Chapter 10, Problem 32E

Activity-Based Costing of Customers

 Rock Solid Bank and Trust (RSB&T) oilers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB&T earns revenue by investing the money deposited; currently, it averages 5.2 percent annually on its investments of those deposits. To compete with larger banks. RSB&T pays depositors 0.5 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities:

Data on two representative customers follow:

Required

1. a.      Compute RSB&T’s operating profits.
2. 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 (= $15,000,000/$375,000,000) of deposits.
3. 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.

To determine

Compute the operating profit.

Explanation of Solution

Operating profit:

Operating profit is the amount retained by subtracting the total costs of operations occurred from the sales revenues earned.

Compute the operating profit:

Particulars	Amount
Sales revenue $\left(\text{Deposits×Percentage earned}\right)$	$19,500,000
Costs:
Interest on deposits $\left(\text{Deposits×Percentage paid}\right)$	$1,875,000
Operating costs	$15,000,000
Total costs $\left(\begin{array}{l}\text{Interest on deposits}\\ \text{+ Operating costs}\end{array}\right)$	$16,875,000
Operating profit $\left(\text{Sales revenue }-\text{ Total costs}\right)$	$2,625,000

Table: (1)

To determine

Compute the profit from customer A and customer B according to the information given in the question.

Explanation of Solution

Profit:

Profit is the amount retained by subtracting the total costs from the sales revenues earned.

Compute the customer profit of both the customers:

Particulars	Customer A	Customer B
Sales revenue $\left(\begin{array}{l}\text{Respective deposits}\\ \times \text{Interest earned}\end{array}\right)$	$312	$312
Interest on deposits $\left(\begin{array}{l}\text{Respective deposits}\\ \times \text{Interest charged}\end{array}\right)$	$30	$30
Operating costs $\left(\begin{array}{l}\text{Respective deposits}\\ \times \text{Operating cost}\end{array}\right)$	$240	$240
Customer profit $\left(\begin{array}{l}\text{Sales revenue}\\ -\text{Interest on deposits}\\ -\text{Operating costs}\end{array}\right)$	$42	$42

Table: (2)

Measures that are used for computation:

Particulars	Details
Deposit of customer A	$6,000
Deposit of customer B	$6,000
Interest earned	5.20%
Interests charged	0.50%
Operating cost	4.00%

Table: (3)

To determine

Compute the profit from customer A and customer B according to the information given in the question.

Explanation of Solution

Cost driver:

Cost driver refers to the factor that causes changes in the determination of the cost of the activity.

Compute the rates required for the computation of the customer profit:

Activity	Cost driver	Cost $\left(\text{Cost}\right)$	Driver volume $\left(\text{Volume}\right)$	Rate $\left(\text{Rate=}\frac{\text{Cost}}{\text{Volume}}\right)$
Use ATM	Number of uses	$1,500,000	2,000,000	0.75
Visit Branch	Number of visits	$900,000	150,000	6.00
Process transaction	Number of transactions	$6,600,000	80,000,000	0.0825
General bank overhead	Total deposits	$6,000,000	375,000,000	1.60%

Table: (4)

	Customer A	Customer B
Activity	Amount	Amount
Sales revenue $\left(\begin{array}{l}\text{Respective deposits}\\ \times \text{Interest earned}\end{array}\right)$	$312	$312
Interest on deposit $\left(\begin{array}{l}\text{Respective deposits}\\ \times \text{Interest charged}\end{array}\right)$	$30	$30
Account margin	$282	$282
Operating costs:
Use ATM $\left(\begin{array}{l}\text{Rate per use }\\ \times \text{ Number of uses}\end{array}\right)$	$75	$150
Add: Visit branch $\left(\begin{array}{l}\text{Rate per visit}\\ \times \text{Number of visits}\end{array}\right)$	$30	$120
Add: Process transaction $\left(\begin{array}{l}\text{Number of transactions}\\ \times \text{Rate per transaction}\end{array}\right)$	$3	$124
Add: General bank overhead $\left(\begin{array}{l}\text{Deposit }\\ \text{× Overhead rate}\end{array}\right)$	$96	$69
Total operating cost	$204	$490
Customer profit $\left(\begin{array}{l}\text{Account margin }\\ -\text{ Total operating cost}\end{array}\right)$	$78	($208)

Table: (5)

Particulars	Details
Deposit of customer A	$6,000
Deposit of customer B	$6,000
Interest earned	5.20%
Interests charged	0.50%

Table: (6)