400.00
$ 271,600.00
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