AMIfs Bank Cost Analysis Model (BCAM) implementing activity-based cost management in a financial institution

Journal of Bank Cost & Management Accounting, The, 2001 by Smith, J Timothy, Harper, Charlene

Much more additional information can be gleaned from the right side ABC/M view. Look at the second activity, "process branch transactions" for $121,000 and ask what would make that cost significantly increase or decrease. The answer is the "number of branch transactions processed" That answer represents that work's activity driver. Figure 2 illustrates that each activity on a stand-alone basis has its own unique activity driver. At this stage, the costing is no longer recognizing the organization chart and its artificial boundaries. The focus is now on the work that the organization performs and what impacts the level of that workload.

ABC/M is not a replacement for the traditional general ledger accounting. It is a translator or overlay that lies between the ledger account and cost center accumulators in the general ledger and the end-users, like managers and analysts, who apply cost data in decision making. ABC/M translates expenses into a language that people can understand. ABC/M translates expenses into elements of costs, namely the work activities, which can be more flexibly linked or assigned to business processes or cost objects based on demand-driven consumption patterns, not simplistic cost allocations.

Defining Costs, Drivers, and Objects

Part of the problem defining and designing costing systems involves understanding just what exactly costs are. Costs are not cash expended in the sense you see them categorized in the general ledger. Costs themselves are abstract and intangible. One cannot see costs or hold a couple of them in one's hands. Yet we all know they are there. We know they exist whether we measure them or not.

We know that costs increase or decrease as there are changes in the workload that affect the activity costs via their cost drivers. Work activities are triggered by events, and the costs react as the effect. Costs measure effects more so than they illuminate root causes. Costs are the collective effects of work activity triggered by various demands on work. ABC/M links these effects to their usage by varying types of customers, products, service-lines, channels, or any other user object. ABC/M systems provide an enterprise-wide image of all the collective effects plus the causal relationships that result in an organization's costs. So costs give insights to root causes, but mainly through their inferences. This may sound ironic, but "cost management" is a contradictory phrase. You do not really manage costs and financial results. You understand the causes (or drivers) of costs. Then you manage the causes. In ABC/M, driver management accomplishes cost management.

A cost driver is something that can be described in words but not necessarily in numbers. For example, a storm would be a cost driver that results in much clean-up work and the resulting costs. In contrast, the activity drivers in ABC/M's cost assignments must be quantitative, using measures that apportion the costs among various products and customers. In the ABC/M vertical cost assignment view, there are two types of drivers, and both are required to be quantitative: