Bank Cost Accounting
elevance of Managerial Concepts in the Banking Industry by Zabihollah Rezaee Ph.D., CPA, CMA,
INTRODUCTION In the past, bank accountants paid little or no attention to the use of managerial accounting concepts in the banking industry. Viewing managerial accounting from the perspective of the banking industry provides a unique opportunity to explore the development of the internal reporting structure. While the use of internal cost and profitabiHty reports is widespread in merchandising, manufacturing, and other service industries, banks have historically focused only on overall profitability. The reason is simple. In the past, interest rates, branch locations, and service offerings were heavily regulated by the government; banks had little incentive or opportunity to consider issues such as pricing, product mix, or market share strategies. Deregulation has put an end to this complacent approach, and bankers are now scurrying to survive in a quickly changing environment. The most obvious result of deregulation is increased competition.' Customers are more aware today of yields on investments and costs of loans. For banks, this means increased pressure on interest spreads, and ultimately, on bottom-line profits. Currently, the traditional business of banking, loans and deposits, is being challenged by outsiders.^ To meet these challenges, banks are adding managerial accounting concepts and techniques to their existing financial reporting structures. Banks are seeking more information regarding the profit contribution of business units, product lines, and customers,. The purposes of this paper are to: (1) discuss the phases of bank profitability reporting; (2) examine the costing methods most commonly used by the banking industry; and (3) discuss the concept of internal funds transfer pricing and a mechanism for measuring and allocating the costs of gathering funds to the users of those funds.
'Associate Professor of Accounting Middle Tennessee State Universitv 1.
INTRODUCTION In the past, bank accountants paid little or no attention to the use of managerial accounting concepts in the banking industry. Viewing managerial accounting from the perspective of the banking industry provides a unique opportunity to explore the development of the internal reporting structure. While the use of internal cost and profitabiHty reports is widespread in merchandising, manufacturing, and other service industries, banks have historically focused only on overall profitability. The reason is simple. In the past, interest rates, branch locations, and service offerings were heavily regulated by the government; banks had little incentive or opportunity to consider issues such as pricing, product mix, or market share strategies. Deregulation has put an end to this complacent approach, and bankers are now scurrying to survive in a quickly changing environment. The most obvious result of deregulation is increased competition.' Customers are more aware today of yields on investments and costs of loans. For banks, this means increased pressure on interest spreads, and ultimately, on bottom-line profits. Currently, the traditional business of banking, loans and deposits, is being challenged by outsiders.^ To meet these challenges, banks are adding managerial accounting concepts and techniques to their existing financial reporting structures. Banks are seeking more information regarding the profit contribution of business units, product lines, and customers,. The purposes of this paper are to: (1) discuss the phases of bank profitability reporting; (2) examine the costing methods most commonly used by the banking industry; and (3) discuss the concept of internal funds transfer pricing and a mechanism for measuring and allocating the costs of gathering funds to the users of those funds.
'Associate Professor of Accounting Middle Tennessee State Universitv 1.