Essay on Case East Penn Bank

2475 WordsFeb 14, 201510 Pages
Activity-Based Costing in the Service Sector: The East Penn Bank ABSTRACT: This case illustrates why a major segment of the service sector banks - needs accurate cost information to make strategic decisions, and how more refined accounting systems help fulfill this need. East Penn Bank is a hypothetical bank that has suffered falling profits despite a shift in customer base toward retail customers, which the current information system reports are more profitable than business customers. Following a stepby-step approach, you will develop the Bank’s average cost of serving a retail customer account and a business customer account, under (1) the Bank’s traditional single allocation base system, and (2) a (pilot test) activity-based costing…show more content…
The bank allocates these indirect costs to either the retail customer line or the business customer line, based on the total dollar value of checks processed (which is readily available because each branch must provide the dollar values of daily transactions for internal control). For the current period East Penn processed a total of $95 million in checks, of which $9.5 million was written by retail customers, and $85.5 million was written by business customers. This costing approach was fairly typical of banks and other financial institutions at the time East Penn developed its cost system. In college, Erik learned about an alternative costing approach called activitybased costing (ABC). However, the examples he remembered involved manufacturing firms. He wondered whether East Penn could develop an ABC system, with the business account customer line and the retail account customer line as the two primary cost objects. Erik approached Rob Garrison with this suggestion. Rob was skeptical, exclaiming, “Our profits are going down the tubes and you want me to spend money developing a new accounting system?” However, Erik persisted, and Rob eventually authorized a pilot ABC study using three local branches of the bank. The ABC implementation team included Erik, the managers of each of the three bank branches, a bank teller, and a representative from the customer
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