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Bank - Activity Based Costing

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The Bank offers only checking accounts. Customers can write checks and use a network of automated teller machines. The bank earns revenue by investing the money deposited; currently, it averages 5.2 percent annually on its investments of those deposits. To compete with other banks, The bank pays depositors 0.5 percent on all deposits. The bank's annual operating costs activities:

Activity /Cost Driver /Cost /Driver Volume
Using ATM # of uses $850,000 10,000,000 uses
Visiting branch # of visits $2,350,000 750,000 visits
Processing trans. # of transactions $2,500,000 40,000,000 transactions
Managing functions Total deposits $3,000,000 $187,500,000 in deposits
Total overhead $8,700,000

Data on two representative customers follow:

Customer A Customer B
200 250 ATM uses
5 20 Branch visits
40 1500 # of transactions
$300 $5,000 Average deposit

(a) Compute the bank'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 ( = $8,700,000/$187,500,000) 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.

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Solution Summary

The solution applies activity based costing techique to bank cost and compute the bank's operating profits, compute the profit from Customer A and Customer B using both traditional costing and activity-based costing analysis.