The accounting department has provided the following data for the company\'s fiv
ID: 2568256 • Letter: T
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The accounting department has provided the following data for the company's five major cost pools for 2017. The CEO, Daniel Vega, is concerned about operating costs associated with processing mortgage applications and has decided to install an ABC costing system to help him get a handle on costs. Although labor hours seem to be the primary driver of the cost of processing a new mortgage, the labor cost for the different activities involved in processing new loans varies widely. Woodcrest is a full service residential mortgage company in the Houston area that operates in a very competitive market. Activity Cost Pools Activity Drivers Taking customer application $ 364,900 Time - Assistant Managers 17,000 hours Conducting credit investigaions 350,000 Time - Credit Managers 12,500 hours Underwriting 797,500 Time - Underwriting Department 15,000 hours Preparing loan packages 585,000 Time - Processing Department 22,500 hours Closing Loans 1,485,000 Time - Legal Department 18,000 hours Total 3,582,400 85,000 hours During 2017, the company processes & issued 9,000 new mortgages, two of which are summerized here with regard to activities used to process mortgages: Loan 1812 Loan 3075 Application process hours 2.00 3.00 Credit investigating hours 2.50 2.50 Underwriting hours 1.50 1.50 Processing hours 3.00 3.50 Legal hours 1.50 2.50 Total hours 10.50 13.00 A. Determine the cost per unit of activity for each avtivity cost pool B. Determine the cost of processing loans 1812 and 3075 C. Determine the cost of preparing loans 1812 and 3075 assuming that an average cost per hour for all activities is used. D. Compare and discuss your answers to requirements (A) and © The accounting department has provided the following data for the company's five major cost pools for 2017. The CEO, Daniel Vega, is concerned about operating costs associated with processing mortgage applications and has decided to install an ABC costing system to help him get a handle on costs. Although labor hours seem to be the primary driver of the cost of processing a new mortgage, the labor cost for the different activities involved in processing new loans varies widely. Woodcrest is a full service residential mortgage company in the Houston area that operates in a very competitive market. Activity Cost Pools Activity Drivers Taking customer application $ 364,900 Time - Assistant Managers 17,000 hours Conducting credit investigaions 350,000 Time - Credit Managers 12,500 hours Underwriting 797,500 Time - Underwriting Department 15,000 hours Preparing loan packages 585,000 Time - Processing Department 22,500 hours Closing Loans 1,485,000 Time - Legal Department 18,000 hours Total 3,582,400 85,000 hours During 2017, the company processes & issued 9,000 new mortgages, two of which are summerized here with regard to activities used to process mortgages: Loan 1812 Loan 3075 Application process hours 2.00 3.00 Credit investigating hours 2.50 2.50 Underwriting hours 1.50 1.50 Processing hours 3.00 3.50 Legal hours 1.50 2.50 Total hours 10.50 13.00 A. Determine the cost per unit of activity for each avtivity cost pool B. Determine the cost of processing loans 1812 and 3075 C. Determine the cost of preparing loans 1812 and 3075 assuming that an average cost per hour for all activities is used. D. Compare and discuss your answers to requirements (A) and ©Explanation / Answer
a) Activity cost pool Total cost Activity driver Activity units # of activity units Activity rates Taking customer application $ 364,900 Time-AMs Hours 17000 $ 21.46 Conducting credit investigations $ 350,000 Time-CMs Hours 12500 $ 28.00 Underwriting $ 797,500 Time--UD Hours 15000 $ 53.17 Preparing loan packages $ 585,000 Time-PD Hours 22500 $ 26.00 Closing loans $ 1,485,000 Time-LD Hours 18000 $ 82.50 $ 3,582,400 85000 b) Cost of processing loans 1812 and 3075: Loan 1812 Loan 3075 Hours utilized Amount Hours utilized Amount Application process hours 2.0 $ 42.93 3.0 $ 64.39 Credit investigating hours 2.5 $ 70.00 2.5 $ 70.00 Underwriting hours 1.5 $ 79.75 1.5 $ 79.75 Processing hours 3.0 $ 78.00 3.5 $ 91.00 Legal hours 1.5 $ 123.75 2.5 $ 206.25 Total hours 10.5 $ 394.43 13.0 $ 511.39 c) Cost per hour = 3582400/85000 = $ 42.15 Cost of preparing Loan 1812 = 10.5*42.15= $ 442.58 Cost of preparing Loan 3075 = 13.0*42.15= $ 547.95 d) The ABC method breaks up the total cost into various activity cost pools, each cost pool driven by a particular distinct activity or process and having a measurable activity unit. A separate allocation rate is worked out for each activity pool and costs are then assigned to each Job (here each loan application). Such an allocation of costs helps in assigning costs to jobs according to that job's consumption of the various activities. For instance the time utilized by the two jobs specified, are different for each of the activities. The allocation is thus more fair. Under the traditional method (under 'c'), there is only one cost pool with a total overhead cost and the total hours of all activities put together. A broad allocation rate is prepared, on the basis of the total cost and total hours. This rate is then used to allocate costs to individual job applications.
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