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 completed cost flow diagram would show the relationship between these and other activities. Costs would be assigned to each activity; this information would be used in developing the costs for each service provided.

The fifth step is to develop a standard process to maintain the cost information that is determined to be important. There are a number of software tools available for this use. MBI has product profitability software already in place that could be used to maintain and allocate these costs as they are determined. For example, the software sold by IPS/Summit contains components for both organizational profitability reporting and product profitabil ity reporting. To date, only the organizational profitability system is being used by MBI. The product profitability software allocates costs through the use of rules that can charge costs based on volume or percents. It has the flexibility to be revised and updated as needed. The IPS/Summit software has adequate reporting capabilities that can help to get the information to the managers who can benefit from it.

The last step in the ABC process is to establish a process to manage the change that results from the implementation of ABC. As has been mentioned, ABC, if done property, will bring changes not only to how MBI will do things but how it will think as well. This step is not an afterthought but a vital step if ABC is to succeed. The system needs to be maintained and analyzed. The persons who are affected by the changes need to see why, and an atmosphere must be developed that will allow people to grow and refine the activities which make up their jobs. The continued support of top management is essential for ABC to be fully effective.

SUMMARY AND CONCLUSION

After going through the previous steps, Midwest Banking, Inc., imple mented Activity-Based Costing in 1996. MBI bills each of its subsidiaries according to volumes and/or predetermined fees. These amounts appear on the general ledger in three accounts (Management Fees - DP & Operations Expense, Management Fees Holding Company, and Management Fees Interbank). The general ledger entry is made at a bank level, rather than at a departmental level. MBI then takes the billing statement and enters the detail into a worksheet similar to the one illustrated in Appendix A. MBI uses its profitability software to allocate fees to reporting centers or regions based on their actual volumes or balances. The reporting center or region receives monthly a data file with the activity provided at a department level. Reports are issued to regions or departments depending on the bank, and each reporting unit is allocated its respective share of these management fees. Those expenses for which a good allocation basis is not available are allocated as overhead based on the portion of all other direct and allocated expenses.

This implementation demonstrated that Activity-Based Costing can be revolutionary in the banking industry. It can give a bank the vital information that it needs to succeed into the next century. Nonetheless, an effective ABC system will not happen easily. Activity-Based Costing is a process that cannot be started in the middle; to succeed it needs to follow all steps. Much information is available, but the process needs to go back to the first step. As the process continues, the pieces that are present can then be put in place. Activity-Based Costing can help MBI grow stronger and more profitable if it will allocate the time, money and effort necessary for its implementation.