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:
|In-house computing charges||55,000|
|Miscellaneous office costs||25,000|
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:
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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