ACCOUNTING

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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 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

Activity Cost Pools
 
Cost Drivers
 
Estimated Overhead
 
Expected Use of
Cost Drivers
 
Audit
 
Tax
Employee training Direct labor dollars 
$177,250
 
$1,772,500
 
$1,149,000
 
$623,500
Typing and secretarial Number of reports/forms 
76,470
 
2,500
 
800
 
1,700
Computing Number of minutes 
233,380
 
60,000
 
25,000
 
35,000
Facility rental Number of employees 
140,600
 
40
 
22
 
18
Travel Per expense reports 
81,300
 
Direct
 
56,000
 
25,300
    
$709,000
      
 
 
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.

  
Audit
 
Tax
Total overhead cost assigned 
$[removed]
 
$[removed]
 
 
(1) Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates. (Round overhead rate to 2 decimal places, e.g. $12.25.)

Activity Cost Pools
 
Estimated
Overhead
 
Expected Use of
Cost Drivers per Activity
 
Activity-Based
Overhead Rates
Employee training 
$[removed]
 
[removed]
Direct labor dollars 
$[removed]
 per DL dollar
Typing and secretarial 
[removed]
 
[removed]
Reports/forms 
$[removed]
 per report/form
Computing 
[removed]
 
[removed]
Minutes 
$[removed]
 per minute
Facility rental 
[removed]
 
[removed]
Employees 
$[removed]
 per employee
Travel 
[removed]
 Direct  Direct 
  
$[removed]
      

(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 places, e.g. $12.25 and cost assigned to 0 decimal places, e.g. $2,500. )

  
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
Employee training 
$[removed]
 
$[removed]
 
$[removed]
 
$[removed]
 
$[removed]
 
$[removed]
Typing and secretarial 
[removed]
 
$[removed]
 
[removed]
 
[removed]
 
$[removed]
 
[removed]
Computing 
[removed]
 
$[removed]
 
[removed]
 
[removed]
 
$[removed]
 
[removed]
Facility rental 
[removed]
 
$[removed]
 
[removed]
 
[removed]
 
$[removed]
 
[removed]
Travel 
$[removed]
 
Direct
 
[removed]
 
$[removed]
 
Direct
 
[removed]
     Overhead costs assigned     
$[removed]
     
$[removed]

 
    • 6 years ago
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