Reference no: EM13169243
Cost Accounting
Kelly and Logan, 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 with 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 Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of profits attributed to tax planning services would:
A. decrease by $23,500.
B. increase by $23,500.
C. decrease by $32,500.
D. change by an amount other than those listed above.
E. change, but the amount cannot be determined based on the information presented.
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