Implementing activity-based management in the banking industry

Journal of Bank Cost & Management Accounting, The, 1998 by McGuire, Brian L, Kocakulah, Mehmet C, Wagers, Leonard G

The support and direction of top management

A direct link to company goals and objectives

A team of persons from various departments or divisions of the company who are dedicated to the implementation of ABC

A pilot project with a well-defined scope for company-wide implementation

A standard cost process to maintain the information deemed important

An established process to manage the change that results from management decisions based on ABC data13 Like other management initiatives, ABC invariably runs up against employee resistance. Many employees have already encountered downsizing, TQM changes and reengineering. Therefore, Activity-Based Costing is often greeted as the latest threat to their jobs.14

The primary building material for ABC is knowledge-knowledge of the activities performed by the people and resources employed by the bank or organization. 15 The downfall of many aborted ABC programs lies in inadequate documentation of the information that is collected. The cost flow diagram (CFP) is a tool which can be used to document this information in a clear and effective manner. The purpose of the CFP is to define what economic relationships exist within an organization and to identify what operational data are necessary to build the ABC analysis. The CFP includes the buildings, machinery and equipment employed, the activities performed by the persons in each department and their outputs, the cost drivers and cost objects and the flow of operational relationships between them.

In some instances, the CFP appears as a flowchart with symbols, lines and connections. It might appear as lists of activities and relationships between the resources, activities and cost objects.16 The principle function of the CFP is to provide a record of how the relationships in the organization are viewed.

The CFP flowchart is different from those previously done in the area of cost accounting. Furthermore, this process is a disciplined and critical step in the ABC implementation process. The cost flow diagram is an important tool used by ABC implementation teams because of its role in defining the data requirements. It also provides a mechanism with which to control design complexity and the amount of detail to be managed. This is important because ABC costing is only as accurate as the analysis of activities.

There are a series of steps which need to be undertaken to develop a cost flow diagram in the banking industry. Table 1 provides these steps necessary.

APPLICATION OF ACTIVITY-BASED COSTING

This project was started with the assumption that ABC would provide a quick and easy method to implement product costing at MBI (an assumption which proved to be incorrect). Although ABC can provide valuable information to a bank which may increase its profitability, it will not be quick or easy.

The first step, as outlined above, in the ABC process is to gain the support and direction of senior management. This initial step is one of the most imperative. Although managers often do not consider the implementation of ABC as a major organizational-change program, it really can cause significant changes. A major reason why so many companies fail in their ABC programs is that the program is handed over to someone who lacks the authority to carry it out. If senior management is concerned about ABC and makes it known that this is an important undertaking (with impli cations for the future of the bank), then the first hurdle can be cleared. Therefore, in a bank (as in any organization), the first step is to get top management behind the project.