Abc Costing in Banking
Activity-Based Costing in Banking
Jessica Phinney
ACC522: Budgeting and Cost Accounting
Professor Guenther
April 15, 2013 Activity-based costing (“ABC”) is considered one of the best and most popular tools for allocating costs by identifying individual activities as cost objects. Originally, activity-based costing was mainly used in manufacturing industries but, due to its preciseness, this system has recently grown popular in the service industries as well, including banking. Activity-based costing provides bank mangers with a better and more accurate understanding of costs and true profitability associated with the daily operations of the bank and can be utilized in all aspects of banking.
As mentioned previously, activity-based costing has proved to be an effective measure to accurately determine costs associated with products and services of a company. “ABC systems identify activities in all functions of the value chain, calculate costs of individual activities, and assign costs to cost objects such as products and services on the basis of the mix of activities needed to produce each product or service.” ABC is further defined as: “1) a more accurate cost management methodology, 2) mostly focuses on indirect costs (overhead), 3) traces rather than allocates each expense category to the particular cost object, 4) makes ‘indirect’ expenses ‘direct.’”
Activity-based costing is best to use in an industry where competition is prevalent. According to Mehmet Kocakulah, “The competitive environment in the banking/financial institution industry has made it very difficult to increase revenues and market share that is sufficient in growth and maximizing shareholder’s wealth. The minimal growth in the area plus the over saturation of banks, financial institutions and other sectors (mortgage companies, insurance agencies, internet companies, etc.) competing for the traditional banking products has forced banks to look at ways to control
Jessica Phinney
ACC522: Budgeting and Cost Accounting
Professor Guenther
April 15, 2013 Activity-based costing (“ABC”) is considered one of the best and most popular tools for allocating costs by identifying individual activities as cost objects. Originally, activity-based costing was mainly used in manufacturing industries but, due to its preciseness, this system has recently grown popular in the service industries as well, including banking. Activity-based costing provides bank mangers with a better and more accurate understanding of costs and true profitability associated with the daily operations of the bank and can be utilized in all aspects of banking.
As mentioned previously, activity-based costing has proved to be an effective measure to accurately determine costs associated with products and services of a company. “ABC systems identify activities in all functions of the value chain, calculate costs of individual activities, and assign costs to cost objects such as products and services on the basis of the mix of activities needed to produce each product or service.” ABC is further defined as: “1) a more accurate cost management methodology, 2) mostly focuses on indirect costs (overhead), 3) traces rather than allocates each expense category to the particular cost object, 4) makes ‘indirect’ expenses ‘direct.’”
Activity-based costing is best to use in an industry where competition is prevalent. According to Mehmet Kocakulah, “The competitive environment in the banking/financial institution industry has made it very difficult to increase revenues and market share that is sufficient in growth and maximizing shareholder’s wealth. The minimal growth in the area plus the over saturation of banks, financial institutions and other sectors (mortgage companies, insurance agencies, internet companies, etc.) competing for the traditional banking products has forced banks to look at ways to control
Bibliography: Hicks, Douglas T., Edmond J. Olejniczak III, and Bradley A. Curell. "Measuring Customer & Product Profitability at Regional & Community Banks." Journal of Performance Management. 2009. no. 1: 3-18. Business Source Premier, EBSCOhost (accessed April 6, 2013). Hornfren, Charles T., Srikant M. Datar and Madhav Rajan. Cost Accounting: A Managerial Emphasis, 14th edition (New Jersey: Pearson Prentice Hall, 2012) 146. Kocakülâh, Mehmet C. “Usage of Activity-Based Costing on a Commercial Loan Portfolio in a Small Bank.” (accessed April 6, 2013). ----. "Using Activity-Based Costing (ABC) to Measure Profitability on a Commercial Loan Portfolio." Journal of Performance Management 2007, no. 3: 29-46. Business Source Premier, EBSCOhost (accessed April 6, 2013). Max, Mitchell. "ABC Trends in the Banking Sector A Practitioner 's Perspective." Journal Of Performance Management. 2008. no. 1: 32-47. Business Source Premier, EBSCOhost (accessed April 9, 2013). McGuire, Brian L., Mehmet C. Kocakulah, and Leonard G. Wagers. "Implementing Activity-Based Management in the Banking Industry," The Journal of Bank Cost & Management Accounting 11, no. 1 (1998). Sharman, Paul A. Management Accounting: Activity-Based Costing Provides Insights into the Economics of Banking. Wallace, Vanessa and Andrew Herrick, The Future of Banking: Reappraising Core Capabilities after the Crisis (Booz & Company Inc.: 2009) 17-18. Witherite, Jeffrey and Il-woon Kim. “Implementing Activity-Based Costing in the Banking Industry” Bank Accounting & Finance. 2006. no. 3: 29-34. Business Source Premier, EBSCOhost (accessed April 6, 2013).