Tubac Savings and Loan collects fees for 3 service activities: credit risk assessment, loan processing, and other services. During March, the overhead costs related to these three service activities totalled $500,000. Activity information and direct costs for the month were as follows:
Service Events Employee Time Direct Costs
Credit risk assessment 60,000 150 hours $300,000
Loan processing 1,000 260 hours 130,000
Miscellaneous services 9,000 90 hours 70,000
a)Tubac allocates overhead using one office-wide rate based on employee time. Determine the rate and the amount allocated to each department.
b)One of the commercial clients, Desert Dune Buggies, had 1,000 credit risk assessments, 50 loans processed, and 80 miscellaneous services performed this month. The total employee time used for Desert Dune Buggies was estimated to be about 11 hours, of which 8 hours were for processing loans. How much overhead would be allocated to this client using the office-wide rate?
c)The overhead costs can be separated by service activity, so that all costs are traced to the service department where possible, and then costs that cannot be traced are allocated. Using this method, cheque processing overhead costs were $120,000, loan processing costs were $200,000, and other activities were $180,000. Number of credit risk assessments is used as the allocation base for credit checks, number of events (services)is used for miscellaneous services, and employee hours are used to allocate the costs of servicing loans. How much overhead would be allocated to Desert Dune Buggies under this system?
d)Why are the amounts allocated in parts (b)and (c)different? Be specific in your answer.
e)Suppose Tubac's managers would like to compare the profitability from Desert Dune Buggies with the profitability from other commercial clients. Discuss whether the costs you calculated in part (c)represent the incremental cost of overhead for the Desert Dune Buggies account.

Question

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The Answer of Tubac Savings and Loan collects fees for 3 service activities: credit risk assessment, loan processing, and other services. During March, the overhead costs related to these three service activities totalled $500,000. Activity information and direct costs for the month were as follows:
Service Events Employee Time Direct Costs
Credit risk assessment 60,000 150 hours $300,000
Loan processing 1,000 260 hours 130,000
Miscellaneous services 9,000 90 hours 70,000
a)Tubac allocates overhead using one office-wide rate based on employee time. Determine the rate and the amount allocated to each department.
b)One of the commercial clients, Desert Dune Buggies, had 1,000 credit risk assessments, 50 loans processed, and 80 miscellaneous services performed this month. The total employee time used for Desert Dune Buggies was estimated to be about 11 hours, of which 8 hours were for processing loans. How much overhead would be allocated to this client using the office-wide rate?
c)The overhead costs can be separated by service activity, so that all costs are traced to the service department where possible, and then costs that cannot be traced are allocated. Using this method, cheque processing overhead costs were $120,000, loan processing costs were $200,000, and other activities were $180,000. Number of credit risk assessments is used as the allocation base for credit checks, number of events (services)is used for miscellaneous services, and employee hours are used to allocate the costs of servicing loans. How much overhead would be allocated to Desert Dune Buggies under this system?
d)Why are the amounts allocated in parts (b)and (c)different? Be specific in your answer.
e)Suppose Tubac's managers would like to compare the profitability from Desert Dune Buggies with the profitability from other commercial clients. Discuss whether the costs you calculated in part (c)represent the incremental cost of overhead for the Desert Dune Buggies account.

Tubac Savings and Loan Collects Fees for 3 Service Activities