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Differential Costing
As pointed out earlier in “Here’s the Real Kicker,” Kicker changed banks a couple of years ago because the loan officer at its bank moved out of state. Kicker saw that as an opportunity to take bids for its banking business and to fine-tune the banking services it was using. This problem uses that situation as the underlying scenario but uses three banks: FirstBank, Community Bank, and RegionalOne Bank. A set of representative data was presented to each bank for the purpose of preparing a bid. The data are as follows:
Checking accounts needed: 6
Checks per month:* 2,000
Foreign debits/credits on checking accounts per month: 200
Deposits per month:* 300
Returned checks:* 25 per month
Credit card charges per month: 4,000
Wire transfers per month: 100, of which 60 are to foreign bank accounts
Monthly credit needs (line of credit availability and cost): $100,000 average monthly usage
*These are overall totals for the six accounts during a month.
Internet banking services?
Knowledgeable loan officer?
Responsiveness of bank?
FirstBank Bid:
Checking accounts: $5 monthly maintenance fee per account
$0.10 foreign debit/credit
$0.50 earned for each deposit
$3 per returned check
Credit card fees: $0.50 per item
Wire transfers: $15 to domestic bank accounts, $50 to foreign bank accounts
Line of credit: Yes, this amount is available,
interest charged at prime plus 2%,
subject to a 6% minimum interest rate
Internet banking services? Yes, full online banking available:
$15 one-time setup fee for each account
$20 monthly fee for software module
The loan officer assigned to the potential Kicker account had 10 years of experience with medium to large business banking and showed an understanding of the audio industry.
Community Bank Bid:
Checking accounts: No fees for the accounts, and no credits earned on deposits
$2.00 per returned check
Credit card fees: $0.50 per item,
$7 per batch processed. Only manual processing was available, and
Kicker estimated 20 batches per month
Wire transfers: $30 per wire transfer
Line of credit: Yes, this amount is available:
interest charged at prime plus 2%
subject to a 7% minimum interest rate
Internet banking services? Not currently, but within the next 6 months
The loan officer assigned to the potential Kicker account had 4 years of experience with medium to large business banking, none of which pertained to the audio industry.
RegionalOne Bank Bid:
Checking accounts: $5 monthly maintenance fee per account to be waived for Kicker
$0.20 foreign debit/credit
$0.30 earned for each deposit
$3.80 per returned check
Credit card fees: $0.50 per item
Wire transfers: $10 to domestic bank accounts, $55 to foreign bank accounts
Line of credit: Yes, this amount is available:
interest charged at prime plus 2%
subject to a 6.5% minimum interest rate
Internet banking services? Yes, full online banking available:
one-time setup fee for each account waived for Kicker
$20 monthly fee for software module
The loan officer assigned to the potential Kicker account had 2 years of experience with large business banking. Another branch of the bank had expertise in the audio industry and would be willing to help as needed. This bank was the first one to submit a bid.
Required:
- 1. Calculate the predicted monthly cost of banking with each bank. Round answers to the nearest dollar.
- 2. CONCEPTUAL CONNECTION Suppose Kicker felt that full online Internet banking was critical. How would that affect your analysis from Requirement 1? How would you incorporate the subjective factors (e.g., experience, access to expertise)?
1.
Calculate the predicted monthly cost of banking for each bank.
Explanation of Solution
Cost:
Cost can be defined as the cash and cash equivalent which is incurred against the products or its related services which will benefit the organization in the future.
The following table represents the predicted monthly cost of banking for Bank F:
| Cost | Amount ($) | Amount ($) |
| Checking accounts: | ||
| Maintenance fees1 | 30 | |
| Foreign debit/credit2 | 20 | |
| Returned checks3 | 75 | |
| Earnings on deposits4 | (150) | (25) |
| Credit card fees5 | 2,000 | |
| Wire transfers6 | 3,600 | |
| Line of credit charges7 | 500 | |
| Internet banking charges | 20 | |
| Total monthly charges | 6,095 |
Table (1)
The total amount of monthly charges of Bank F is $6,095.
The following table represents the predicted monthly cost of banking for Bank C:
| Cost | Amount ($) | Amount ($) |
| Checking accounts: | ||
| Returned checks8 | 50 | |
| Credit card fees: | ||
| Per item9 | 2,000 | |
| Batch processing10 | 140 | 2,140 |
| Wire transfers11 | 3,000 | |
| Line of credit charges12 | 583 | |
| Total monthly charges | 5,773 |
Table (2)
The total amount of monthly charges of Bank C is $5,773.
The following table represents the predicted monthly cost of banking for Bank R:
| Cost | Amount ($) | Amount ($) |
| Checking accounts: | ||
| Foreign debit/credit13 | 40 | |
| Returned checks14 | 95 | |
| Earnings on deposits15 | (90) | 45 |
| Credit card fees16 | 2,000 | |
| Wire transfers17 | 3,700 | |
| Line of credit charges18 | 542 | |
| Internet banking charges | 20 | |
| Total monthly charges | 6,307 |
Table (3)
The total amount of monthly charges of Bank R is $6,307.
Therefore, Bank C has the lowest overall monthly charges that is $5,773.
Working Notes:
1. Calculation of maintenance fees of Bank F:
Hence, the amount of maintenance fees is $30.
2. Calculation of foreign debit/credit amount for Bank F:
Hence, the foreign debit/credit amount is $20.
3. Calculation of returned checks for Bank F:
Hence, the amount of returned checks is $75.
4. Calculation of earnings on deposits for Bank F:
Hence, the amount of earnings on deposits is $150.
5. Calculation of credit card fees Bank F:
Hence, the amount of credit card charges is $2,000.
6. Calculation of wire transfers for Bank F:
Hence, the amount of wire transfers is $3,600.
7. Calculation of line of credit charges Bank F:
Hence, the amount of line of credit charges is $500.
8. Calculation of returned checks for Bank C:
Hence, the amount of returned checks is $50.
9. Calculation of credit card fees per item for Bank C:
Hence, the amount of credit card charges is $2,000.
10. Calculation of credit card fees of batch processing for Bank C:
Hence, the amount of credit card charges is $140.
11. Calculation of wire transfers for Bank C:
Hence, the amount of wire transfers is $3,000.
12. Calculation of line of credit charges Bank C:
Hence, the amount of line of credit charges is $583.
13. Calculation of foreign debit/credit amount for Bank R:
Hence, the foreign debit/credit amount is $40.
14. Calculation of returned checks for Bank R:
Hence, the amount of returned checks is $95.
15. Calculation of earnings on deposits for Bank R:
Hence, the amount of earnings on deposits is $90.
16. Calculation of credit card fees Bank R:
Hence, the amount of credit card charges is $2,000.
17. Calculation of wire transfers for Bank R:
Hence, the amount of wire transfers is $3,700.
18. Calculation of line of credit charges Bank R:
Hence, the amount of line of credit charges is $542.
2.
Describe the effect of internet banking on the analysis. Also, describe how to incorporate subjective factors.
Explanation of Solution
If the internet banking is a crucial factor, then Bank C will be eliminated because it does not offer internet banking. Person K will not consider Bank C as an appropriate bank. The monthly cost of Bank F is slightly different from that of Bank R. Therefore, Person K’s deciding factors will be the ability of the bank officers to respond quickly and their expertise in granting loan. If any of the banks satisfy the needs of Person K, then it will be selected.
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Chapter 8 Solutions
Managerial Accounting
- Cost Behavior, High-Low Method, Pricing Decision Fonseca, Ruiz, and Dunn is a large, local accounting firm located in a southwestern city. Carlos Ruiz, one of the firms founders, appreciates the success his firm has enjoyed and wants to give something back to his community. He believes that an inexpensive accounting services clinic could provide basic accounting services for small businesses located in the barrio. He wants to price the services at cost. Since the clinic is brand new, it has no experience to go on. Carlos decided to operate the clinic for 2 months before determining how much to charge per hour on an ongoing basis. As a temporary measure, the clinic adopted an hourly charge of 25, half the amount charged by Fonseca, Ruiz, and Dunn for professional services. The accounting services clinic opened on January 1. During January, the clinic had 120 hours of professional service. During February, the activity was 150 hours. Costs for these two levels of activity usage are as follows: Required: 1. Classify each cost as fixed, variable, or mixed, using hours of professional service as the activity driver. 2. Use the high-low method to separate the mixed costs into their fixed and variable components. (Note: Round variable rates to two decimal places and fixed amounts to the nearest dollar.) 3. Luz Mondragon, the chief paraprofessional of the clinic, has estimated that the clinic will average 140 professional hours per month. If the clinic is to be operated as a nonprofit organization, how much will it need to charge per professional hour ? How much of this charge is variable? How much is fixed? (Note: Round answers to two decimal places.) 4. CONCEPTUAL CONNECTION Suppose the accounting center averages 170 professional hours per month. How much would need to be charged per hour for the center to cover its costs ? Explain why the per-hour charge decreased as the activity output increased. (Note: Round answers to two decimal places.)arrow_forwardAt the beginning of the last quarter of 20x1, Youngston, Inc., a consumer products firm, hired Maria Carrillo to take over one of its divisions. The division manufactured small home appliances and was struggling to survive in a very competitive market. Maria immediately requested a projected income statement for 20x1. In response, the controller provided the following statement: After some investigation, Maria soon realized that the products being produced had a serious problem with quality. She once again requested a special study by the controllers office to supply a report on the level of quality costs. By the middle of November, Maria received the following report from the controller: Maria was surprised at the level of quality costs. They represented 30 percent of sales, which was certainly excessive. She knew that the division had to produce high-quality products to survive. The number of defective units produced needed to be reduced dramatically. Thus, Maria decided to pursue a quality-driven turnaround strategy. Revenue growth and cost reduction could both be achieved if quality could be improved. By growing revenues and decreasing costs, profitability could be increased. After meeting with the managers of production, marketing, purchasing, and human resources, Maria made the following decisions, effective immediately (end of November 20x1): a. More will be invested in employee training. Workers will be trained to detect quality problems and empowered to make improvements. Workers will be allowed a bonus of 10 percent of any cost savings produced by their suggested improvements. b. Two design engineers will be hired immediately, with expectations of hiring one or two more within a year. These engineers will be in charge of redesigning processes and products with the objective of improving quality. They will also be given the responsibility of working with selected suppliers to help improve the quality of their products and processes. Design engineers were considered a strategic necessity. c. Implement a new process: evaluation and selection of suppliers. This new process has the objective of selecting a group of suppliers that are willing and capable of providing nondefective components. d. Effective immediately, the division will begin inspecting purchased components. According to production, many of the quality problems are caused by defective components purchased from outside suppliers. Incoming inspection is viewed as a transitional activity. Once the division has developed a group of suppliers capable of delivering nondefective components, this activity will be eliminated. e. Within three years, the goal is to produce products with a defect rate less than 0.10 percent. By reducing the defect rate to this level, marketing is confident that market share will increase by at least 50 percent (as a consequence of increased customer satisfaction). Products with better quality will help establish an improved product image and reputation, allowing the division to capture new customers and increase market share. f. Accounting will be given the charge to install a quality information reporting system. Daily reports on operational quality data (e.g., percentage of defective units), weekly updates of trend graphs (posted throughout the division), and quarterly cost reports are the types of information required. g. To help direct the improvements in quality activities, kaizen costing is to be implemented. For example, for the year 20x1, a kaizen standard of 6 percent of the selling price per unit was set for rework costs, a 25 percent reduction from the current actual cost. To ensure that the quality improvements were directed and translated into concrete financial outcomes, Maria also began to implement a Balanced Scorecard for the division. By the end of 20x2, progress was being made. Sales had increased to 26,000,000, and the kaizen improvements were meeting or beating expectations. For example, rework costs had dropped to 1,500,000. At the end of 20x3, two years after the turnaround quality strategy was implemented, Maria received the following quality cost report: Maria also received an income statement for 20x3: Maria was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as she had projected for the two-year period. Growth next year should be even greater as she was beginning to observe a favorable effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components. Required: 1. Identify the strategic objectives, classified by the Balanced Scorecard perspective. Next, suggest measures for each objective. 2. Using the results from Requirement 1, describe Marias strategy using a series of if-then statements. Next, prepare a strategy map. 3. Explain how you would evaluate the success of the quality-driven turnaround strategy. What additional information would you like to have for this evaluation? 4. Explain why Maria felt that the Balanced Scorecard would increase the likelihood that the turnaround strategy would actually produce good financial outcomes. 5. Advise Maria on how to encourage her employees to align their actions and behavior with the turnaround strategy.arrow_forwardIn attempting to achieve better results in the marketplace, management has been looking at changing the reward system for marketing, distribution and sales personnel. 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Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning