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

* Resource drivers- trace expenditures (cash outlays) to work activities

* Activity drivers - trace work activity costs to cost objects

Activity drivers will have their own higher order cost drivers. Events or other influences that are formally called cost drivers, prompt work activities. A cost driver, such as processing a new bank customer, is the trigger that causes the work activity to utilize resources to produce output or results.

Cost drivers and activity drivers serve different purposes. Activity drivers are output measures that reflect the usage of each work activity, and they must be quantitatively measurable. An activity driver, which relates a work activity to its cost objects, "meters-our" the work activity based on the unique diversity and variation of the cost objects that are consuming the activity.

Cost objects are the persons or things that benefit from incurring activity costs; examples are products, internal or external customers, stakeholders and outputs of internal processes. Cost objects can be thought of as: to what and for whom work is done.

Because the management information resulting from ABC/M systems can be so rich, it is imperative at the outset to determine the primary business uses) for the data prior to starting any ABC/M study. That is, begin by working backwards with the end in mind. Strong executive sponsorship is also essential, accompanied by a clear definition of the business problem to be addressed through an ABC/M implementation. The level of detail employed in an ABC/M implementation will be directly affected by the ultimate use of the data. Ideally, it is advisable to start with a more summarized ABC/M structure, and then later selectively build in more detail in places that need greater visibility. ABC/M is scalable. Leveling and Right-Sizing an ABC/M System

For example, Bank X can discern through management accounting that their consumer loan portfolio is not meeting a corporate ROE hurdle rate of 18%. Product pricing is competitive and largely market driven. Costs appear to be the issue, but there is no understanding of the dynamics driving the costs.

Since Bank X has several consumer loan types (e.g., auto, home equity, credit lines), the first question is "What is the profitability of each product?" If one is simply interested in the total cost by product, as a first cut in the analysis, then process-based costing may be appropriate. In other words, define and measure processes at a high level (such as Make Auto Loan) rather than lower level work activities (e.g., interviewing customers, taking application, reviewing application, approving application, preparing loan docs, funding the loan, etc). In this case, all of the process might be linked to a single cost object: an Auto Loan Made.

Once the process cost has been determined, management may have identified a new problem: The cost must be reduced in order to price this product competitively and still earn a profit. In order to further analyze the product, the work activities contributing to each type of product will need definition and analysis. The cost drivers for each activity will require definition and data collection. How many applications are turned down before a loan is made to a customer? How many times is an application shuttled back and forth for approvals? How many times is the customer contacted for additional information? These are all potential drivers that could affect the overall product cost plus reveal substantial cost differences among products that people believe have always been comparable in cost and profit. However, to initially pursue this level of information for all products and service-lines without first understanding high level product costs might be overkill. The initial ABC/M structure and system will likely be way over-designed and engineered beyond diminishing returns for extra levels of administrative effort. These delays can risk losing the all-important buy-in from managers and employees.