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 c

1 answer
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:________.
a. decrease by $23,500.
b. change, but the amount cannot be determined based on the information presented.
c. increase by $23,500.
d. decrease by $32,500.
e. change by an amount other than those listed.

Answers

Answer:Bridges and LloydIf 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:________. d. decrease by $32,500.Explanation:a) Data and Calculations:Total administrative cost = $250,000Services                       Tax Planning       Consulting     TotalTraditional cost pool basis: Billable hours to clients     65%                  35%             100%Administrative costs     $162,500         $87,500        $250,000 Activity cost pool bases: Client base                         80%                  20%             100% Computer hours                70%                   30%             100% Total client transactions    80%                  20%             100%ABC Allocation:Services                                              Tax Planning    ConsultingStaff Support                       $ 180,000    $144,000     $36,000 In-house computing charges 50,000        35,000        15,000 Miscellaneous office costs    20,000         16,000          4,000 Total                                  $ 250,000    $195,000      $55,000                      Tax Planning       Consulting        TotalTraditional        $162,500          $87,500        $250,000ABC system     $195,000          $55,000       $250,000Difference         $32,500         -$32,500       $0

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