Question

The operations vice president of Security Home Bank has been interested in investigating the efficiency of the bank’s operations. She has been particularly concerned about the costs of handling routine transactions at the bank and would like to compare these costs at the bank’s various branches. If the branches with the most efficient operations can be identified, their methods can be studied and then replicated elsewhere. While the bank maintains meticulous records of wages and other costs, there has been no attempt thus far to show how those costs are related to the various services provided by the bank. The operations vice president has asked your help in conducting an activity-based costing study of bank operations. In particular, she would like to know the cost of opening an account, the cost of processing deposits and withdrawals, and the cost of processing other customer transactions.

The Westfield branch of Security Home Bank has submitted the following cost data for last year:

Teller wages	$	160,000
Assistant branch manager salary		75,000
Branch manager salary		80,000
Total	$	315,000

Virtually all other costs of the branch—rent, depreciation, utilities, and so on—are organization-sustaining costs that cannot be meaningfully assigned to individual customer transactions such as depositing checks.

In addition to the cost data above, the employees of the Westfield branch have been interviewed concerning how their time was distributed last year across the activities included in the activity-based costing study. The results of those interviews appear below:

Distribution of Resource Consumption Across Activities
	Opening Accounts		Processing Deposits and Withdrawals		Processing Other Customer Transactions		Other Activities		Totals
Teller wages	5	%	65	%	20	%	10	%	100	%
Assistant branch manager salary	15	%	5	%	30	%	50	%	100	%
Branch manager salary	5	%	0	%	10	%	85	%	100	%

The manager of the Westfield branch of Security Home Bank has provided the following data concerning the transactions of the branch during the past year:

Activity	Total Activity at the Westfield Branch
Opening accounts	500	new accounts opened
Processing deposits and withdrawals	100,000	deposits and withdrawals processed
Processing other customer transactions	5,000	other customer transactions processed

Required:

1. Compute the activity rates for the activity-based costing system.

Answer 1

Cost in activity pool = Cost*% Resource Consumption

Total cost of opening accounts = 160,000*5% + 75,000*15% + 80,000*5% = $23,250

Processing Deposits and Withdrawals = 160,000*65% + 75,000*5% + 0 = 107,750

Processing other customer transactions = 160,000*20% + 75,000*30% + 80,000*10% = $62,500

Other activities = 160,000*10% + 75,000*50% + 80,000*85% = 121,500

Activity Rate = Overhead Cost/Total Activity

Opening accounts = 23,250/500 = $46.5 per account opened

Processing Deposits and Withdrawals = 107,750/100,000 = $1.0775 per deposit or withdrawal

Processing other customer transactions = 62500/5000 = $12.5 per other customer transaction