Reference no: EM13502486

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	Expected Use
			Use of	of Cost Drivers
		Estimated	Cost	per Service
Activity Cost Pools	Cost Drivers	Overhead	Drivers	Audit	Tax
Employee training	Direct labor dollars	$216,000	$1,800,000	$1,050,000	$750,000
Typing and	Number of reports/
secretarial	forms	76,200	2,500	800	1,700
Computing	Number of minutes	204,000	60,000	25,000	35,000
Facility rental	Number of employees	142,500	40	22	18
Travel	Per expense reports	81,300	Direct	56,000	25,300
		$720,000

Instructions

(a) 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.

(b) (1) Using activity-based costing, prepare a schedule showing the computations 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.

(c) Classify each of the activities as a value-added activity or a non-value-added activity.

(d) Comment on the comparative overhead cost for the two services under both traditional costing and ABC.