Question

Exercise 10-30 Activity-Based Costing of Customers (LO 10-3, 4)

Rock Solid Bank and Trust (RSB&T) offers 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 6.20 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.50 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities:

Activity	Cost Driver		Cost	Driver Volume
Using ATM	Number of uses	$	1,610,000		2,300,000	uses
Visiting branch	Number of visits		1,071,000		153,000	visits
Processing transaction	Number of transactions		6,889,000		83,000,000	transactions
Managing functions	Total deposits		5,460,000	$	390,000,000	in deposits
Total overhead		$	15,030,000

Data on two representative customers follow:

	Customer A			Customer B
ATM uses		220			270
Branch visits		5			22
Number of transactions		100			1,600
Average deposit	$	6,300		$	6,300

Required:

a. Compute RSB&T's operating profits.

operating profit

7,200,000

b. Compute the profit from Customer A and Customer B, assuming that customer costs are based only on deposits. Interest costs = 0.50 percent of deposits; operating costs are 5 percent of deposits. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Profit Per customer
Customer A
Customer B

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. (Do not round intermediate calculations. Round your answers to 2 decimal places.Loss amounts should be indicated by a minus sign.)

	customer A	Customer B
Sales Revenue
Interest on deposit
total operating cost
customer profit/loss

Answer 1

Ans a Particulars Remarks Amount Amount [$390000000 x 6.20%) $24,180,000 | Earns 6.2% annually on deposits Sales Revenue Less: Expenses Interest on Deposits Operating Cost Total Expenses Operating Profit [$390000000 x 0.5%) $1,950,000 $15,030,000 Give 0.6% interest on deposits $7,200,000 Ans b Particulars Remarks Customer A Customer B $390.60 | Earns 6.2% annually on deposits Sales Revenue $390.60 [$6300 x 6.2%) [$6300 x 6.2%) Less: Expenses Interest on Deposits $31.50 $315.00 $44.10 $33.50 Give 0.5% interest on deposits [$6300 x 0.5%) [$6300 x 0.5%) $315.00 | Cost 6% on deposits Operating Cost 6300 x 596] [$6300 x 596] Operating Profit per customer $42.10 Ans c Particulars Remarks Customer A Customer B $390.60 | Earns 6.2% annually on deposits Sales Revenue $390.60 [$6300 x 6.2%) [$6300 x 6.2%) Less: Expenses Interest on Deposits $31.50 $33.50 Give 0.5% interest on deposits [$6300 x 0.5%) [$6300 x 0.5%) Total Operating Cost Customer Profit/(Loss) $285.50 $73.60 $564.00 Based on calculation in Note 1 ($206.90)

Note 1 Activity based costing system is a process in which overhead costs are accumulated based on the activity done and then those are allocated product based on actual consumption of those activities by the product. Calculation of cost based on activity Activity Using ATM Visiting Branch Processing Transactions Managing Functions Cost Driver Number of Uses Number of Visits Number of Transactio Total Deposits Driver Volume Rate per activity $0.70 $7.00 $0.08 $0.01 Cost $1610000/2300000] [$1071000/153000] 83,000,000 $6,889,000 [$6889000/83000000] 2,300,000 $1,610,000 153,000 $1,071,000 390,000,000 5,460,000 [S5460000/$390000000] Customer A Customer B Particulars Rate per activity Total Activity Total Activity Amount Amount (A) x (B) (A) x (C) Using ATM Visiting Branch Processing Transactions Managing Functions Operating Cost $0.70 $7.00 $0.08 $0.01 $154.00 $35.00 $8.30 $88.20 $285.50 $189.00 $154.00 $132.80 $88.20 $564.00 220 270 100 $6,300 1600 $6,300