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