Hy and Lowe is a public accounting firm that offeres 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 acivity-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 Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Expected Use of Cost Drivers per Service
Audit Tax
Employee training Direct labor dollars 216,000 1,800,000 1,000,000 800,000
Typing and Secretarial No. of reports/forms 76,200 2,500 600 1,900
Computing No. of minutes 204,000 60,000 25,000 35,000
Facility rental No. 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 Hy and Lowe.
b (1). Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).
b(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.