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 2016:

Activity Cost Pools		Activity Drivers
Taking customer applications	$600,000	Time-assistant managers	12,000 hours
Conducting credit investigations	900,000	Time-credit managers	16,500 hours
Underwriting	1,050,000	Time-Underwriting Department	10,000 hours
Preparing loan packages	400,000	Time-Processing Department	8,000 hours
Closing loans	1,200,000	Time-Legal Department hours	6,000 hours
	$4,150,000		52,500 hours

During 2016, 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	1.5	2.75
Credit investigating hours	4	3
Underwriting hours	2.5	4.75
Processing hours	3.5	3
Legal processing hours	1.5	1.5
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

d. Compare and discuss your answers to requirements b. and c. (Select the most appropriate statement.)

Answer 1