Activity Based Costing in the Service Sector: The Buckeye National Bank 1. a) single indirect cost allocation rate:
total indirect costs/total amount of checks processed
$2,850,000/$95,000,000 = $0.03 per dollar processed
b) total annual indirect cost assigned to the retail customer line and the business customer line: amount of checks processed x allocation rate = total indirect costs
$9,500,000 x $0.03 = $285,000 (retail customers)
$85,500,000 x $0.03 = $2,565,000 (business customers)
$95,000,000 x $0.03 = $2,850,000 (total)
The allocations are driven by the amount of the checks processed c) proportion of total indirect cost assigned to the retail customer line and the business customer line:
indirect costs of segments/total indirect costs = proportion
$285,000/$2,850,000 = 10%
$2,565,000/$2,850,000 = 90%
indirect costs are directly related to the amount of checks processed, so the proportion is going to be based on the amount of checks processed.
d) the indirect cost per retail account and per business account:
total indirect cost/number of accounts = indirect cost per account
$285,000/150,000 = $1.90 (retail)
$2,565,000/50,000 = $51.30 (business)
e) average contribution to profit per account for retail and business customers:
revenue per account – cost per account = profit/loss per account
$10 - $1.90 = $8.10 (retail)
$40 - $51.30 = ($11.30) (business)
this is saying that the retail customers are profitable and the business customers are not. A manager would try to bring in more retail customers to increase profit and raise costs or interest for business customers to try to make profit.
2. Signs that the original cost system is broken:
* The bank primarily focused on serving business customers, but with the weak economy those customers started declining and retail customers increased. This added more costs/resources for the bank. * The system uses a single allocation/activity instead of...
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