Problem - First Eastern Bank is a large, multibranch bank offering a wide variety of commercial and retail banking services. Eastern uses an absorption costing system to monitor the costs of various services and provide information for a variety of decisions.
One set of services is a retail loan operation providing residential mortgages, car loans, and student college loans. All loan applications are filed by the applicant at a branch bank, where the branch manager fills out the loan application. From there, the loan application is sent to the loan processing department, where the applicant's credit history is checked and a recommendation is made regarding loan approval based on the applicant's credit history and current financial situation. This recommendation is forwarded to the loan committee of senior lending officers, who review the file and make a final decision.
Thus, there are three stages to making a loan: application in a branch, the loan processing department, and the loan committee. Mr. and Mrs. Jones visit the West Street branch and file an application for a residential mortgage. The Jones's loan application is processed through the three stages.
West Street Branch Bank. The branch manager spends one hour taking the application. The branch manager spends 1,000 hours per year of her total time taking loan applications and the remainder of her time providing other direct services to customers. Total overhead in the West Street Branch is budgeted to be $259,000, excluding the manager's salary, and is allocated to direct customer services using the branch manager's time spent providing direct customer services. The branch manager's annual salary is $42,600.
Processing department. The processing department budgets its total overhead for the year to be $800,000, which is allocated to loans processed using direct labor hours. Budgeted direct labor hours for the year are 40,000 hours. Direct labor hours in the processing department cost $18 per hour. The Jones's loan requires five direct labor hours in the loan processing department.
Loan committee. Ten senior bank executives are on the loan committee. The loan committee meets 52 times per year, every Wednesday, all day, to approve all loans. The average salary and benefits of each member of the loan committee are $104,000. The loan committee spends 15 minutes reviewing the Jones's loan application before approving it.
For costing purposes, all employees are assumed to work eight-hour days, five days per week, 52 weeks per year.
Required: Calculate the total cost of taking the aplication, processing and approving the Joneses' mortgage.