Logan and Phillips, an accounting firm, provides consulting and tax planning services. A recent analysis found that 55% of the billable hours to clients resulted from tax planning and for many years, the firm's total administrative e cost (currently $270,000) has been allocated to services on this basis.
The firm, contemplating a change to activity based costing has identified three components of administrative cost, as follows:
Staff support 200,000
In-house computing charges 50,000
Misc. office costs 20,000
Total 270,000
A recent analysis of support staff found a strong correlation with the number of clients served. In contrast, in-house computing and misc. 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 transactions.
If Logan and Phillipsswitched firm its current accounting method to an activity based costing system, the amount of admin cost chargeable to consulting services would:
a- Decrease by 32,500
b- Increase by 32,000
c- Decrease by 59,500
d- Other
e- Change but amount cannot be calculated with present info