Buckeye National Bank
Buckeye National Bank
1. Under the traditional (old) cost system:
a. Compute the single indirect cost allocation rate that the bank would use to allocate the total indirect costs presented in Exhibit B. (Total indirect costs/total value of checks processed, in thousands)
$2,850 / $95,000 = $0.03
b. Use your answer to part A to determine the total annual indirect cost assigned to:
i. The retail customer line (Value of checks processed X cost per dollar processed, in thousands), and
$9,500 * $0.03 = $285 ii. The business customer line. (Value of checks processed X cost per dollar processed, in thousands). What drives theses allocations?
$85,500 * $0.03 = $2,565 The allocations are driven by the checks processed.
c. What proportion of the total indirect cost is assigned to: iii. The retail customer line, and iv. The business customer line? Why? That is, what is the underlying rationale for indirect cost allocation under the old system? What assumption must hold approximately true for the traditional cost allocation procedure to generate “accurate” customer cost information? (in thousands)
Retail line: $285 $285 / ($285 + $2,565) =10％
Business line: $2,565 $2,565 / ($285 + $2,565) =90％
The traditional system assumed that indirect costs are incurred in direct proportion to the dollar value of the checks processed. Since the old indirect cost was allocated by paying checks, which was processed, and 90% of the checks wrote through business line, 90% indirect cost was allocated in Business line and 10% was allocated in retail line. This allocation is approximately accurate only if the indirect costs in Exhibit B are incurred in direct proportion to the dollar value of the checks each customer line writes
d. Use your answer to part B and data on the number of retail and business accounts to determine:
v. The indirect cost per retail account, and vi. The indirect cost per business account (in thousands).
Retail: $285 / 150 (number of accounts) = $1.90
Business: $2,565
1. Under the traditional (old) cost system:
a. Compute the single indirect cost allocation rate that the bank would use to allocate the total indirect costs presented in Exhibit B. (Total indirect costs/total value of checks processed, in thousands)
$2,850 / $95,000 = $0.03
b. Use your answer to part A to determine the total annual indirect cost assigned to:
i. The retail customer line (Value of checks processed X cost per dollar processed, in thousands), and
$9,500 * $0.03 = $285 ii. The business customer line. (Value of checks processed X cost per dollar processed, in thousands). What drives theses allocations?
$85,500 * $0.03 = $2,565 The allocations are driven by the checks processed.
c. What proportion of the total indirect cost is assigned to: iii. The retail customer line, and iv. The business customer line? Why? That is, what is the underlying rationale for indirect cost allocation under the old system? What assumption must hold approximately true for the traditional cost allocation procedure to generate “accurate” customer cost information? (in thousands)
Retail line: $285 $285 / ($285 + $2,565) =10％
Business line: $2,565 $2,565 / ($285 + $2,565) =90％
The traditional system assumed that indirect costs are incurred in direct proportion to the dollar value of the checks processed. Since the old indirect cost was allocated by paying checks, which was processed, and 90% of the checks wrote through business line, 90% indirect cost was allocated in Business line and 10% was allocated in retail line. This allocation is approximately accurate only if the indirect costs in Exhibit B are incurred in direct proportion to the dollar value of the checks each customer line writes
d. Use your answer to part B and data on the number of retail and business accounts to determine:
v. The indirect cost per retail account, and vi. The indirect cost per business account (in thousands).
Retail: $285 / 150 (number of accounts) = $1.90
Business: $2,565