Carlin and Marley, an accounting firm, provides consulting and tax planningservices. For many years, the firm's total administrative cost (currently$270,000) has been allocated to services on this basis of billable hours toclients. A recent analysis found that 55% of the firm's billable hours to clientsresulted from tax planning services, while 45% resulted from consultingservices. The firm, contemplating a change to activity-based costing, has identifiedthree components of administrative cost, as follows: Staff Support $200,000
In-house computingcharges 50,000
Miscellaneous officecosts 20,000
Total $270,000
A recent analysis of staff support found a strong correlation with the numberof clients served. In contrast, in-house computing and miscellaneous officecost varied directly with the number of computer hours logged and number ofclient transactions, respectively. Consulting clients served totaled 35% of thetotal client base, consumed 30% of the firm's computer hours, and accountedfor 20% of the total client transactions.

The amount of administrative cost chargeable to tax planning services would decrease by $32,500

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Explanation:

Solution

Given that:

In this example, the total cost of administrative charged to tax planning services is given as =$270,000 * 55%

=$148,000

Now,

The activity based cost system is shown below:

Cost                 Amount           Cost driver          Consulting     Tax planning

Staff support  200,000      No of clients served     35%              65%

In house com-  

puting charges 50,000     Computers hrs logged   30%             70%

Misc office

Cost                   20,000         No of clients

                                               Transaction                  20%              80%

Total                  $270,000

Thus,

Activity                    Workings         Allocated to tax planning services

Staff support        200,000 * 65%             130,000

In house Comp-

uting Charges        50,000 * 70%              35,000

Misc office costs    20,000 * 80%              16,000

The total cost

allocated                                                       $181,000

So, the change in amount allocated to tax planning services under this system is = $181,000-$148,500

= $32,500

this conflict is person vs. society

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