Marvel Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available: Activity Cost Drive Driver Units Application processing $900,000 Applications 4,000 Loan underwriting 800,000 Underwriting hours 16,000 Loan closure 880,000 Legal hours 8,000 Total $2,580,000 Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure. Required: A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications. B. Determine the cost of processing the two loans if Marvel uses the traditional labor-hour-based system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure. C. Is Marvel making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?
Marvel Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available:
|
Activity |
Cost |
Drive |
Driver Units |
|
Application processing |
$900,000 |
Applications |
4,000 |
|
Loan underwriting |
800,000 |
Underwriting hours |
16,000 |
|
Loan closure |
880,000 |
Legal hours |
8,000 |
|
Total |
$2,580,000 |
|
|
Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure.
Required:
A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.
B. Determine the cost of processing the two loans if Marvel uses the traditional labor-hour-based system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure.
C. Is Marvel making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?
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