question archive GFN bank operated for years under the assumption that profitability can be increased by increasing account balances from bank clients
GFN bank operated for years under the assumption that profitability can be increased by increasing account balances from bank clients
Subject:AccountingPrice: Bought3
GFN bank operated for years under the assumption that profitability can be increased by increasing account balances from bank clients. However, they have not paid attention to the costs of operating the various bank products. The bank accountant is now using the activity based costing to find out the costs of operating the three types of products: checking accounts, personal loans and the gold VISA. The accountant has identified the following cost pools and related costs, as well as the cost drivers in operating these products: Cost Pool Activity Cost Activity Driver Activity Capacity $ Number Providing ATM service 100,000 ATM transactions 200,000 Computer processing 1,000,000 Computer transactions 2,500,000 Issuing statements 800,000 No. of statements 500,000 Customer inquiries 360,000 Telephone minutes 600,000 Total $2,260,000 The following annual information on the three products was also made available: Checking a/cs Personal Loans Gold VISA Units of product 30,000 5,000 10,000 qty qty qty ATM transactions 180,000 20,000 Computer transactions 2,000,000 200,000 300,000 No. of statements 300,000 50,000 150,000 Telephone minutes 350,000 90,000 160,000 Based on the information, the accountant has computed the cost of each product using activity- based costing. After working out the costs of each type of product, the general manager of the bank would like to focus on the product, 'checking account'. The checking account product is described as follows: 1. Depositors with average balances greater than $500 earn interest of 2 percent per year from the bank. 2. A service charge of $5 per month is charged on depositors for average balances less than $1,000. 3. The bank earns 4 percent per year on all deposit balances. The checking accounts have been analyzed as follows: Checking a/c balances % of units of Average deposit balance ($) product <$500 50% 400 >=$500; <=$1,000 10% 750 >$1,000; <=$2,767 25% 2,000 >$2,767 15% 5,000 100% The general manager has now decided to compute the annual profitability of each of the four categories (1. to 4.) of checking account product described above.
