Reference no: EM132657493

Carlin and Marley, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $330,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning services, while 45% resulted from consulting services.

The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

Staff Suppor t$220,000
In-house computing charges 70,000
Miscellaneous office costs 40,000
Total $330,000

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.

Problem 1: If Carlin and Marley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Multiple Choice

Option 1: decrease by $75,500.

Option 2: change by an amount other than those listed.

Option 3: change, but the amount cannot be determined based on the information presented.

Option 4: decrease by $42,500.

Option 5: increase by $42,500.