Question

Pewter Banking is a financial institution that originates mortgage loans. The company charges a service fee for processing loan applications. This fee is set twice a year based on the cost of processing a loan application. For the first half of the year, the bank estimated that it would process 360 loans. Correspondence, credit reports, supplies and other materials that vary with each loan are estimated to cost $45.00 per loan. The company hires a loan processor at an estimated cost of $90,000 per year and an assistant at an estimated cost of $70,000 per year. The cost to lease office space and pay utilities and other related cost is estimated to be $195,000 per year.

During the first six months of this year, Pewter Banking processed 384 loans. Cost of materials, credit reports and other items related to loan processing were 5% lower than expected for the volume of loans processed.

The loan processor and her assistant cost $84,000 for the six months. Leasing and related office costs were $98,500 for the six months.

Required:

Prepare an analysis of the variance for Pewter Banking

Answer 1

Answer :-

Total number of loans = 384

cost per loan = $ 45

Correspondence & supplies
Particulars	Amount
Standard cost	= 384 * 45 = $ 17,280
Actual cost	= $ 384 * ( 45 - 5%(40)) = $ 384 * ( 45 - 2.25) = $ 384 * 42.75 = $ 16,416
Cost variance	=$ 17,280 - $ 16,416 = $ 864

Here cost variance is favourable.

Total no.of months = 6

estimated cost =$ 195,000

First 6 months loans = 384

Leasing related cost = $ 98,500

Loan processor & other
Particulars	Amount
Standard cost	= ( $ 84,000 + $ 70,000 + $ 195,000 ) * 6 / 12 = ($ 84,000 + $ 70,000 + $ 195,000) * 0.5 = $ 349,000 * 0.5 = $ 174500
Actual cost	= $ 84,000 + $ 98,500 = $ 182,500
Cost variance	=$ 174,500 - $ 182,500 = - $ 8000

Here cost variance is unfavourable.

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