Accounting for Managers: Interpreting accounting information for decision-making

176 ACCOUNTING FOR MANAGERS

Case study: Quality Bank – the overhead allocation problem

Quality Bank has three branches and a head office. Table 11.9 shows how the
accounting system, based on absorption costing, has calculated the costs for
each branch. Direct costs of £104,000 are traceable based on staff working in
each location. Overhead costs of £400,000 for the bank have been allocated as a
percentage of the direct labour cost.
The bank used its internal staff to study the effects of introducing an activity-
based costing system. Table 11.10 shows the cost pools and cost drivers that
were identified.
The bank calculated costs for each cost driver as shown in Table 11.11. It then
analysed the transaction volume for each of its branches and head office. These
figures are shown in Table 11.12.

Table 11.9 Quality Bank – direct costs and allocated overheads by branch

Total Branch

A

Branch

B

Branch

C

Total

branch

HO Total

Direct labour cost (£) 14,000 11,000 9,000 34,000 70,000 104,000
Overheads £400,000
Allocated as % of
direct labour

384.6% 53,846 42,308 34,615 130,769 269,231 400,000

Total costs 67,846 53,308 43,615 164,769 339,231 504,000

Table 11.10 Quality Bank – cost pools and drivers

Cost pools £ Cost driver

Branch costs 120,000 No. of branch transactions

Computer system costs 180,000 No. of total transactions

Telecommunications costs 60,000 No. of customers

Credit checking costs 40,000 No. of new accounts

400,000

Table 11.11 Quality Bank – costs per driver

Branch

costs

Computer

system

Telecomms Credit

checking

Total

Overheads (£) 120,000 180,000 60,000 40,000 400,000
No. transactions 16,000 38,000 10,000 1,500

Overhead per
transaction

£7.50 £4.74 £6.00 £26.67

Per Branch trans. Total trans. Customer New account