City of Joseph Commercial Bank hired consultants to compute the costs of three products: checking accounts, personal loans, and the Gold visa card. The consultant identified the following activities, costs and activity drivers (annual data):
Activity: Activity Cost: Activity Driver: Activity Capacity:
ATM Service $100,000 No. of transactions 200,000
Computer Processing $1,000,000 No. of transactions 2,500,000
Issuing Statements $800,000 No. of statements 500,000
Customer Inquiries $360,000 Telephone Minutes 600,000
The following annual information on the three products was also made available.
Checking Accounts: Personal Loans: Gold Visa:
Units of Product 30,000 5,000 10,000
ATM transactions 180,000 0 20,000
Computer transactions 2,000,000 200,000 300,000
Number of statements 350,000 50,000 100,000
Telephone minutes 350,000 90,000 160,000
In light of the new cost information, the bank president wanted to know whether a decision made two years ago to modify the banks checking account was sound. At that time, the service charge was eliminated on accounts with an average annual balance greater than $1,000. Based on increases in the total dollars in checking, the bank president was pleased with the new product. The checking account product is described as follows: 1. Checking account balances greater than $500 earn interest of 2 percent per year, and 2. a service charge of $5 per month is charged for balances less than $1,000. The bank earns 4 percent on checking account deposits. The balances of the checking accounts are broken down as follows:
Account Category: Percentage of Total Accounts: Average Balance:
< $500 50% $400
$500 to $1,000 10% $750
$1,001 to $2,767 25% $2,000
> $2,767 15% $5,000
Research indicates that the $2,000 category was by far the greatest contributor to the increase in dollar volume when the checking account product was modified two years ago.
1. Calculate rates for each activity
2. Using the rates, calculate the cost of each product.
The solution examines activity based costing for Joseph Commercial Bank. The rates for each activity and cost for each product are calculated.