Tutorial 3 Questions

Question 1

Case 5.54 page 215, Hilton, McGraw-Hill

Ogden Bank has been in the customer-lending business for more than 100 years.
Competitors recently have taken a considerable portion of its market share. In addition, its
remaining customers have complained that the bank’s loan-approval process is too slow and
that finding out the status of loan application is difficult. The traditional procedure for
consumer loan approval is summarized here:

 A loan applicant picks up a standard loan application at the bank, completes it, and
mails it to the bank. A mail clerk delivers applications along with the regular mail.
 The loan application is delivered to a loan-processing clerk, who logs it in, attaches a
routing/status form to the front page, and files it in a folder of outstanding loan
applications. At the end of the day or when the folder is full, the clerks delivers the
contents to a credit analyst.
 The credit analyst enters data from the application into a computer program,
records the results on the status form, sends the application through interoffice mail
to a consumer-lending specialist.
 The consumer-lending specialist appproves or rejects the loan application and
customizes the loan if necessary according to the particular applicant’s needs. From
here, all apllications go to a pricing specialist via interoffice mail.
 The pricing specialist determines the appropriate interest rate to charge aprroved
applicants by using a computer program written for this purpose. The rate is
recorded on the stsatus form of approved applications, which are forwarded to
another clerical group.
 These clerks prepare letters informing applicants of the bank’s decisions along with a
note stating the loan terms of approved applications.
 After the legal department reviews all of this material, clerks mail the bank’s decision
to the applicants along with a promisory note to be signed and returned to those
who are approved.

This process takes four weeks on average, during which time applicants could find
alternative financing but could almost never determine the status of their application with
Ogden Bank. The bank has engaged you to analyze its loan approval process and make
recommendations for improvement.
Required:

a) Prepare a brief memo explaining how Ogden Bank could benefit from using ABM and
what steps and resources would be necessary to successfully implement it.
b) Suggest and explain at least three ways that Ogden Bank could reduce the cycle time
of its loan application process.
c) Suggest and explain at least three ways that Ogden Bank could improve its
communication, internally and externally, about its processes and possible process
changes.

Question 2

GlobalPopular.com (GP) sells books and software over the internet. A recent article in a trade
journal has caught the attention of management, given that the company has experienced
soaring inventory handling costs. The article noted that similar firms have purchasing,
warehousing, and distribution costs that average 13 per cent of sales, which is attractive when
compared with GP’s results for the past year.

The following information is available:

Activity Cost pool Cost driver Cost driver % of cost % of cost

(RM) quantity driver driver
activity for activity for
books software
Incoming 600,000 Number of 2,000 70% 30%
receipts purchase
orders
Warehousing 720,000 Number of 9,000 80% 20%
inventory
moves
Outgoing 450,000 Number of 15,000 25% 75%
shipments shipments

Book sales totalled RM7,800,000 and software sales totalled RM5,200,000. A review of the
company’s activities found various inefficiencies with respect to the warehousing of books
and outgoing shipments of software. These inefficiencies resulted in an extra 550 inventory
moves and 250 shipments, respectively.

Required:

a) What is activity-based management and explain the meaning of non-value-added activity?

b) How much did the non-value-activities cost GP for the past year?

c) Provide FOUR (4) examples of situations that may have given rise to non-value-added
activities for GP.
d) Will the elimination of non-value-added activities allow GP to achieve purchasing,
warehousing and distribution costs that average 13% of sales for each of the product
lines? Show your calculations using target costing.

e) Does either of the two product lines require additional cost reduction to achieve the target
percentage? If so, how much additional cost reduction is needed, and what tools
(methods) might the company use to achieve the reduction? Briefly describe.