Carlin and Marley, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning services, while 45% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: Staff Support$200,000 In-house computing charges 50,000 Miscellaneous office costs 20,000 Total$270,000 A recent analysis of staff support found a strong correlation with the number of clients served. 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 clients served totaled 35% of the total client base, consumed 30% of the firm's computer hours, and accounted for 20% of the total client transactions. If Carlin and Marley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Carlin and Marley

Using activity-based costing system, the amount of administrative cost chargeable to consulting services would be:

= $89,000

instead of $121,500 using the traditional method.

Explanation:

a) Data and Calculations:

Services provided by the accounting firm = consulting and tax planning

Total administrative cost = $270,000

Traditional allocation basis = billable hours to clients

Services                       Tax Planning       Consulting     Total

Traditional cost pool basis:

Billable hours to clients     55%                  45%             100%

Activity cost pool bases:

Client base                         65%                  35%             100%

Computer hours                70%                   30%             100%

Total client transactions    80%                  20%             100%

Activity Pools                     Overhead Costs  Activity Basis

Staff Support                           $200,000      Number of clients served

In-house computing charges     50,000       Number of computer hours

Miscellaneous office costs         20,000       Number of client transactions

Total administrative cost =     $270,000

Overhead Allocation for each Activity Cost Pool:

Services                                        Total       Tax Planning       Consulting    

Staff Support                           $200,000     $130,000             $70,000

In-house computing charges     50,000         35,000                15,000

Miscellaneous office costs         20,000         16,000                  4,000

Total administrative cost =     $270,000      $181,000             $89,000

Traditional costing method:

Billable hours to clients               100%              55%                  45%

Amount based on billable hours $270,000     $148,500       $121,500

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