Carlin and Marley, an accounting firm, provides consulting and tax planning services.

Carlin and Marley, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently $285,000) 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 $ 205,000
In-house computing charges 55,000
Miscellaneous office costs 25,000
Total $ 285,000

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:

 

ANSWER: 

Administrative cost chargeable to consulting services = $93,250
Staff Support = $205000 x 35% = $71750
In house computing charges = $55000 x 30% = $16500
Misc. office costs = $25000 x 20% = $5000

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