Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher

Exercise 5

Activity-Based Costing of Customers
Rock Solid Bank and Trust (RSB T) offers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB T earns revenue by investing the money deposited; currently, it averages 6 percent annually on its investments of those deposits. To compete with larger banks, RSB T pays depositors 1 percent on all deposits. A recent study classified the bank's annual operating costs into four activities:

Data on two representative customers follow:

Required
a. Compute RSB T's operating profits.
b. Compute the profit from Customer A and Customer B, assuming that customer costs are based only on deposits. Interest costs = 1 percent of deposits; operating costs are 4 percent (= $10,000,000/$250,000,000) of deposits.
c. Compute the profit from Customer A and Customer B, assuming that customer costs are computed using the information in the activity-based costing analysis.