Reference no: EM132562841

Question - COVID 19, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $270.000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that $5% 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 Support $200,000

In-house computing charges 50,000

Miscellaneous office costs 20,000

Total $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 20% of the total client base, consumed 30% of the firm's computer hours, and accounted for 35% of the total client transactions.

If the firm switched from its current accounting method to an activity-based costing system, compute the amount of administrative cost chargeable to tax planning services?

a. decrease by $86,500

b. decrease by $32,500.

c. decrease by $58,000

d. decrease by $59,500