Problem - Hy and van Lamsweerde 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 regarding 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 labour dollars, while the audit partners argue for implementing activity-based costing. The partners agree to use next year's budgeted data for analysis and comparison. The following overhead data are collected:
|
Activity Cost Pools
|
Cost Drivers
|
Estimate Overhead
|
Expected Use of Cost Drivers
|
Expected Use of Cost Drivers per Service
|
|
Audit
|
Tax
|
|
Employee training
|
Direct labour dollars
|
$225,634
|
$1,880,283
|
$991,000
|
$889,283
|
|
Typing and secretarial
|
Number of reports and forms
|
78,435
|
2,700
|
600
|
2,100
|
|
Computing
|
Number of minutes
|
204,624
|
60,900
|
25,400
|
35,500
|
|
Facility rental
|
Number of employees
|
160,320
|
48
|
28
|
20
|
|
Travel
|
Per expense reports
|
83,100
|
Direct
|
56,900
|
26,200
|
|
|
|
752,113
|
|
|
|
(a) Using traditional product costing as proposed by the tax partners, calculate the total overhead cost assigned to both services (audit and tax) of Hy and van Lamsweerde.
(b) 1. Using activity-based costing, prepare a schedule showing the calculations 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.