Buckeye National Bank

Topics: Management, Resource allocation Pages: 5 (1140 words) Published: April 1, 2015
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 / 50 (number of accounts) = $51.30
e. Assuming there are no direct costs or other indirect costs, compute the average contribution to profit per account for retail customers and for business customers. What business strategy would a manager using the original cost allocation system likely adopt? Why? Profit (Retail): $10 - $1.9 = $8.1

Profit (Business): $40 - $51.3 = ($11.3)
This suggests Buckeye National Bank should pursue a strategy that increases the retail-customer base because the traditional cost system shows retail customers are profitable, but business customers are not. Since business line reached a negative profit, manger used traditional cost allocation system will increase to attract new account opened in retail line. Encourage mangers to increase the retail customer base. 2. What are the signs that Buckeye’s original cost system is “broken,” such that it needs refinement on improvement? One sign that the cost allocation system is broken is the amount of allocated cost per business account. Although the company made strategy through traditional cost system, it is still unclear why the profit was declining. When you have such few accounts but allocate based on the total dollar value of checks processed, you over allocate for the business line. There might be some problem when the company was allocating the cost on both lines, and the methods to allocate will route a wrong strategy for the company. 3. Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities: f. Paying checks:

$700 +$440 = $1,140
$1140 / $2,850 = $0.4 per check processed
g. Providing teller services:
$1,000 + $200 = $1200
$1,200 / $200 = $6 per teller
h. Responding to customer account inquiries:
$450 + $60 = $510
$510 / $100 = $5.1 per call
4. Use the following schedule to compute the total indirect cost allocated to each customer line (show your computations beside the activity description)...
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