Clark CPA and Associates is a local accounting firm specializing in bookkeeping and tax services. The firm has four certified public accountants who supervise 20 clerks. The clerks handle basic bookkeeping jobs and prepare tax return drafts. The CPAs review and approve the bookkeeping jobs and tax returns. Each CPA receives a fixed salary of $9,000 per month; the clerks earn an hourly rate of $18. Because the clerks are paid by the hour and their work hours can be directly traced to individual jobs, their wages are considered direct costs. The CPAs€™ salaries are not traced to individual jobs and are therefore treated as indirect costs. The firm allocates overhead based on direct labor hours. The following is Clark€™s income statement for the previous month.

Mary Clark, CPA and chief executive officer, is not sure that the two operations are equally profitable as the income statement indicates. First, she believes that most of the CPAs€™ time was spent instructing clerks in tax return preparation. The bookkeeping jobs appear to be routine, and most of the clerks can handle them with little supervision. After attending a recent professional development seminar on activity-based costing (ABC), Ms. Clark believes that the allocation of indirect costs can be more closely traced to different types of services. To facilitate an activity-based analysis, she asked the CPAs to document their work hours on individual jobs for the last week. The results indicate that, on average, 25 percent of the CPAs€™ hours was spent supervising bookkeeping activities and the remaining 75 percent was spent supervising tax activities.

Required
a. Based on the preceding information, reconstruct the income statement for bookkeeping services, tax services, and the total, assuming that Clark revises its allocation of indirect supervisory costs based on ABC.
b. Comment on the results and recommend a new businessstrategy.

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Bookkeeping Tax Total (45000 $200,000 18,000 (36,000) $37000 74,000 $100,000 Revenues Direct expenses Indirect supervisory expenses18,000) Net income $100,000 (45,000* (45,000) (90,000) S37000 2,500 clerical hours were used in each category during the previous month.