An article in Cost Management , by Kocakulah, Bartlett, and Albin entitled “ABC
ID: 383678 • Letter: A
Question
An article in Cost Management, by Kocakulah, Bartlett, and Albin entitled “ABC for Calculating Mortgage Loan Servicing Expenses” (July/August 2009, p. 36), discusses a use of ABC in the financial services industry.
Instructions:
Read the article and answer the following questions.
(a) What are some of the benefits of ABC that relate to the financial services industry?
(b) What are three things that the company's original costing method did not take into account?
(c) What were some of the cost drivers used by the company in the ABC approach?
ABC FOR CALCULATING This artiene pr.se ts ABC a· methed that nasaela. Isstitetleea esn us to ealeslate the eest of banklng services by delermising cest and sessumpties et ach usit ef @wtpet by the funetians required t. delle· he.. Servtees MORTGAGE LOAN SERVICING EXPENSES MEHMET C. KOCAKOLAH, JAMES BARTLETT, AND MARVIN ALBIN overhead costs and derive more accu ctivity-based costing (ABC) allocates overhead costs based on how the organi- sion using the information zation's resources are con Additionally, according to an article rate product costs and make better deci sumed through the pro on the American Institute of Certified Pub duction of products or provision of ser- lic Accountants (AICPA) Web site, the : vices. Rather than aligning costs by AICPA notes that the: - basic distiactioa betwe departments or cost centers, ABC me thodology aligns costs based on activi accoanting and activity-based cesting is as ties performed and then allocates these follw:traditional cost acceuating echniques ufactere a unit, purchase cest of merchandise links the activity to the product or ser or days occupied by the customer. Ia contras activity costs to beneficiaries of the activ- cate coats so producta based os attribes a single unit. Typical atteibutes inclade the : ities and ultimately, the products or ser nuber of direct labor hours : vices that benefit from the performance : of the activities. Once an activity has required to man been identified, an activity cost driver resold, or number of days eccupied. Alloca tions, therefore, vary directly with the volume of ueita prced.cost f merchandise sold, : titative measure of the output of activities vice. Activity cost drivers serve as a quan- ctivity-based costing systems focus on activ vide sah service based on rach prduco ities reqeired to produce each product or and replace the simple volume-based service's consumption of the activities drivers used in the traditional costing sys tems. By using activity-based costing,In using activity-based costing,over- organizations hope to better allocate head costs are traced to products by identifying the resources, activities, and MENMET C. KOCAKLLAN He caa be rrecked a 812-464-1730 or e-mail mie calculate the cost of each activity con Preer of Accoiasat their costs and quantities to produce the product. The cost drivers are used to theveriy cekalas.ed AMES BARTLETT is Senior Markering Reearch Ans An activity-based costing system can be a. He as be mechyrinzzreo sumed during any given period of time viewed in two different ways. Phe cost assignment provides information abott objects. MARVIN ALBIN n a Pooessor of Cemputer laferma tesources, activities and-cost The processes provide operational and frequently non-financial information HeFusl edu 36Explanation / Answer
The benefits of ABC that relate to financial services industry are that it provides accuracy in the price allocation of product and services. As ABC is based on activities and not on products so the cost allocation can be done in a more accurate way. Through ABC method the service industry can identify the customers which are bringing most profits to the organisation from the ones who don't. As the costing is more accurate, based on it the customers important for the organisation can be figured out. As the costing method bring out accurate results the profits attained from the services are more through this method. The process costs are more organized as this method requires proper planning to be executed.
B. The three things that the company's costing method did not take into account are:
1. The company has grown and the business transactions have complicated but the costing method used is too simplistic to be used pratically. For eg. The same administrative and servicing costs are applied to all types of mortgages whether fixed rate or adjustable rate ones.
2. This method does not keep any difference in the servicing expenses of the newly generated account and an account in the books from a long duration.
3. It does not take into consideration the quality of the credit. For instance, a customer with bettrr credit scores should be charged with lower servicing expenses and that with lower credit scores should be charged a higher amount of servicing expenses but in this method the price of servicing is equal for all type of customers.
C. The cost drivers in the ABC approach are:
- the average number of accounts negligent for more than 60 days
- the average number of accounts that were outstanding which means yet to be paid off by the customers
- the average number or bankrupt accounts, means the accounts whose owners are legally considered unable to pay off the debts.
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