Oliver and Sprung, an Accounting Firm, Provides Tax Compliance and Tax

Multiple Choice

Oliver and Sprung, an accounting firm, provides tax compliance 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 $300,000) 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: $\begin{array} { | l | r r | } \hline \text { Staff Support } & \$ \quad 215,000 \\\hline \text { In-house IT charges } & 65,000 \\\hline \text { Miscellaneous office expenditures } & 20,000 \\\hline & \$ 300,000 \\\hline\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house IT and miscellaneous office expenditures varied directly with the number of computer hours logged and number of client transactions, respectively. Tax compliance clients served totaled 25% of the total client base, consumed 35% of the firm's computer hours, and accounted for 30% of the total client transactions.
If Oliver and Sprung switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to tax compliance services would:

A) decrease by $24,500.
B) increase by $24,500.
C) decrease by $114,500.
D) increase by $114,500.
E) decrease by $89,000.