Chapter 5 Activity-Based Costing and ManagementProblem 5-57 Customers as a Cost ObjectMorrisom National Bank has requested an analysis of checking account profitability by custom-er type. Customers are categorized according to the size of their account: low balances, mediumbalances, and high balances. The activities associated with the three different customer catego-ries and their associated annual costs are as follows:Opening and closing accountsIssuing monthly statementsProcessing transactionsCustomer inquiries$ 300,000450,0003,075,0000000 Providing automatic teller machine (ATM) services600,000Total cost1,680,000$6,105,000Additional data concerning the usage of the activities by the various customers are alsoprovided:Account BalanceLowMediumHighNumber of accounts opened/closed22,5004,5003,000Number of statements issued675,000150,00075,000Processing transactions27,000,0003,000,000750,000Number of telephone minutes1,500,000900,000600,000Number of ATM transactions2,025,000300,00075,000Number of checking accounts57,00012,0006,000Required:(Note: Round answers to two decimal places.)1. Calculate a cost per account per year by dividing the total cost of processing andmaintaining checking accounts by the total number of accounts. What is the average feeper month that the bank should charge to cover the costs incurred because of checkingaccounts?2. Calculate a cost per account by customer category by using activity rates.3. Currently, the bank offers free checking to all of its customers. The interest revenues$90per account; however, the interest revenues earned per account by categoryaverageare $80, $100, and $165 for the low-, medium-, and high-balance accounts, respectively.Calculate the average profit per account (average revenue minus average cost fromRequirement 1). Then calculate the profit per account by using the revenue per customertype and the unit cost per customer type calculated in Requirement 2.

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Morrisom National Bank has requested an analysis of checking account profitability by custom- er type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the three different customer catego- ries and their associated annual costs are as follows: Opening and closing accounts Issuing monthly statements Processing transactions Customer inquiries Providing automatic teller machine (ATM) services Total cost $ 300,000 450,000 3,075,000 600,000 1,680,000 $6,105,000

Morrisom National Bank has requested an analysis of checking account profitability by custom- er type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the three different customer catego- ries and their associated annual costs are as follows: Opening and closing accounts Issuing monthly statements Processing transactions Customer inquiries Providing automatic teller machine (ATM) services Total cost $ 300,000 450,000 3,075,000 600,000 1,680,000 $6,105,000

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter5: Activity-based Costing And Management

Section: Chapter Questions

Problem 57P: Customers as a Cost Object Morrisom National Bank has requested an analysis of checking account...

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Variable costs and activity bases in decision making Sales volume has been dropping at Pinnacle Publishing Company. During this time, however, the Shipping Department manager has been under severe financial constraints. The manager knows that most of the Shipping Department's effort is related to pulling inventory from the warehouse for each order and performing the paperwork. The paperwork involves preparing shipping documents for each order. Thus, the pulling and paperwork effort associated with each sales order is essentially the same, regardless of the size of the order. The Shipping Department manager has discussed the financial situation with senior management. Senior management has responded by pointing out that sales volume has been dropping, so that the amount of work in the Shipping Department should be dropping. Thus, senior management told the Shipping Department manager that costs should be decreasing in the department. The Shipping Department manager prepared the following information: Given this information, how would you respond to senior management?
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Customers as a Cost Object Morrisom National Bank has requested an analysis of checking account profitability by customer type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the three different customer categories and their associated annual costs are as follows: Additional data concerning the usage of the activities by the various customers are also provided: Required: (Note: Round answers to two decimal places.) 1. Calculate a cost per account per year by dividing the total cost of processing and maintaining checking accounts by the total number of accounts. What is the average fee per month that the bank should charge to cover the costs incurred because of checking accounts? 2. Calculate a cost per account by customer category by using activity rates. 3. Currently, the bank offers free checking to all of its customers. The interest revenues average 90 per account; however, the interest revenues earned per account by category are 80, 100, and 165 for the low-, medium-, and high-balance accounts, respectively. Calculate the average profit per account (average revenue minus average cost from Requirement 1). Then calculate the profit per account by using the revenue per customer type and the unit cost per customer type calculated in Requirement 2. 4. CONCEPTUAL CONNECTION After the analysis in Requirement 3, a vice president recommended eliminating the free checking feature for low-balance customers. The bank president expressed reluctance to do so, arguing that the low-balance customers more than made up for the loss through cross-sales. He presented a survey that showed that 50% of the customers would switch banks if a checking fee were imposed. Explain how you could verify the presidents argument by using ABC.
Identifying activity bases in an activity-based cost system Select Foods Inc. uses activity-based costing to determine product costs. For each activity listed in the left column, match an appropriate activity base from the right column. You may use items in the activity-base list more than once or not at all. Activity Activity Base Accounting reports Engineering change orders Customer return processing Kilowatt hours used Electric power Number of accounting reports Human resources Number of customers Inventory control Number of customer orders Invoice and collecting Number of customer returns Machine depreciation Number of employees Materials handling Number of inspections Order shipping Number of inventory transactions Payroll Number of machine hours Production control Number of material moves Production setup Number of payroll checks processed Purchasing Number of production orders Quality control Number of purchase orders Sales order processing Number of sales orders Number of setups
Evaluating selling and administrative cost allocations Gordon Gecco Furniture Company has two major product lines with the following characteristics: Commercial office furniture: Few large orders, little advertising support, shipments in full truckloads, and low handling complexity Home office furniture: Many small orders, large advertising support, shipments in partial truckloads, and high handling complexity The company produced the following profitability report for management: The selling and administrative expenses are allocated to the products on the basis of relative sales dollars. Evaluate the accuracy of this report and recommend an alternative approach.
Communication The controller of New Wave Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating both the factory overhead and the marketing expenses. As such, the controller has confidence in the accuracy of this report. Home Theater Speakers Wireless Speakers Wireless Headphones Total Sales 1,500,000 1,200,000 900,000 3,600,000 Cost of goods sold 1,050,000 720,000 810,000 2,580,000 Gross profit 450,000 480,000 90,000 1,020,000 Marketing expenses 600,000 120,000 72,000 792,000 Income from operations (150,000) 360,000 18,000 228,000 In addition, the controller interviewed the vice president of marketing, who provided the following insight into the company's three products: The home theater speakers are an older product that is highly recognized in the marketplace. The wireless speakers are a new product that was just recently bunched. The wireless headphones are a new technology that has no competition in the marketplace, and it is hoped that they will become an important future addition to the companys product portfolio. Initial indications are that the product is well received by customers. The controller believes that the manufacturing costs for all three products are in line with expectations. Based on the information provided: 1. Calculate the ratio of gross profit to sales and the ratio of income from operations to sales for each product. 2. Write a brief (one page) memo using the product profitability report and the calculations in (1) to make recommendations to management with respect to strategies for the three products.
Refer to Exercise 8.29. Suppose Gene determines that next years Sales Division activities include the following: Researchresearching current and future conditions in the industry Shippingarranging for shipping of mattresses and handling calls from purchasing agents at retail stores to trace shipments and correct errors Jobberscoordinating the efforts of the independent jobbers who sell the mattresses Basic adsplacing print and television ads for the Sleepeze and Plushette lines Ultima adschoosing and working with the advertising agency on the Ultima account Office managementoperating the Sales Division office The percentage of time spent by each employee of the Sales Division on each of the above activities is given in the following table: Additional information is as follows: a. Depreciation on the office equipment belongs to the office management activity. b. Of the 21,000 for office supplies and other expenses, 5,000 can be assigned to telephone costs which can be split evenly between the shipping and jobbers activities. An additional 2,400 per year is attributable to Internet connections and fees, and the bulk of these costs (80 percent) are assignable to research. The remainder is a cost of office management. All other office supplies and costs are assigned to the office management activity. Required: 1. Prepare an activity-based budget for next year by activity. Use the expected level of sales activity. 2. On the basis of the budget prepared in Requirement 1, advise Gene regarding actions that might be taken to reduce expenses. Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,000 for the Sleepeze, 12,000 for the Plushette, and 5,000 for the Ultima. Gene Dixon, vice president of sales, has provided the following information: a. Salaries for his office (including himself at 65,000, a marketing research assistant at 40,000, and an administrative assistant at 25,000) are budgeted for 130,000 next year. b. Depreciation on the offices and equipment is 20,000 per year. c. Office supplies and other expenses total 21,000 per year. d. Advertising has been steady at 20,000 per year. However, the Ultima is a new product and will require extensive advertising to educate consumers on the unique features of this high-end mattress. Gene believes the company should spend 15 percent of first-year Ultima sales for a print and television campaign. e. Commissions on the Sleepeze and Plushette lines are 5 percent of sales. These commissions are paid to independent jobbers who sell the mattresses to retail stores. f. Last year, shipping for the Sleepeze and Plushette lines averaged 50 per unit sold. Gene expects the Ultima line to ship for 75 per unit sold since this model features a larger mattress. Required: 1. Suppose that Gene is considering three sales scenarios as follows: Prepare a revenue budget for the Sales Division for the coming year for each scenario. 2. Prepare a flexible expense budget for the Sales Division for the three scenarios above.
Exercise 9-51 (Algo) Activity-Based Costing for an Administrative Service (LO 9-5, 8) John’s Custom Computer Shop (JCCS) assembles computers for both individual and corporate customers. The company is organized into two divisions: Personal and Business. Once a computer is built, it is shipped to the customer. Billing for all customers is handled by the corporate Accounts Receivable Department. Accounts Receivable performs two major activities: billing and dispute resolution. Billing refers to preparing and sending the bills as well as processing the payments. Dispute resolution occurs when a customer refuses to pay, usually due to an error in billing. The costs of the Accounts Receivable Department are allocated to the two divisions based on the number of bills prepared. Kyle, the manager of the Business division, has complained that the allocated costs from Accounts Receivable are beginning to make the business division look unprofitable and has asked you to recommend some changes…
Exercise 5 - 6. ALLOCATION OF SERVICE DEPARTMENT COSTS The controller of MM Company estimates that factory overhead will be as follows for ts two producing departments and three service departments. Cutting department P 240,000 Finishing department 168,000 Maintenance department 40,340 Warehousing department 30,000 Factory office 65,000 The controller also provides the following tabulation of the interdependence of departments: Services provided by To Department Maintenance Warehousing Factory office Cutting 45% 50% 62% Finishing 28 32 38 Maintenance -…
a-1. What is the cost per unit for paychecks processed? a-2. What is the cost per unit for customer accounts maintained? a-3. What is the cost per unit for special analyses performed? b. Assuming the followiing level of cost-driver volumes for a month, what are the accounting department's estimated costs of doing busines using the account analysis approach? -1000 paycheck processed -200 customer accounts maintained -3 special analyses
Exercise 12-3 Measures of Internal Business Process Performance [LO12-3] Management of Mittel Rhein AG of Köln, Germany, would like to reduce the amount of time between when a customer places an order and when the order is shipped. For the first quarter of operations during the current year the following data were reported: Inspection time 0.7 day Wait time (from order tostart of production) 16.5 days Process time 3.0 days Move time 0.6 day Queue time 3.8 days 4. Compute the delivery cycle time. (Round your intermediate calculations and final answer to 1 decimal place.) 5. If by using Lean Production all queue time during production is eliminated, what will be the new MCE? (Do not round intermediate calculations. Round your percentage answer to nearest whole percent.)
Exercise 12-3 Measures of Internal Business Process Performance [LO12-3] Management of Mittel Rhein AG of Köln, Germany, would like to reduce the amount of time between when a customer places an order and when the order is shipped. For the first quarter of operations during the current year the following data were reported: Inspection time 0.7 day Wait time (from order tostart of production) 16.5 days Process time 3.0 days Move time 0.6 day Queue time 3.8 days Required: 1.Compute the throughput time. (Round your answer to 1 decimal place.) 2. Compute the manufacturing cycle efficiency (MCE) for the quarter. (Round your percentage answer to nearest whole percent.) 3. What percentage of the throughput time was spent in non–value-added activities? (Round your percentage answer to nearest whole percent.) 4. Compute the delivery cycle time. (Round your intermediate calculations and final answer to 1 decimal place.) 5. If by using Lean…