Keenan & Quigley, LLC, is a CPA firm that offers both tax and audit services to two large clients. The firm bills each client for cost plus 20%. It is straightforward to trace the direct costs associated with each client.

However, the firm also incurs $45,000 in support costs (or overhead) each month. Currently, Keenan & Quigley accumulates overhead cost into three pools: Audit, tax, and administration.

Keenan & Quigley wishes to explore alternative ways of allocating overhead costs to clients so that each client is charged for its fair share of the CPA firm's overhead costs.

The following table provides relevant data.

Required:
a. Using the step-down method, what is the overhead cost allocated to each client? Allocate administration costs first.
b. Would your answer to part (a) differ if you used the direct method? Why or why not?
c. Would your answer to part (a) hold regardless of the order in which you allocated over-head costs using the step-down method?
d. Using logic rather than numbers, discuss why your answer to part (a) would not differ if you used the reciprocal method?

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Adminis- AuditTaxtration Client 1 Client 2 Traced costs S15,000 $7,500 $22,500 /a a 40% 60% 70% 30% 20% 60% Audit Tax Services provided by Administration 10% 10%