7-7 Why is the first stage of the allocation process in activity-based costing often based on interviews?

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7-6 Why are there two stages of allocation in activity-based costing?

EXERCISE 7-7 First-Stage Allocations (L07-2] The operations vice president of Security Home Bank has been interested in investigating the efficiency of the bank's operations. She has been particularly concerned about the costs of han- dling routine transactions at the bank and would like to compare these costs at the bank's various branches. If the branches with the most efficient operations can be identified, their methods can be studied and then replicated elsewhere. While the bank maintains meticulous records of wages and other costs, there has been no attempt thus far to show how those costs are related to the various services provided by the bank. The operations vice president has asked your help in conducting an activity-based costing study of bank operations. In particular, she would like to know the cost of opening an account, the cost of processing deposits and withdrawals, and the cost of processing other customer transactions. The Westfield branch of Security Home Bank has submitted the following cost data for last year: Teller wages ......... ......... Assistant branch manager salary .... Branch manager salary .. Total .... Total ........................... $160,000 75,000 80,000 $315,000 Virtually all other costs of the branch rent, depreciation, utilities, and so on-are organization- sustaining costs that cannot be meaningfully assigned to individual customer transactions such as depositing checks. In addition to the cost data above, the employees of the Westfield branch have been inter- viewed concerning how their time was distributed last year across the activities included in the activity-based costing study. The results of those interviews appear below: Distribution of Resource Consumption Across Activities Processing Opening Deposits and Accounts Withdrawals Processing Other Customer Other Transactions Activities othefires Total Total Teller wages ................... Assistant branch manager salary ... Branch manager salary .......... 5% 15% 5% 65% 5% 0% 20% 30% 10% 10% 50% 85% 100% 100% 100% Required: Prepare the first-stage allocation for the activity-based costing study. (See Exhibit 7–6 for an example of a first-stage allocation.)

Activity based costing is considered a better method ofallocating manufacturing overhead than the more simplified"plant-wide" overhead allocation method.

a. Activity based costing doesrequire more work than a plant-wide allocation. Under whatcircumstances is it worth the extra effort?

b. What is the typically result when activity based costing isadopted, in terms of cost allocation between differentproducts?

c. Name three advantages of activity based costing overplant-wide allocation.

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7-7 Why is the first stage of the allocation process in activity-based costing often based on interviews?

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