=+6-37 KK Activity-based costing, product costing at banks, cross-subsidisation OBJECTIVES 3, 5, 7 Primiere Bank of Australia (PBA) is examining the profitability of its Prime Account, a combined savings and cheque account.

Depositors receive a 7% annual interest rate on their average deposit. PBA earns an interest rate spread of 3% (the difference between the rate at which it lends money and the rate it pays depositors) by lending money for home loan purposes at 10%. Thus PBA would gain $60 on the interest spread if a depositor had an average Prime Account balance of $2000 in 2013 ($2000 ×

3% = $60).

The Prime Account allows depositors unlimited use of services such as deposits, withdrawals, cheque accounts and foreign currency drafts. Depositors with Prime Account balances of $1000 or more receive unlimited free use of services. Depositors with minimum balances of less than $1000 pay a $22 a month service fee for their Prime Account.

PBA recently conducted an activity-based costing study of its services. It assessed the following costs for six individual services.