Problem 7-57 Customers
as a Cost Object
Morisson National Bank has requested an
analysis of checking account profitability by customer type. Customers are
categorized according to the size of their account. The activities associated
with the three different customer categories and their associated annual costs
are as follows:
Opening and closing accounts $ 300,000
Issuing monthly statement 450,000
Processing transactions 3,075,000
Customer inquiries 600,000
Providing automatic teller
machine (ATM) services 1,680,000
Total cost $6,105,000
Additional
data concerning the usage of the activities by the various customers are also
provided:
|
Account Balance
|
|||
|
Low
|
Medium
|
High
|
|
|
Number of accounts
opened/closed
|
22,500
|
4,500
|
3,000
|
|
Number of statements
issued
|
675,000
|
150,000
|
75,000
|
|
Processing
transactions
|
27,000,000
|
3,000,000
|
750,000
|
|
Number of telephone
minutes
|
1,500,000
|
900,000
|
600,000
|
|
Number of ATM
transactions
|
2,025,000
|
300,000
|
75,000
|
|
Number of checking
accounts
|
57,000
|
12,000
|
6,000
|
1. Cost
per account = Total
Cost_____
Total
checking accounts
= $6,105,000
75,000
= $81.40
Total
checking accounts = 57,000 + 12,000 + 6,000
=
75,000
Average fee per month = $81.40_
12 months
= $6.78 per month
2.
Cost per account by customer category by using
activity rates.
Opening and closing accounts = $300,000______
(22,500 + 4,500 + 3,000)
= $300,000
30,000
=
$10 per account
Processing transaction = ________$3,075,000____________
(27,000,000 + 3,000,000 +
750.000)
=
$3.075.000
30.750.000
= $0.10 per transaction
Processing transaction = ____________$3,075,000_________
(27,000,000 + 3,000,000 + 750,000)
=
$3,075,000
÷ 30,750,000
= $0.10 per transaction
Customer inquiries = _____________$600,000 _________
(1,500,000 + 900,000 + 600,000 )
=
$600,000
÷ 3,000,000
= $0.20 per minute
Providing automatic teller machine (ATM) services = _________$1,680,000_______
(2,025,000 + 300,000 + 75,000)
=
$1,680,000
2,400,000
= $0.70 per transaction
3.
|
Low
|
Medium
|
High
|
|
|
Opening
and closing accounts
|
|
||
|
$10 × 22.500
|
$ 225.000
|
|
|
|
$10 × 4.500
|
|
$ 45.000
|
|
|
$10 × 3.500
|
$
30.000
|
||
|
Issuing
monthly statements
|
$
337.500
|
||
|
$0,50 × 675.000
|
$ 75.000
|
||
|
$0,50 × 150.000
|
|
|
|
|
$0,50 × 75.000
|
$
37.500
|
||
|
Processing
transaction
|
$
2.700.000
|
||
|
$0,10 × 27.000.000
|
$ 300.000
|
||
|
$0,10 × 3.000.000
|
|
|
|
|
$0,10 × 750.000
|
$
75.000
|
||
|
Customer
inquiries
|
$
300.000
|
||
|
$0,20 × 1.500.000
|
$ 180.000
|
||
|
$0,20 × 900.000
|
|
|
|
|
$0,20 × 600.000
|
$
120.000
|
||
|
Providing
automatic teller machine (ATM) services
|
$
1.417.500
|
||
|
$0,70 × 2.025.000
|
$
210.000
|
||
|
$0,70 × 300.000
|
|
|
|
|
$0,70 × 75.000
|
________________
|
_____________
|
$ 52.500___
|
|
Total
Cost
|
$
4.980.000
|
$ 600.000
|
$
262.500
|
|
Number
of accounts
|
÷
57.000___
|
÷
12.000__
|
÷ 6.000___
|
|
Cost
per account
|
$ 87,37
|
$ 50,00
|
$ 43,75
|
|
Average
profit per account =
$90,00 - $81.40 = $8,60
ABC profit measure:
|
|
Low - balance
customers = $ 80 - $87,37 = $
(7,37)
|
|
Medium - balance
customers = $100 - $50,00 = $
50,00
|
|
High - balance
customers = $160 - $43,75 = $116,25
|
4. First,
calculate the profits from loans, credit cards, and other products by customer
category (using ABC data). Next, compare 50 percent of the cross sales profits
from low-balance customers with the total loss from the low- balance checking
accounts. If the cross sales profits are greater than the loss, the president’s
argument has merit.
Problem 7-58 Activity-Based Costing and Costumer-Driver
Costs
1. GAAP
mandates that all nonmanufacturing costs be expensed during the pe- riod in
which they are incurred. GAAP are the most likely cause of the practice. The
limitations of GAAP-produced information for cost management should be emphasized.
2. The
total product consists of all benefits, both tangible and intangible, that a
customer receives. One of the benefits is the order-filling service provided by
Sorensen. Thus, it can be argued that these costs should be product costs and
not assigning them to products undercosts all products. From the infor- mation
given, there are more small orders than large (50,000 orders averaging 600
units per order); thus, these small orders consume more of the order- filling
resources. They should, therefore, receive more of the order-filling costs.
The average order-filling cost per unit
produced is computed as follows:
$4,500,000/90,000,0001 units = $0.05 per
unit
(50,000 orders * 600 units per order) +
(30,000 orders * 1,000 units per order) + (20,000 orders * 1,500 units per
order) = 90,000,000 units
Thus, order-filling costs are about 6 to
10 percent of the selling price, clearly not a trivial amount.
Furthermore, the per-unit cost for
individual product families can be com- puted using the number of orders as the
activity driver:
Activity rate = $4,500,000/100,000
orders
= $45 per order
The per-unit ordering cost for each
product family can now be calculated:
Category
I: $45/600 = $0.075 per unit
Category
II: $45/1,000 = $0.045 per unit
Category
III: $45/1,500 = $0.03 per unit
Category
I, which has the smallest batches, is the most undercosted of the three
categories. Furthermore, the unit ordering cost is quite high relative to
Category I’s selling price (9 to 15 percent of the selling price). This
suggests that something should be done to reduce the order-filling costs.
3. With
the pricing incentive feature, the average order size has been increased to
2,000 units for all three product families. The number of orders now processed
can be calculated as follows:
Orders =
[(600 × 50,000) + (1,000 × 30,000) + (1,500 × 20,000)]/2,000
=
45,000
Reduction in orders =
100,000 – 45,000 = 55,000
Steps that can be reduced = 55,000/2,000
= 27 (rounding down to nearest whole number)
There were initially 50 steps:
100,000/2,000
Reduction in resource spending:
Step-fixed costs: $50,000 × 27 = $1,350,000
Variable activity costs: $20 ×
55,000 = 1,100,000
$2,450,000
Customers
were placing smaller and more frequent orders than necessary. They were
receiving a benefit without being charged for it. By charging for the benefit
and allowing customers to decide whether the benefit is worth the cost of
providing it, Sorensen was able to reduce its costs (potentially by shifting the
cost of the service to the customers). The customers, however, apparently did
not feel that the benefit was worth paying for and so increased order size. By
increasing order size, the number of orders decreased, de- creasing the demand
for the order-filling activity, allowing Sorensen to reduce its order-filling
costs. Other benefits may also be realized. The order size af- fects activities
such as scheduling, setups, and material handling. Larger or- ders should also
decrease the demand for these activities, and costs can be reduced even more. Competitive advantage
is created by providing the same customer value for less cost or better value
for the same or less cost. By reducing the cost, So- rensen can increase
customer value by providing a lower price (decreasing customer sacrifice) or by
providing some extra product features without in- creasing the price
(increasing customer realization, holding customer sacri- fice constant). This
is made possible by the decreased cost of producing and selling the bolts.
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