Question
EasyCredit Financial is a banking services company that offers many different types of chequing accounts. It has recently adopted an activity-based costing (ABC) system to
EasyCredit Financial is a banking services company that offers many different types of chequing accounts. It has recently adopted an activity-based costing (ABC) system to assign costs to various types of chequing accounts. The following data relate to one type of chequing account, the money market chequing account, and the ABC cost pools:
Total number of chequing accounts: 221,750
Number of money market chequing accounts: 70,000
Chequeing Account Cost Pools
Cost Pool | Cost | Cost Driver |
Returned cheque costs | $3,000,000 | Number of returned cheques |
Chequing account reconciliation costs | 60,000 | Number of account reconciliation requests |
New account setup | 780,000 | Number of new accounts |
Photocopies of cancelled cheques | 300,000 | Number of cancelled cheque copy requests |
Web site maintenance (online banking) | 225,000 | Per product group (type of chequing account) |
Total Chequing account costs | $4,365,000 |
|
Annual activity information related to cost drivers
Cost Pool | All Products | Money Market Chequing |
Returned cheque costs | 200,000 returned cheques | 18,000 |
Cheque reconciliation costs | 3,000 chequing account reconciliations | 420 |
New accounts | 60,000 new accounts | 20,0000 |
Cancelled cheque photocopies requests | 80,000 cancelled cheque photocopy requests | 50,000 |
Web site costs | 10 types of chequing accounts | 1 |
Required:
- Calculate the cost rate per cost driver activity for each of the five cost pools. Round to the nearest dollar.
- Calculate the total cost assigned to the Money Market chequing account. Round to the nearest dollar.
- Suppose that EasyCredit Financial allocates overhead using the number of chequing accounts as the allocation base and one cost pool. Determine the cost rate per chequing account and the per account cost assigned to the Money Market chequing account. Explain in detail the difference in cost allocations between this method and the ABC approach.
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