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McDonald and O'Toole is a law firm that serves both individuals and corporations. 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 individual partners argue for assigning overhead on the basis of 28.125% of direct labour dollars, while the corporate 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.
Estimated
Expected Use
Expected Use of Cost
Drivers per Service
Activity Cost Pool
Cost Driver
Overhead
of Cost Drivers
Corporate
Individual
Employee training
Direct labour dollars
$120,000
$1,600,000
$900,000
$700,000
Clerical
Number of reports and forms
60,000
2,000
500
1,500
Computing
Number of minutes
100,000
40,000
17,000
23,000
Facility rental
Number of employees
25
14
11
Travel
Per expense reports
70,000
Direct
48,000
22,000
$450,000
Instructions
Question (a) Using traditional product costing as proposed by the tax partners, calculate the total overhead cost assigned to both services (individual and corporate) of McDonald and O'Toole.
Question (b) 1. Using activity-based costing, prepare a schedule showing the calculations of the activity-based overhead rates (per cost driver).
Question 2. Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers.
Question (c) Classify each of the activities as a value-added activity or a non-value-added activity
Question (d) Comment on the comparative overhead cost service line under both traditional costing and ABC.
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