Solved ABC : Bank of Marin Activity-Based Costing Accounting
Bank of Marin Activity Based Costing (ABC)
Activity-based costing (ABC) is an accounting approach that enables Bank of Marin to assign overhead activities costs of the firm to the specific products and services it produces & delivers.
Compare to the traditional approach, ABC assigns the overheads and indirect costs less arbitrarily and focuses on true relationship between costs, overhead activities, and related products (manufactured, produced) / services delivered by Bank of Marin.
Solving Bank of Marin Costing Problem with ABC Accounting Method
Bank of Marin markets two types of products in the Regional Banks industry. For sake of simplicity let us call them Financial Standard product and Financial Custom Product. Standard Product is lot simpler than Custom Product, so Bank of Marin produces Standard product in large batch sizes compare to Custom product which is produced in smaller batch sizes.
Bank of Marin Standard Product
Bank of Marin Custom Product
The difference between the traditional method and ABC can be only noticed when there are different types of products produced by Bank of Marin and indirect costs comprise a significant chunk of the overall cost structure of Bank of Marin.
To calculate the "Overhead Recovery Rate" add up all the indirect costs that Bank of Marin is incurrring for both the standard and custom product.
Return on Sales Calculations for Bank of Marin
Activity Based Costing System for Bank of Marin
Activity Based Costing can improve the costing process at Bank of Marin in three prominent ways –
After identifying all the support activities and associated costs & factors that drive those cost, managers at Bank of Marin can take following steps to conduct ABC costing -
The profit per unit of standard product is higher than custom product under ABC technique.By comparing the Return on Sales numbers under both traditional and ABC technique - We can easily conclude that ABC is far more effective costing technique for Bank of Marin as it stops inefficient allocation of costs to Standard product. Bank of Marin should focus on standard product rather than custom product as standard product is delivering much higher returns on sales.
References for Activity-Based Costing for Bank of Marin
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Bank of America Corp Pj ADR Activity Based Costing (ABC) Solution
You can download Excel Template of Activity Based Costing of Bank of Marin