*Problem 185A Polk and Stoneman is a public accounting firm that offers two pri
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Question
*Problem 185A
Polk and Stoneman 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 activitybased 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
$235,300
$1,810,000
$1,120,000
$690,000
Typing and secretarial Number of reports/forms 76,750 2,500 800 1,700
Computing Number of minutes 182,750 60,000 25,000 35,000
Facility rental Number of employees 147,900 40 22 18
Audit $____________________
Tax$________________
$
$
Using traditional product costing as proposed by the tax partners, compute the total overhead cost assigned to both services (audit and tax) of Polk and Stoneman.
(2) Prepare a schedule assigning each activity’s overhead cost pool to each service based on the use of the cost drivers. (Round overhead rate to 2 decimal p and cost assigned to 0 decimal places, e.g. $2,500. )
The last one is Cost Assigned for the end column for the last section.
Activity Cost Pools
Cost Drivers
Estimated Overhead
Expected Use of Cost Drivers
Audit
Tax
Employee training
Direct labor dollars
$235,300
$1,810,000
$1,120,000
$690,000
Explanation / Answer
Answer: 1
Total estimated overhead = 235300+76750+182750+147900 = 642700
For audit = (642700/1810000)*1120000 = $392000
For tax = (642700/1810000)*690000 = $241500
Answer:2
Activity based overhead rates:
Employee training = 235300/1810000 = 0.13 per DL dollar
Typing and secretarial= 76750/2500 = 30.7 per report/ form
Computing = 182750/60000 = 3.04 per minute
Facility rental = 147900/40 = 3697.5 per employee
Audit Activity cost pool Expected use of cost driver Activity based overhead rates Cost assigned Employee training $ 11,20,000.00 $ 0.13 $ 1,45,600.00 Typing and secretarial 800 $ 30.70 $ 24,560.00 Computing 25000 $ 3.04 $ 76,000.00 Facility rental 22 $ 3,697.50 $ 81,345.00 overhead cost assigned $ 3,27,505.00 Tax Activity cost pool Expected use of cost driver Activity based overhead rates Cost assigned Employee training $ 6,90,000.00 $ 0.13 $ 89,700.00 Typing and secretarial 1700 $ 30.70 $ 52,190.00 Computing 35000 $ 3.04 $ 1,06,400.00 Facility rental 18 $ 3,697.50 $ 66,555.00 overhead cost assigned $ 3,14,845.00Related Questions
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