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

In another example demonstrating the evolution of cost data, in early cost studies, Bank Y was satisfied knowing the average cost of their five types of consumer checking accounts. As they realized the wide range of transaction activity among clients, they felt it appropriate to calculate the cost of checking deposits and withdrawals. As ATM and phone delivery channels became more popular, this bank wanted to understand the relative costs of transactions through different delivery channels and be able to compare the cost of a teller withdrawal to an ATM withdrawal. This led to the ability to calculate customer profitability incorporating delivery channel usage. The results were substantially different than what the managers and employees believed. The message here is that ABC/M does not automatically fix the problem, but it stimulates discovery and discussion with fact-based data.

In summary, it is wise to carefully plan an ABC/M implementation to address the current information needs of bank management, while considering where the organization is in its evolution of costing data. It is not an "all or nothing" proposition. The design should embody a "top down" approach to initially enhance the understanding of overall cost structure of the organization and then focus efforts on the greatest needs of management. ABC/M may be implemented at varying levels of detail throughout an organization. It is an iterative process, with subsequent cost studies "peeling back additional layers of the onion" in order to better understand the cost of activities, processes and products. This paper provides banks with guidelines and information to implement ABC/M at whatever level is appropriate to the organization. More importantly, it also provides a model that encompasses this"top down" approach and provides the basis on which to expand and build not only greater levels of detailed analysis but also potentially a consistency in operational benchmarking never achieved in our industry.

2) THE CASE FOR ACTIVITY-BASED COST MANAGEMENT (ABC/M) IN BANKS

In the early 1980's many organizations began to realize their traditional accounting systems were generating inaccurate costing information. The typical organization's cost structure had been substantially changing. For most of them, overhead and indirect costs were increasing and mainly displacing the direct labor costs - the costs of front-line workers. For banks, higher and higher levels of cost are shared across products, customers, channels, etc. The three primary causes for this shift were: (1) increasing organizational complexity resulting from proliferation in the variety of product and service offerings, (2) a more diverse group of channels and customers, and (3) increased automation, new technologies, and new methodologies.

Clearly, this situation exists in banks. Today the margin for error is even slimmer. Banks cannot make as many mistakes as they could in the past and remain competitive or effective. Capital investment decisions, product mix selection, technology choices, outsourcing, and make vs. buy decisions today all require a sharper pencil. More competitors are better understanding the cause-and-effect connections that drive their costs, and they are fine-tuning their business processes and adjusting their prices accordingly. The resulting price squeeze from more intense competition is making life for banks much more difficult relative to the past. Knowing what your real costs are for outputs, product costs, and the costs-to-serve different types of channels and customers is becoming key to survival.