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.

Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:

Multiple Choice

• 20%.

• 60%.

• 65%.

• 75%.

• 80%.

Answer 1

	Correct Answer is Option D: 75%
	Explained As Below:
	Basis of Allocation of Staff Support Costs:
	Consulting Services	20 / ( 20 + 60)
		25%
	Tax Planning Services	60 / (20 + 60)
		75%
1	In ABC we Identify the cost drivers associated with each activity. A cost driver is an activity or transaction that causes costs to be incurred. For eg: for the purchasing materials activity, the cost drivers could be the number of orders placed or the number of items ordered. Each activity could have multiple cost drivers.
2	In our question for staff support costs, the most suitable cost driver found was the number of staff personnel and the number of clients served.
3	Hence, we used the same to calculate basis of allocating staff support costs.
	FURTHER SOLUTION:
			Basis of Allocation	Basis of Allocation		Costs	Costs
			Consulting	Tax Planning		Consulting	Tax Planning
	Staff Support	$1,80,000	0.25	0.75		$45,000	$1,35,000
	In-house Computing	$50,000	0.30	0.70		$15,000	$35,000
	Miscellaeous Office Costs	$20,000	0.20	0.80		$4,000	$16,000
	TOTAL COSTS	$2,50,000				$64,000	$1,86,000