Question - ABC Costing for a Service Organization
First Mortgage Company is a full-service residential mortgage company in the Baltimore area that operates in a very competitive market. The manager, Richard Sissom, is concerned about operating costs associated with processing mortgage applications and haas decided to install an ABC costing system to help him get a handle on costs. Although labor hours seems 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. The Accounting Department has provided the following data for the company's five major cost pools for 2009.
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Activity Cost Pools
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|
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Activity Drivers
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|
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Taking Customer Applications
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$300,000
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Time-Assistant Managers
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12,000 hours
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|
Conducting credit investigations
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450,000
|
|
Time-Credit Managers
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16,500 hours
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|
Underwriting
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500,000
|
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Time-Underwriting Department
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10,000 hours
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|
Preparing loan packages
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200,000
|
|
Time-Processing Department
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10,000 hours
|
|
Closing loans
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600,000
|
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Time-Legal Department hours
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6,000 hours
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$2,050,000
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|
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54,500 hours
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During 2009, the company processed and issued 5,000 new mortgages, two of which are summarized here with regard to activites used to process the mortgages.
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Loan 5066
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Loan 5429
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Application processing hours
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1.5
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2.75
|
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Credit investigating hours
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4
|
3
|
|
Underwriting hours
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2.5
|
4.75
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|
Processing hours
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3.5
|
3
|
|
Legal processing hours
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1.5
|
1.5
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|
Total Hours
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13
|
15
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Question:
a) Determine the cost per unit of activity for each activity cost pool.
b) Determine the cost of processing loans 5066 and 5429.
c) Determine the cost of preparing loans 5066 and 5429 assuming that an average cost per hour for all activates is used.