Question

COVID 19, an accounting firm, provides consulting and tax planining services. For many years, the firm's total administrative cost (currently $270,000) has been allocated services on this basis of billable hours to clients. A recent analysis found that 5596 of the firm's billable hours to clients resulted from tax planning services, while 45% resulted from consulting services The firm, contemplating a change 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 the firm switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to tax planning services would

Answer 1

Answer:-

ABC System:

Administrative Costs	Amount	Cost Driver
Staff Support Costs	$200,000	No. of clients
In house Computing	$50,000	No. of Computing hours
Miscellaneous Office Costs	$20,000	No. of client transactions

• No. of Consulting Service Clients = 35% of total client base
• Computing hours consumed by Consulting Service Clients = 30% of firm's computing hours
• No. of Client transactions for Consulting Service Clients = 20% of total client transactions

Cost Driver	Consulting	Tax Planning
No. of Clients	35%	65%
No. of Computing hours	30%	70%
No. of Client Transactions	20%	80%

Hence, Amount of Administrative Cost Chargeable to Tax Planning Services:

Administrative Costs	Amount	Cost Driver	Tax Planning Service base	Allocation
Staff Support Costs	$200,000	No. of clients	65%	$130,000
In house Computing	$50,000	No. of Computing hours	70%	$35,000
Miscellaneous Office Costs	$20,000	No. of client transactions	80%	$16,000
			Total	$181,000

If the firm switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to tax planning services would be $181,000.