Question 2: Wang Loans is a non-profit loan originator for small consumer credit unions. There are four stages in originating a loan: the intial interview, application processing, due diligence, and the final interview. Since Wang Loan's mission is to provide low cost loans to the community they work hard to keep costs down. The company handles three types of loans: automobile loans, housing loans, and personal credit lines. Currently they allocate overhead costs to each type of loan based on direct labor hours and charge the credit union that purchases the loan They have asked you to consider whether Activity Based Costing would be a cost effective alternative to this traditional costing system. The Activity Based Costing system will cost $50,000 per year. Processing Diligence Current Costing Stage Auto Home Personal Init Interview 0.50 0.50 0.25 0.125 0.125 0.125 1.00 1.50 2.00 Final Interview 0.50 0.25 Total DL hr. 2.125 2.375 2.625 Expected Loans 1,000 775 500 0.25 $ Total OH Total DL Allocation Rate 350,000 5,278 hours 66.31 per DL hr. Total Overhead Cost per Loan Auto Home $ 140.91 $ 157.49 Personal $ $ 174.07 Meetings Activity Based Costing Stage Initial Int Processing Diligence Final Int Cost Driver Computer hours Docs Checked Banker hours Auto 1.00 0.075 2.00 0.50 Home 1.00 0.100 3.00 0.25 Personal 1.00 0.025 4.00 0.25 Total Cost s 45,000 $ 35,000 $ 220,000 $ 50,000 Stage Initial Int Processing Diligence Final Int Driver Meetings Computer hrs. Docs Checked Banker hrs Justification Each initial interview is substantially the same The application processing is automated and performed by a computer scanner Due diligence takes aproximately the same amount of time for each document that is checked Final interviews may vary in length, so the time needed is used rather than the number (A) Use the Activity Based Costing Information above to determine the new overhead cost for each loan type. Overhead Total Activities Allocation per Activity Allocation Rates Meetings Comp hrs. Docs Checked Banker hrs. Init Interview Processing Diligence Final Interview Total Overhead Costs Auto Home Personal (B) Should Wang Loans Invest in the activity based costing system? Why or why not