Martin and Beasley, an accounting firm, provides consulting and tax planning ser

Question

Martin and Beasley, an accounting firm, provides consulting and tax planning services. A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $270,000) has been allocated to services on this basis.

The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:
Staff support $200,000
In-House Computing Charges $50,000
Misc. Office Cost 20,000
Total Cost: 270,000

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.

If Martin and Beasley 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 $32,500.

   B. increase by $32,500.

   C. decrease by $59,500.

   D. change by an amount other than those listed above.

   E. change, but the amount cannot be determined based on the information presented.

Explanation / Answer

A. decrease by $32,500.

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