Activity-based costing, service company Towerton Financial Services13 Towerton Financial Services,…

Activity-based costing, service company Towerton Financial Services13 Towerton Financial Services, a brokerage firm, started with a focus on stock trading and mutual funds. As the business grew, Towerton diversified into two new product lines, investment account management and financial planning. Although revenue has grown with the new product lines, Towerton’s management is disappointed with the firm’s profitability. (See Exhibit 5-13 for the most recent monthly income statement, which is typical for the company.)
Towerton’s three groups of professional staff deal directly with customers across the four product and service lines. Brokers execute stock trades and mutual fund transactions and provide advice and recommendations. However, Towerton’s brokerage customers make their own buy and sell decisions. Towerton charges a flat fee per stock trade that depends on the total amount of assets a customer has on deposit with the company. Last month, these fees averaged $8.80 per transaction. For mutual fund transactions, Towerton charges 1.5% of the value of the mutual fund shares purchased. This fee averaged $41.45 per mutual fund transaction last month. There is no charge when customers later sell their shares.
Investment account managers actively manage customers’ investments by buying and selling stocks to meet customer objectives. These managers meet initially with customers to learn about their investment goals, interests, and risk tolerance. Thereafter, the parties meet quarterly to review account performance and investment strategy. Towerton charges each customer an annual asset management fee of 1.5% of the customer’s assets under management.
Financial planners prepare financial plans for customers. The planners help customers develop a budget and determine how much to save and how much insurance to purchase. Towerton charges $1,200 for the first financial plan and $125 per hour thereafter for ongoing advice. Planners typically meet quarterly with customers to discuss any needed changes in plans. Among the support personnel, principals manage and supervise brokers, investment account managers, and financial planners. Customer service representatives handle customer requests over the telephone for sales and account services.
Towerton uses two types of computer equipment: servers and desktop computers. Servers, in centralized clusters, process customer transactions, maintain customer accounts, and perform various administrative functions. Server capacity is measured in millions of computer instructions processed (MIPS). Towerton also leases a desktop computer for every employee.

Towerton’s remaining expenses include office space rental and miscellaneous corporate expenses. Office space consists of individual offices for each of the professional staff and support personnel, as well as conference rooms for face-to-face meetings with customers to open accounts or service existing accounts. Miscellaneous expenses include administrative expenses for finance, human resources, audits, taxes, professional fees, and compliance.
Because of management’s concern about the company’s profitability, Towerton’s accountants have gathered the following information:

1. After taking into account weekends, holidays, and vacations, the professional staff and support personnel work about 20 days per month on average.

2. Brokers, account managers, financial planners, and principals show up for 8 hours of work per day, but spend an average of 1.5 hours per day on breaks, training, education, and professional activities, with the remaining workday spent interacting with customers.

3. Like the other personnel, customer service representatives show up for 8 hours of work per day, but they spend an average of 1 hour per day on breaks, training, and education.

4. Each server costs $3,168 per month and operates 24 hours per day for 22 days each month. The cost per server hour is therefore $6. The server processing capacity is 50 MIPS per hour. Peak server usage occurs for 8 hours each day; during these hours, all 76 servers are operated. During the nonpeak hours, only 19 of the servers are operated. Towerton has computed the cost per MIPS as $0.12 for nonpeak hours and $0.30 for peak hours.

5. The costs per month in Exhibit 5-14 include compensation, fringe benefits, and the costs of space assigned on the basis of square feet of space occupied and individual information technology resources used for other than for customer-related activities.

Towerton’s enterprise resource planning (ERP) system provided the activity report, average time utilizations, and peak and nonpeak transactions detailed in Exhibits 5-15, 5-16, and 5-17, respectively.


(a) Calculate the practical capacity and the capacity cost rates for each of Towerton’s personnel resources: brokers, account managers, financial planners, principals, and customer service representatives.

(b) Using the data in Exhibits 5-15, and 5-16, calculate the time utilization for each category of personnel for each of the four product lines.

(c) Using the data in Exhibit 5-17, calculate the MIPS during peak usage for each of the product lines and the MIPS during nonpeak usage for each of the product lines.

(d) Assume that the average price per mutual fund trade is $41.45. Prepare an income statement showing costs and profits for each of Towerton’s four product lines, as well as the cost of unused capacity. What are reasons for the large differences in profits across the product lines?

(e) What actions might Towerton’s management team take to improve the company’s profitability?

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