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

The Process Assignment View

The horizontal view of the ABC/M Cross represents the business process view. A business process can be defined as two or more activities or a network of work activities with a common purpose - usually customer-focused. Activities belong to the business processes. Therefore, the activity costs comprise the costs of the business processes. Figure 7 illustrates the process view.

Across each process, the activity costs are sequential and additive. In this orientation, activity costs satisfy the requirements for popular flowcharting and process modeling techniques and software. Business process-based thinking, which can be visualized as tipping the organization chart 90 degrees, is now dominating managerial thinking. ABC/M provides the cost elements for process costing that are not available from the General Ledger. A future AMI/s project will focus on the business process view of ABC/M.

The ABC/M Cross displays in a simple fashion that the work activities at the intersection of the vertical and horizontal axes are integral to determining the cost of an organization's processes as well as the cost of its cost objects. The work activity at the intersection schematically represents an individual work activity - a very local view. But, from a global perspective, the vertical (cost assignment) and horizontal (process) views may consist of many activities that are each networked together based on their relationships to resources, cost objects, and other activities.

To be clear, both of the views are of increasing value to managers and employees because the General Ledger's chart-of-accounts is structurally deficient. It is an excellent instrument for accumulating transactions into buckets, but it fails at supporting decision making.

Expanding the Two-Stage ABC/M Cross Model

The fundamental structure of the ABC/M Cross Model appears to have withstood the test of time. However, the two-stage allocation appearance can leave an impression that tracing costs is an overly simplistic process.

The two primary elements of an ABC/M application will always be:

1. the three cost modules and two cost assignments of the cost object assignment view, and

2. the linking of sequential activities in the process view as processes and sub-processes.

The initial focus of early ABC/M applications was the determination of product costs through better segmentation of resource consumption. Subsequent applications in larger and more complex organizations revealed that ABC/M data solved broader problems. For these solutions, the ABC/M cost calculation usually required more than a simple socalled "two-stage" cost re-assignment, as indicated by the cost assignment view of the ABC/M Cross. Figure 6 illustrates the expansion of the cost assignment network from a two-stage to a multi-stage network.

The expanded ABC Model includes intermediate stages of activities i.e., activity outputs that are inputs to successive work activities. Specific usage, not time-based sequence, is the dominant factor for determining this cost assignment structure. These intermediate input/outputs cannot easily be traced directly to final cost objects (i.e., products, service lines, types of channels, or customers) since there is no causal relationship. As a result, intermediate activities are two or more stages removed from a final cost object.