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    Activity base costing

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    Please see attached document for problem.

    The operations vice president of First Bank of Eagle, Kristin Wu, has been interested in investigating the efficiency of the bank's operations. She has been especially concerned about the costs of handling routine transactions at the bank and would like to compare these costs at the bank's various branches. If the branches with the most efficient operations can be identified, their methods can be studied and then replicated elsewhere. While the bank maintains meticulous records of wages and other costs, there has been no attempt thus far to show how those costs are related to the various services provided by the bank. Ms. Wu has asked your help in conducting an activity-based costing study of bank operations. In particular, she would like to know the cost of opening an account, the cost of processing deposits and withdrawals, and the cost of processing other customer transactions.

    The Avon branch of First Bank of Eagle has submitted the following cost data for last year:

    Teller Wages $150,000
    Assistant branch manager salary 70,000
    Branch manager salary 85,000
    Total $305,000

    Virtually all of the other costs of the branch - rent, depreciation, utilities, and so on - are organization sustaining costs that cannot be meaningfully assigned to individual customer transactions such as depositing checks.

    In addition to the cost data above, the employees of the Avon branch have been interviewed concerning how their time was distributed last year across the activities included in the activity based costing study. The results of those interviews appear below:

    Distribution of Resource Consumption Across Activities
    Opening Accounts Processing Deposits and Withdrawals Processing Other Customer Transactions Other Activities Totals
    Teller Wages 0% 75% 15% 10% 100%
    Assistant branch manager salary 10% 15% 25% 50% 100%
    Branch manager salary 0% 0% 20% 80% 100%

    Prepare a first-stage allocation for Ms. Wu.

    The manager of Avon branch of First Bank of Eagle has provided the following data concerning the transaction of the branch during the past year:

    Activity Total Activity at the Avon Branch
    Opening Accounts 200 accounts opened
    Processing deposits and withdrawals 50,000 deposits and withdrawals
    Processing other customer transactions 1,000 other customer transactions

    The lowest costs reported by other branches for these activities are displayed below:

    Activity Lowest Cost Among All First Bank of Eagle Branches
    Opening Accounts $24.35 per account opened
    Processing deposits with withdrawals $2.72 per deposit or withdrawal
    Processing other customer transactions $48.90 per other customer transaction

    Using the first-stage allocation from the problem above data, compute the activity rates for the activity-based costing system.

    What do these results suggest to you concerning operations at the Avon branch?

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    Solution Summary

    Excel file shows calculations of activity rate and cost per operation of the branch using activity based costing.