Activity-Based Costing of Customers
Rock Solid Bank and Trust (RSB&T) oilers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB&T earns revenue by investing the money deposited; currently, it averages 5.2 percent annually on its investments of those deposits. To compete with larger banks. RSB&T pays depositors 0.5 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities:
Data on two representative customers follow:
Required
- a. Compute RSB&T’s operating profits.
- b. Compute the profit from Customer A and Customer B, assuming that customer costs are based only on deposits. Interest costs = 0.5 percent of deposits; operating costs are 4 percent (= $15,000,000/$375,000,000) of deposits.
- c. Compute the profit from Customer A and Customer B, assuming that customer costs are computed using the information in the activity-based costing analysis.
a.
Compute the operating profit.
Explanation of Solution
Operating profit:
Operating profit is the amount retained by subtracting the total costs of operations occurred from the sales revenues earned.
Compute the operating profit:
Particulars | Amount |
Sales revenue | $19,500,000 |
Costs: | |
Interest on deposits | $1,875,000 |
Operating costs | $15,000,000 |
Total costs | $16,875,000 |
Operating profit | $2,625,000 |
Table: (1)
b.
Compute the profit from customer A and customer B according to the information given in the question.
Explanation of Solution
Profit:
Profit is the amount retained by subtracting the total costs from the sales revenues earned.
Compute the customer profit of both the customers:
Particulars | Customer A | Customer B |
Sales revenue | $312 | $312 |
Interest on deposits | $30 | $30 |
Operating costs | $240 | $240 |
Customer profit | $42 | $42 |
Table: (2)
Measures that are used for computation:
Particulars | Details |
Deposit of customer A | $6,000 |
Deposit of customer B | $6,000 |
Interest earned | 5.20% |
Interests charged | 0.50% |
Operating cost | 4.00% |
Table: (3)
c.
Compute the profit from customer A and customer B according to the information given in the question.
Explanation of Solution
Cost driver:
Cost driver refers to the factor that causes changes in the determination of the cost of the activity.
Compute the rates required for the computation of the customer profit:
Activity | Cost driver |
Cost |
Driver volume |
Rate |
Use ATM | Number of uses | $1,500,000 | 2,000,000 | 0.75 |
Visit Branch | Number of visits | $900,000 | 150,000 | 6.00 |
Process transaction | Number of transactions | $6,600,000 | 80,000,000 | 0.0825 |
General bank overhead | Total deposits | $6,000,000 | 375,000,000 | 1.60% |
Table: (4)
Customer A | Customer B | |
Activity | Amount | Amount |
Sales revenue | $312 | $312 |
Interest on deposit | $30 | $30 |
Account margin | $282 | $282 |
Operating costs: | ||
Use ATM | $75 | $150 |
Add: Visit branch | $30 | $120 |
Add: Process transaction | $3 | $124 |
Add: General bank overhead | $96 | $69 |
Total operating cost | $204 | $490 |
Customer profit | $78 | ($208) |
Table: (5)
Particulars | Details |
Deposit of customer A | $6,000 |
Deposit of customer B | $6,000 |
Interest earned | 5.20% |
Interests charged | 0.50% |
Table: (6)
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Chapter 10 Solutions
FUNDAMENTAL'S OF COST ACCOUNTING LL
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