Question

ABC Costing for a Service Organization
Fairfield Mortgage Company is a full-service residential mortgage company in the Atlanta area that operates in a very competitive market. The CEO, Richard Sissom, is concerned about operating costs associated with processing mortgage applications and has decided to install an ABC costing system to help him get a handle on costs. Although labor hours seem to be the primary driver of the cost of processing a new mortgage, the labor cost for the different activities involved in processing new loans varies widely. The Accounting Department has provided the following data for the company's five major cost pools for 2019:

Taking customer applications	$300,000	Time-assistant managers	12,000 hours
Conducting credit investigations	450,000	Time-credit managers	16,500 hours
Underwriting	525,000	Time-Underwriting Department	10,000 hours
Preparing loan packages	200,000	Time-Processing Department	8,000 hours
Closing loans	600,000	Time-Legal Department hours	6,000 hours
	$2,075,000		52,500 hours

During 2019, the company processed and issued 5,000 new mortgages, two of which are summarized here with regard to activities used to process the mortgages:

	Loan 5066	Loan 5429
Application processing hours	1.50	2.75
Credit investigating hours	4.00	3.00
Underwriting hours	2.50	4.75
Processing hours	3.50	3.00
Legal processing hours	1.50	1.50
Total hours	13.00	15.00

a. Determine the cost per unit of activity for each activity cost pool.
Round rates to two decimal places.
Activity-based overhead rates:

Taking applications	Answer
Conducting credit investigations	Answer
Underwriting	Answer
Preparing loan packages	Answer
Closing loans	Answer

b. Determine the cost of processing loans 5066 and 5429.
Round answers to two decimal places.

	Loan 5066	Loan 5429
Taking applications	Answer	Answer
Investigations	Answer	Answer
Underwriting	Answer	Answer
Loan packages	Answer	Answer
Closing loans	Answer	Answer
Total costs	Answer	Answer

c. Determine the cost of preparing loans 5066 and 5429 assuming that an average cost per hour for all activities is used.
Round answers to two decimal places.
Average cost per hour for all activities $Answer
Use rounded rate calculated above for calculations below. Round answers to two decimal places.

Cost of Loan #5066 $Answer
Cost of Loan #5429 $Answer

Answer 1

A)Cost per unit of activity for each activity cost pool:

ACTIVITY (1)	ACTIVITY COST POOLS($) (2)	COST DRIVERS (3)	COST DRIVER QUANTITY(Hours) (4)	COST PER UNIT OF ACTIVITY ($) {2 / 4}
Taking customer application	300,000	Application processing hours	12,000	25.00
Conducting credit investigation	450,000	Credit investigating hours	16,500	27.27
Underwriting	525,000	Underwriting hours	10,000	52.50
Preparing loan packages	200,000	Processing hours	8,000	25.00
Closing loans	600,000	Legal processing hours	6,000	100.00

B) Cost of processing loan 5066 & 5429:

PARTICULARS	LOAN 5066 ($)	LOAN 5429 ($)
Taking application	37.50 (25*1.5)	68.75 (25*2.75)
Incestigation	109.08 (27.27*4)	81.81 (27.27*3)
Underwriting	131.25 (52.50*2.5)	249.38 (52.50*4.75)
Loan packages	87.50 (25*3.5)	75.00 (25*3)
Closing loans	150.00 (100*1.50)	150.00 (100*1.50)
Total cost of processing	515.33	624.94

C)Average cost per hour for all activities:

It can be calculated as follows = Total(overall) processing costs Total number of hours for processing

= $2,075,000 / 52,500

= $39.52 per hour

Cost of loan 5066 = No. of hours*average cost per hour = 13*39.52 = $513.76

Cost of loan 5429 = No. of hours*average cost per hour = 15*39.52 = $592.80