Accounting for Managers: Interpreting accounting information for decision-making

ACCOUNTING DECISIONS 177

Table 11.12 Quality Bank – transaction volumes by branch

Branch

A

Branch

B

Branch

C

Total

branch

HO Total

No. of new accounts 350 100 50 500 500
No. of new loan accounts 600 300 100 1,000 1,000

Total no. new accounts 950 400 150 1,500 0 1,500
No. transactions – cashiers 3,000 1,500 500 5,000 5,000
No. transactions – loans 1,500 2,000 500 4,000 4,000
No. transactions – ATM 3,000 3,000 1,000 7,000 7,000
No. transactions – HO 22,000 22,000

Total no. transactions 7,500 6,500 2,000 16,000 22,000 38,000
No. customers 10,000 10,000

The bank was then able to apply the cost per cost driver against the actual
transaction volume for each branch and head office. This resulted in the cost
analysis shown in Table 11.13. A comparison of the costs allocated to each branch
under absorption and activity-based costing is shown in Table 11.14.
The ABC approach revealed that many of the costs charged to head office under
absorption costing should be charged to branches based on transaction volumes.
This had a significant impact on the measurement of branch profitability and

Table 11.13 Quality Bank – cost analysis using ABC

Branch

A

Branch

B

Branch

C

Total

branch

HO Total

New accounts £26.67 25,333 10,667 4,000 40,000 0 40,000
Branch transactions £7.50 56,250 48,750 15,000 120,000 120,000
Total transactions £4.74 35,526 30,789 9,474 75,789 104,211 180,000
No. of customers £6.00 60,000 60,000

Overhead allocation (£) 117,110 90,206 28,474 235,789 164,211 400,000
Direct labour (£) 8,000 12,000 14,000 34,000 70,000 104,000

Total (ABC) 125,110 102,206 42,474 269,789 234,211 504,000

Table 11.14 Quality Bank – comparison of costs under absorption and activity-based
costing

Branch A Branch B Branch C Total branch HO Total

Absorption costing 67,846 53,308 43,615 164,769 339,231 504,000
Activity-based costing 125,110 102,206 42,474 269,789 234,211 504,000