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: 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. If Bridges and Lloyd switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting 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.
E)change, but the amount cannot be determined based on the information presented.

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:  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. If Bridges and Lloyd switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting 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. 
E)change, but the amount cannot be determined based on the information presented.

Quizplus · Accepted Answer

Under activity-based costing, the administrative cost charged to consulting services would be based on the number of computer hours and client transactions attributable to consulting. Based on the information given, consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions. Therefore, the administrative cost charged to consulting would be:
($120,000 x 30%) + ($110,000 x 20%) = $36,000 + $22,000 = $58,000
This represents a decrease of $23,500 compared to the current allocation based on billable hours ($81,500 - $58,000 = $23,500).

Bridges and Lloyd, an Accounting ﬁRm, Provides Consulting and Tax