Case East Penn Bank
Activity-Based Costing in the
Service Sector:
The East Penn Bank
ABSTRACT: This case illustrates why a major segment of the service sector banks - needs accurate cost information to make strategic decisions, and how more refined accounting systems help fulfill this need.
East Penn Bank is a hypothetical bank that has suffered falling profits despite a shift in customer base toward retail customers, which the current information system reports are more profitable than business customers. Following a stepby-step approach, you will develop the Bank’s average cost of serving a retail customer account and a business customer account, under (1) the Bank’s traditional single allocation base system, and (2) a (pilot test) activity-based costing system.
You will analyze these results to determine how and why costs reported by the activity-based system differ from the costs reported by the traditional system, and what this difference means for the Bank’s business strategy. Finally, you will consider how the Bank’s managers can use the new, more refined activity-based cost data in strategic decision making, including controlling costs and developing more profitable business strategies.
T
INTRODUCTION
he East Penn Bank began operations in the mid-1980s. The bank quickly grew by providing checking account services to many small businesses that preferred to do business with a “local” bank. Although East Penn initially offered checking account services for individual accounts (retail customers), the bank primarily focused on serving its business customers. During the economic slowdown of the early 1990s that weakened the local economy, growth in business customer accounts began to decline. In response, East Penn’s senior management adopted a new strategy, focusing on increasing the number of retail customer accounts. By aggressively marketing individual retail accounts, East
Penn continued to grow. Today, the East Penn Bank strives to maintain a
2
stable base of business
Service Sector:
The East Penn Bank
ABSTRACT: This case illustrates why a major segment of the service sector banks - needs accurate cost information to make strategic decisions, and how more refined accounting systems help fulfill this need.
East Penn Bank is a hypothetical bank that has suffered falling profits despite a shift in customer base toward retail customers, which the current information system reports are more profitable than business customers. Following a stepby-step approach, you will develop the Bank’s average cost of serving a retail customer account and a business customer account, under (1) the Bank’s traditional single allocation base system, and (2) a (pilot test) activity-based costing system.
You will analyze these results to determine how and why costs reported by the activity-based system differ from the costs reported by the traditional system, and what this difference means for the Bank’s business strategy. Finally, you will consider how the Bank’s managers can use the new, more refined activity-based cost data in strategic decision making, including controlling costs and developing more profitable business strategies.
T
INTRODUCTION
he East Penn Bank began operations in the mid-1980s. The bank quickly grew by providing checking account services to many small businesses that preferred to do business with a “local” bank. Although East Penn initially offered checking account services for individual accounts (retail customers), the bank primarily focused on serving its business customers. During the economic slowdown of the early 1990s that weakened the local economy, growth in business customer accounts began to decline. In response, East Penn’s senior management adopted a new strategy, focusing on increasing the number of retail customer accounts. By aggressively marketing individual retail accounts, East
Penn continued to grow. Today, the East Penn Bank strives to maintain a
2
stable base of business