Buckeye National Bank

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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
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The ABC system allocates indirect costs based on each activity of the retail and business customers. This system shows that 20% of checks processed were from retail customers and 80% were from business customers. 8. Average contribution to profit per account: revenue per account – cost per account = profit/loss per account $10 - $11.15 = ($1.15) (retail customers) [$1,672,500/150,000 = $11.15] $40 - $23.55 = $16.45 (business customers) [$1,177,500/50,000 = $16.45]

The ABC system shows that the business customers are profitable and the retail customers are not, the opposite of what the original system shows. A manger would try to increase business customers and increase fees for retail customers. 9. I think the strategy is unwise because with the original system, management’s strategy was to increase retail customers rather than business customers, when the ABC system shows that retail customers are not profitable. The bank might try to attract new business customers to increase profit. 10. The ABC system can help the bank by pricing their services more appropriately and measuring the profitability of the different services they offer to different customers. It can also use ABC to improve in areas and cut down their costs.

11. The ABC system can point out areas to save costs, which can increase the banks
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