Posted in
P17-5B
Smith and Jones 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 30% of direct labor 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.
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Expected |
Expected Use |
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Use of |
of Cost Drivers |
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Estimated |
Cost |
per Service |
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Activity Cost Pool |
Cost Driver |
Overhead |
Drivers |
Corporate |
Individual |
|
Employee training |
Direct labor dollars |
$120,000 |
$1,600,000 |
$900,000 |
$700,000 |
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Typing and |
Number of reports/ |
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|
|
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|
secretarial |
forms |
60,000 |
2,000 |
500 |
1,500 |
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Computing |
Number of minutes |
130,000 |
40,000 |
17,000 |
23,000 |
|
Facility rental |
Number of employees |
100,000 |
25 |
14 |
11 |
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Travel |
Per expense reports |
70,000 |
Direct |
48,000 |
22,000 |
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|
|
$480,000 |
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Instructions
(a) Using traditional product costing, compute the total overhead cost assigned to both services (individual and corporate) of Smith and Jones.
(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 nonâvalue-added activity.
(d) Comment on the comparative overhead for the two service lines under both traditional costing and ABC.
