Buckeye National Bank Case Study
Buckeye National Bank
1. a) PDOR- Est. MOH/Est. Act. (Total indirect costs/total value of checks processed)
$2,850,000/$95,000,000= $0.03 per dollar processed.
b) (i) Retail Line—(Value of checks processed X cost per dollar processed)
$9,500,000 X $0.03= $285,000 (ii) Business Line $85,500,000 X $0.03= $2,565,000 The allocations are driven by the dollar value of the checks processed. c) (i) Total indirect cost proportion for Retail Line (Allocation amount/Est. MOH) $285,000/$2,850,000= 10% (ii) Total indirect cost proportion for Business line $2,565,000/$2,850,000= 90% The original system assumed that indirect costs are incurred in direct proportion to the dollar value of the checks processed. This allocation is approximately accurate only if the indirect costs in Exhibit B are incurred in direct proportion to the dollar value of the checks each customer line writes. d) (i) Annual indirect cost per Retail account. (Allocated indirect costs/number of accounts) $285,000/150,000= $1.90 per account (ii) Annual indirect cost per Business account $2,565,000/50,000= $51.30 per account e) (i) Contribution to profit per Retail account (Revenue per account minus cost per account) $10.00 - $1.90= $8.10 (ii) Contribution to profit per Business account $40.00 - $51.30= ($11.30) This suggests Buckeye National Bank should pursue a strategy that increases the retail-customer base because the original cost system shows retail customers are profitable, but business customers are not. 2. One sign that the cost allocation system is broken is the amount of allocated cost per business account. When you have such few accounts but allocate based on the total dollar value of checks processed, you over allocate for the business line. The old cost system is a single-allocation-based system. 3. New Activity based costing system Activity Pool | Estimated MOH | / | Estimated Activity | = | PDOR | Paying
1. a) PDOR- Est. MOH/Est. Act. (Total indirect costs/total value of checks processed)
$2,850,000/$95,000,000= $0.03 per dollar processed.
b) (i) Retail Line—(Value of checks processed X cost per dollar processed)
$9,500,000 X $0.03= $285,000 (ii) Business Line $85,500,000 X $0.03= $2,565,000 The allocations are driven by the dollar value of the checks processed. c) (i) Total indirect cost proportion for Retail Line (Allocation amount/Est. MOH) $285,000/$2,850,000= 10% (ii) Total indirect cost proportion for Business line $2,565,000/$2,850,000= 90% The original system assumed that indirect costs are incurred in direct proportion to the dollar value of the checks processed. This allocation is approximately accurate only if the indirect costs in Exhibit B are incurred in direct proportion to the dollar value of the checks each customer line writes. d) (i) Annual indirect cost per Retail account. (Allocated indirect costs/number of accounts) $285,000/150,000= $1.90 per account (ii) Annual indirect cost per Business account $2,565,000/50,000= $51.30 per account e) (i) Contribution to profit per Retail account (Revenue per account minus cost per account) $10.00 - $1.90= $8.10 (ii) Contribution to profit per Business account $40.00 - $51.30= ($11.30) This suggests Buckeye National Bank should pursue a strategy that increases the retail-customer base because the original cost system shows retail customers are profitable, but business customers are not. 2. One sign that the cost allocation system is broken is the amount of allocated cost per business account. When you have such few accounts but allocate based on the total dollar value of checks processed, you over allocate for the business line. The old cost system is a single-allocation-based system. 3. New Activity based costing system Activity Pool | Estimated MOH | / | Estimated Activity | = | PDOR | Paying