Polk and Stoneman, a public accounting firm, is debating how to assign overhead costs between its auditing and tax preparation services. The tax partners argue for a 40% allocation based on direct labor costs, while the audit partners prefer activity-based costing. To resolve the issue, next year the firm will estimate expected use of various overhead activities for each service and calculate activity-based overhead rates to fairly assign costs.

1. 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
Solution
(1) Activity Cost Pools Estimated Expected Use of Activity-Based Overhead Cost Drivers per
Activity Overhead Rates Employee training 269625 1797500 Direct labor dollars
0.15 per DL dollar Typing and secretarial 76840 2500 Reports/forms
30.74 per report/form Computing 149135 60000 Minutes 2.49
per minute Facility rental 142100 40 Employees 3,552.50 per employee Travel
81300 Direct Direct 719000 (2) Audit Tax Activity Cost Pool Expected Use of Activity-Based
Cost Assigned Expected Use of Activity-Based Cost Assigned Cost Drivers Overhead Rates
Cost Drivers Overhead Rates Employee training 1100000 0.15
165,000.00 697500 0.15 104,625.00 Typing
and secretarial 800 30.74 24,592.00 1700
30.74 52,258.00 Computing 25000
2.49 62,250.00 35000 2.49
87,150.00 Facility rental 22 3,552.50
78,155.00 18 3,552.50 63,945.00 Travel 56000 Direct
56,000.00 25300 Direct 25,300.00 Overhead costs assigned
385,997 333,278