Kamis, September 15, 2016

Akmen Chapter 7



Problem 7-57 Customers as a Cost Object
Morisson National Bank has requested an analysis of checking account profitability by customer type. Customers are categorized according to the size of their account. The activities associated with the three different customer categories and their associated annual costs are as follows:
                   Opening and closing accounts                                    $   300,000
                   Issuing monthly statement                                                450,000
                   Processing transactions                                                  3,075,000
                   Customer inquiries                                                            600,000
                   Providing automatic teller machine (ATM) services      1,680,000
                   Total cost                                                                    $6,105,000
Additional data concerning the usage of the activities by the various customers are also provided:

Account Balance
Low
Medium
High
Number of accounts opened/closed
22,500
4,500
3,000
Number of statements issued
675,000
150,000
75,000
Processing transactions
27,000,000
3,000,000
750,000
Number of telephone minutes
1,500,000
900,000
600,000
Number of ATM transactions
2,025,000
300,000
75,000
Number of checking accounts
57,000
12,000
6,000

1.      Cost per account   =                Total Cost_____    
      Total checking accounts
                                    =    $6,105,000
                                              75,000
                                    =   $81.40
Total checking accounts   = 57,000 + 12,000 + 6,000
                                         = 75,000
Average fee per month     =     $81.40_
                                            12 months
                                         = $6.78 per month

2.      Cost per account by customer category by using activity rates.
Opening and closing accounts      =               $300,000______
                                                           (22,500 + 4,500 + 3,000)
                                                      =  $300,000
                                                            30,000
                                                      =  $10 per account


Processing transaction      = ________$3,075,000____________
                                             (27,000,000 + 3,000,000 + 750.000)
                                         = $3.075.000
                                            30.750.000
                                          = $0.10 per transaction
Processing transaction      = ____________$3,075,000_________
                                              (27,000,000 + 3,000,000 + 750,000)
                                         = $3,075,000 ÷ 30,750,000
                                          = $0.10 per transaction
Customer inquiries           = _____________$600,000 _________
                                               (1,500,000 + 900,000 + 600,000 )
                                         = $600,000 ÷ 3,000,000
                                          =  $0.20 per minute
Providing automatic teller machine (ATM) services        = _________$1,680,000_______
                                                                                            (2,025,000 + 300,000 + 75,000)
                                                                                         = $1,680,000
                                                                                             2,400,000
                                                                                          = $0.70  per transaction
3.       

Low
Medium
High
Opening and closing accounts



$10 × 22.500
$        225.000


$10 ×   4.500

$      45.000

$10 ×   3.500


 $      30.000
Issuing monthly statements
 $        337.500


$0,50 × 675.000

 $     75.000

$0,50 × 150.000



$0,50 ×   75.000


 $      37.500
Processing transaction
 $     2.700.000


$0,10 × 27.000.000

 $    300.000

$0,10 ×   3.000.000



$0,10 ×      750.000


 $      75.000
Customer inquiries
 $        300.000


$0,20 × 1.500.000

 $    180.000

$0,20 ×    900.000



$0,20 ×    600.000


 $   120.000
Providing automatic teller machine (ATM) services
 $     1.417.500


$0,70 × 2.025.000

 $      210.000

$0,70 ×    300.000



$0,70 ×      75.000
________________
_____________
 $      52.500___
Total Cost
 $     4.980.000
 $      600.000
 $   262.500
Number of accounts
 ÷          57.000___
 ÷        12.000__
 ÷       6.000___
Cost per account
 $                   87,37
 $              50,00
 $              43,75

Average profit per account                 = $90,00 - $81.40 = $8,60
ABC profit measure:
Low - balance customers              = $ 80 - $87,37  = $  (7,37)
Medium - balance customers        = $100 - $50,00  = $ 50,00
High - balance customers              = $160 - $43,75 = $116,25
4.      First, calculate the profits from loans, credit cards, and other products by customer category (using ABC data). Next, compare 50 percent of the cross sales profits from low-balance customers with the total loss from the low- balance checking accounts. If the cross sales profits are greater than the loss, the president’s argument has merit.


Problem 7-58 Activity-Based Costing and Costumer-Driver Costs
1.      GAAP mandates that all nonmanufacturing costs be expensed during the pe- riod in which they are incurred. GAAP are the most likely cause of the practice. The limitations of GAAP-produced information for cost management should be emphasized. 

2.      The total product consists of all benefits, both tangible and intangible, that a customer receives. One of the benefits is the order-filling service provided by Sorensen. Thus, it can be argued that these costs should be product costs and not assigning them to products undercosts all products. From the infor- mation given, there are more small orders than large (50,000 orders averaging 600 units per order); thus, these small orders consume more of the order- filling resources. They should, therefore, receive more of the order-filling costs.
The average order-filling cost per unit produced is computed as follows:
$4,500,000/90,000,0001 units = $0.05 per unit
(50,000 orders * 600 units per order) + (30,000 orders * 1,000 units per order) + (20,000 orders * 1,500 units per order) = 90,000,000 units
Thus, order-filling costs are about 6 to 10 percent of the selling price, clearly not a trivial amount.
Furthermore, the per-unit cost for individual product families can be com- puted using the number of orders as the activity driver:
Activity rate = $4,500,000/100,000 orders
       = $45 per order
The per-unit ordering cost for each product family can now be calculated:
Category I: $45/600 = $0.075 per unit
Category II: $45/1,000 = $0.045 per unit
Category III: $45/1,500 = $0.03 per unit
Category I, which has the smallest batches, is the most undercosted of the three categories. Furthermore, the unit ordering cost is quite high relative to Category I’s selling price (9 to 15 percent of the selling price). This suggests that something should be done to reduce the order-filling costs. 

3.      With the pricing incentive feature, the average order size has been increased to 2,000 units for all three product families. The number of orders now processed can be calculated as follows:
Orders                          = [(600 × 50,000) + (1,000 × 30,000) + (1,500 × 20,000)]/2,000
                                     = 45,000
Reduction in orders      = 100,000 – 45,000 = 55,000
Steps that can be reduced = 55,000/2,000 = 27 (rounding down to nearest whole number)
There were initially 50 steps: 100,000/2,000
Reduction in resource spending:
Step-fixed costs: $50,000 × 27               = $1,350,000
Variable activity costs: $20 × 55,000     =  1,100,000
     $2,450,000  
             Customers were placing smaller and more frequent orders than necessary. They were receiving a benefit without being charged for it. By charging for the benefit and allowing customers to decide whether the benefit is worth the cost of providing it, Sorensen was able to reduce its costs (potentially by shifting the cost of the service to the customers). The customers, however, apparently did not feel that the benefit was worth paying for and so increased order size. By increasing order size, the number of orders decreased, de- creasing the demand for the order-filling activity, allowing Sorensen to reduce its order-filling costs. Other benefits may also be realized. The order size af- fects activities such as scheduling, setups, and material handling. Larger or- ders should also decrease the demand for these activities, and costs can be reduced even more. Competitive advantage is created by providing the same customer value for less cost or better value for the same or less cost. By reducing the cost, So- rensen can increase customer value by providing a lower price (decreasing customer sacrifice) or by providing some extra product features without in- creasing the price (increasing customer realization, holding customer sacri- fice constant). This is made possible by the decreased cost of producing and selling the bolts.

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