Kelly and Logan, an Accounting Firm, Provides Consulting and Tax

question 62

Multiple Choice

Kelly and Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and 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. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: $\begin{array} { | l | r | } \hline \text { Staff support } & \$ 180,000 \\\hline \text { In-house computing charges } & 50,000 \\\hline \text { Miscellaneous office costs } & 20.000 \\\hline \text { Total } & \$ 250.000 \\\hline\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20 clients; tax planning, 60 clients) . 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 administrative cost chargeable to consulting services would:

• A)decrease by $23,500.
• B)increase by $23,500.
• C)decrease by $32,500.
• D)increase by $32,500.
• E)decrease by $64,000.

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Definitions:

Pie

A metaphorical representation of a total market or economy, which can be divided among participants.

Comparative Advantage

Comparative advantage is an economic principle that describes the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors.

Opportunity Cost

Opportunity cost refers to the value of the next best alternative that is foregone when choosing one option over another.

Ice Cream

A frozen dessert made from dairy products, sweeteners, and flavorings, enjoyed as a treat or snack.