Heartfelt Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available:

Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 4 hours in loan underwriting and 1 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure.

Required:

A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.

B. Determine the cost of processing the two loans if Heartfelt uses the traditional labor-hour-based system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure.

C. Is Heartfelt making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?