Activity Based Costing of Customers
Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB&T earns revenue by investing the money deposited; currently, it averages 5.2 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.5 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities:
Activity |
Cost Driver |
Cost |
Driver Volume |
Using ATM |
Number of uses |
$ 750,000 |
10,000,000 uses |
Visiting branch |
Number of visits |
2,250,000 |
750,000 visits |
Processing transaction |
Number of transactions |
1,500,000 |
40,000,000 transactions |
Managing functions |
Total deposits |
3,000,000 |
$187,500,000 in deposits |
Total overhead |
$7,500,000 |
|
Data on two representative customers follow:
|
Customer A |
Customer B |
ATM uses |
200 |
250 |
Branch visits |
5 |
20 |
Number of transactions |
40 |
1,500 |
Average deposit |
$200 |
$6,000 |
Required
a. Compute RSB&T’s operating profits.
b. Compute the profit from Customer A and Customer B, assuming that customer costs are based only on deposits. Interest costs = 0.5 percent of deposits; operating costs are 4 percent (= $7,500,000/$187,500,000) of deposits.
c. Compute the profit from Customer A and Customer B, assuming that customer costs are computed using the information in the activity based costing analysis.