Question

Bridges and Lloyd, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning services, while 35% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: Staff Support $ 180,000 In-house computing charges 50,000 Miscellaneous office costs 20,000 Total $ 250,000 A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions. If Bridges and Lloyd switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Answer 1

Answer: Decrease by $23,500

Explanation:

The Consulting cost under their current accounting system is:

= 250,000 * 35%

= $87,500

Under Activity based:

Staff support for Consulting:

20 goes to Consulting, 60 to tax planning.

Total = 20 + 60 = 80

Consulting is 20/80 of Staff support amount

= 20/80 * 180,000

= $45,000

In house computing charges for Consulting

Consulting consumed 30% of the firm's computer hours.

= 30% * 50,000

= $15,000

Miscellaneous office costs

Consulting consumed 20% of total client transactions

= 20% * 20,000

= $4,000

Total cost for Consulting under Activity based = 45,000 + 15,000 + 4,000

= $64,000

Difference = 87,500 - 64,000

= $23,500