Cost Driver Expected Use of Cost Drivers Expected Use of Cost Drivers per Servic

Question

Cost Driver

Expected
Use of Cost Drivers

Expected Use of
Cost Drivers per Service

81,300

$720,340

(2) Complete the schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Round the activity-based overhead rates to 3 decimal places, e.g. 2.250 and cost assigned to 0 decimal places, e.g. 12,500. Note due to rounding total cost assigned may be slightly different than from above.)

Audit

Tax

Cost Assigned

Polk and Stoneman is a public 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. Activity Cost Pool

Cost Driver

Estimated Overhead

Expected
Use of Cost Drivers

Expected Use of
Cost Drivers per Service

Audit Tax Employee training Direct labor dollars $213,500 $1,800,850 $1,008,476 $792,374 Typing and secretarial Number of reports/forms 76,240 2,500 600 1,900 Computing Number of minutes 204,000 60,000 25,000 35,000 Facility rental Number of employees 145,300 40 22 18 Travel Per expense reports

81,300

Direct 56,000 25,300

$720,340

Explanation / Answer

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. Overhead assigned to audit $ 403390 [ 720340 * 1008476/1800850] Overhead assigned to tax $ 316950 [ 720340 * 792374/1800850] (1) Using activity-based costing compute the activity-based overhead rates (per cost driver). S.no Overhead Cost Driver Amount of Ratio Audit Tax overhead 1. Employee training : direct labour $ 213500 1008476:792374 119560 93940 2. Typing & secratary: No of report & forms $ 76240 6:19 18298 57942 3. Computing : No of minutes $ 204000 25:35 85000 119000 4. Facility rental : No of employees $145300 22:18 79915 65385 5. Travel Per exp $ 81300 56000 25300 Total Overheads 358773 361567

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