PROBLEM 6-13. Activity-Based Costing at a Service Company [LO 5] Tannhauser Fina
ID: 2418281 • Letter: P
Question
PROBLEM 6-13. Activity-Based Costing at a Service Company [LO 5] Tannhauser Financial is a banking services company that offers many different types of checking accounts.It has recently adopted an activity-based costing system to assign costs to various types of checking accounts. The following data relate to one type of checking account,the money market checking account, and the ABC cost pools:
Total Number of Checking Accounts 221,750
Number of Money Market Accounts 60,000
Checking account cost pools:
Cost Pool Cost Cost Driver
Returned check costs $3,000,000 Number of returned checks
Checking account Number of account
reconciliation costs 60,000 reconciliation requests
New account setup 780,000 Number of new accounts
Copies of cancelled checks 300,000 Number of cancelled check copy requests
Web site maintenance Per product group
(for online banking) 225,000 (type of checking account)
Total checking account costs $4,365,000
Annual activity information related to cost drivers:
Cost Pool All Products Money Market Checking
Returned checks 200,000 returned checks 18,000
Check reconciliation costs 3,000 checking account reconciliations 420
New accounts 60,000 new accounts 20,000
Cancelled check copy requests 80,000 cancelled check copy requests 50,000
Web site costs 10 types of checking accounts 1
Required
a. Calculate the cost rate per cost driver activity for each of the ve cost pools.Round to two decimal places.
b. Calculate the total cost assigned to the money market checking account.Round to two decimal places.
c. Suppose that Tannhauser Financial allocates overhead using the number of checking accounts as the allocation base and one cost pool.Determine the cost rate per checking account and the per account cost assigned to the money market checking account.Discuss the difference in cost allocations between this method and the activity-based costing approach.
Explanation / Answer
ABC Costing Tannhauser Company a Cost Pool Cost Cost Driver Total Activity Qty/No Cost Rate Per cost driver activity Returned check cost 3,000,000 No of Returned checks 200,000 15.00 Checking a/c reconciliation cost 60,000 No of account reconciliation request 3,000 20.00 New account set up 780,000 No of new accounts 60,000 13.00 Copies of cancelled checks 300,000 No of cancelled check copy request 80,000 3.75 Web site maintenance 225,000 per product group type of checking a/cs 10 22,500.00 Total 4,365,000 b Money Market checking A/c Cost Pool Cost Driver Total Activity Qty/No Cost Rate Per cost driver activity Total cost allocated Returned check cost No of Returned checks 18,000 15 270,000 Checking a/c reconciliation cost No of account reconciliation request 420 20 8,400 New account set up No of new accounts 20,000 13 260,000 Copies of cancelled checks No of cancelled check copy request 50,000 4 187,500 Web site maintenance per product group type of checking a/cs 1 22,500 22,500 Total 748,400 So total cost assigned to money market checking a/c is $ 748,400 c Total Overheads 4,365,000 No of checking a/cs 221,750 Cost per checking account 19.68 Per account cost assigned to money market checking a/c is $19.68 Total cost assigned to money market checking a/c = 60,000*19.68 = $ 1,180,800 So there is an additional $432,400 assigned to money market checking a/c in this process than ABC method which is not correct considering low activity in high rate cost drivers
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