National Bank
Group II
Aftab Usmani
Alexander Derevin
Carla Daniels
Shantanu Kumar Singh
Single indirect cost allocation rate: old way
$ in 1000s
Indirect costs:
$2,850
Total Checks value:
$95,000
Cost rate allocation = 2,850 / 95,000
=
$0.03 per dollar paid
Based on $ value of checks paid
Old indirect cost allocations: based on $ checks paid
Checks
in
$1000s
OH
Allocation
Rate
OH
Costs
$1000s
% Total
Business
Account
85500
.03
2,565
90%
Retail
Account
9500
.03
285
10%
95000
.03
2,850
100%
Total
Allocations driven by % of total value of checks written
Indirect cost allocation: old system
Assigns costs based on value of checks processed Underlying rational: indirect costs are related to $ value of checks written
Assumes consistent averages of business and retail check values
Value of checks must be consistent with number of checks written to hold true
Indirect cost per account: old system
Indirect
Costs
$ in
1000s
#
Cost per
Customer Account s (1000s)
Business
Accounts
2565
50
51.30
Retail
Accounts
285
150
1.90
2850
200
14.25
Total
Profit Margin per account: old system
Business
Accounts
Retail
Accounts
Total
Cost per Accoun t Revenu e per
Account
51.30
40
(11.30)
10
8.10
21.05
6.80
1.90
14.25
Account
Contributio
n Margin $
Business Strategy based on old system
Increase retail accounts
Incentives to managers
Ignore business accounts
Signs old system is broken
Revenue increasing at slower rate than expenses Profits declining while retail accounts increasing Allocation distorts actual costs
Business customers likely to have more high value checks than retail customers
Retail customers could have larger number of smaller- valued checks
Teller and call center costs not related to check values
ABC method: activity cost allocations Cost Driver
Process checks Teller
Transaction
s
Service
Calls
Total
Indirect
Costs
(1000s)
Costs per unit 2850
1140
0.40
200
1200
6.00
100
510
5.10
ABC: Indirect cost allocation
Activity Rate / Units unit Retail
1000s
Retail
OH
Applied
Units
Business
Business OH Applied
1000s
Pay
Checks
0.40
570
228
2280
912
Teller
Service
s
6.00
160
960
40
240
Service
Calls
5.10
95
484.5
5
25.5
Total
1672.5
1177.5
ABC: Indirect cost proportion
Activity Total
Units
1000s
Units
Retail
1000s
Retail %
Total
Units
Business
Business % Total
1000s
Pay
Checks
2,850
570
20%
2280
80%
Teller
Service
s
200
160
80%
40
20%
Service
Calls
100
95
95%
5
5%
ABC: Indirect Cost per account
Applied
Number
Average
OH
Customer Cost per
Account $
($1000s) s
Busines
s
Retail
Total
$1177.5
$50,000
$23.55
1672.5
150,000
11.15
2850
200,000
14.25
Old way vs. ABC indirect cost allocation Old Way
Cost per
Account
$
Busines
s
$51.30
ABC Cost Delta % per Chang
Account $ e $23.55 $27.7
5