Comment in detail any company’s primary objectiv...

Your task is to assist Erik Larson and his ABC team by providing the following information:

  • Under the original (old) cost system:
    1. Compute the single indirect cost allocation rate that the bank would use to allocate the total indirect costs presented in Exhibit B.
    2. Use your answer to part A to determine the total annual indirect cost assigned to: (i) the retail customer line, and (ii) the business customer line. What drives these allocations?
    3. What proportion of the total indirect cost is assigned to: (i) the retail customer line, and (ii) the business customer line? Why? That is, what is the underlying rationale for indirect cost allocation under the old system? What assumption must hold approximately true for the original cost allocation procedure to generate “accurate” customer cost information?
    4. Use your answer to part B and data on the number of retail and business accounts to determine: (i) the indirect cost per retail account, and (ii) the indirect cost per business account.
    5. Assuming there are no direct costs or other indirect costs, compute the average contribution to profit per account for retail customers and for business customers. What business strategy would a manger using the original cost allocation system likely adopt? Why?
  • What are the signs that Virgin Islands’ original cost system is “broken”, such that it needs refinement or improvement?
  • Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities:
    1. Paying checks
    2. Providing teller services
    3. Responding to customer account inquiries
  • Use the following schedule to compute the total indirect cost allocated to each customer line (show your computations beside the activity description):

 

Total Indirect                     Total Indirect Cost

                                                            Cost Assigned                           Assigned to

                                                               To Retail                                  Business

 Activity                                            Customer Line                        Costomer Line

Paying checks

Providing teller services

Responding to customer account

Inquiries

Total Indirect Costs

 

  • What proportion of each activity is attributable to: (i) the retail customer line, and (ii) the business customer line?
  • Using the ABC data from Requirement 4, computer (i) the indirect cost per retail customer account and (ii) the indirect cost per business customer account.
  • Explain why the results in Requirement 1, Part D, and requirement 6 differ. Be specific.
  • Using the ABC data, compute the average contribution to profit per account for both retail and business customers. What business strategy would a manger using the ABC cost system likely adopt? How does this result compare to your response to Requirement 1, Part E?
  • The ABC team of Virgin Islands National Bank plans to increase the number of major activities (activity pools) with unique cost drivers to six. Please suggest three major activities with unique cost drivers and three cost drivers. Provide detailed reasons for your choices.

 

Part  2

 

  • Recall Virgin Islands National Bank’s bonus-based incentive plan to increase the number of customers. Do you believe this strategy is wise? Would you suggest any change in strategy based on the ABC analysis?

 

 

The answer to this question is attached. Your job is to put it in your words. The answer is number 9 on solutions.

 

  • Activity-based management (ABM) refers to manger’s use of ABC data in making business decisions. How can Virgin Islands’ management use the ABC data to plan more profitable marketing strategies? How can Virgin Islands’ managers use ABC information to identify opportunities to trim costs while still satisfying customers’ needs?
  • Why might Erik Larsen have suspected that the benefits of ABC would likely outweigh the costs of implementation at Virgin Islands National Bank?
  • Why do you think it is important for a CEO or a bank branch manager to understand ABC?

 

The answer to this question is attached. Your job is to put it in your words. The answer is number 12 on solutions.

 

14) Referring to class discussions, comment in detail any company’s primary objectives for     implementing ABC/ABM systems. How does ABC help in cost reduction and accurate          cost information. Please include the concepts of Strategic and Operational ABM in your             discussion.

  • Discuss the lessons learned from this case.

 

 


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