Cooperative Bank Case

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Title of the Report:
Case Analysis of ‘The Cooperative Bank’

The Purpose:
The purpose of the report is to submit the analysis of The Cooperative Bank based on the Activity Based Costing methodology

To whom it is submitted (Name of the instructor):
Prof. Sandhya Bhatia,
Professor, Managerial Accounting,
Indian Institute of Management, Udaipur

Name of the Author:
Abhishek Sengupta
Anubhav Nigam
Ravindran Damodaran
Saurabh Srivastava

Date of Submission:
24 February 2013

Organization/Institute’s name (and logo):
Indian Institute of Management, Udaipur


TABLE OF CONTENTS

Situation analysis………………………………………………………………………………5 The Problem…………………………………………………………………………………...5 The Options……………………………………………………………………………………5 Criteria…………………………………………………………………………………………6 Evaluating the Options………………………………………………………………………...6 The Recommendations…………………………………………………………………...........6 Action Plan…………………………………………………………………………………….7 Contingency Plan……………………………………………………………………………...7 Exhibits………………………………………………………………………………………...8  

BACKGROUND
The Cooperative Bank, a wholly owned subsidiary of Co-operative Wholesale Society (CWS) became a settlement bank in United Kingdom by 1975. The bank was having an impressive growth and enjoying an increasing customer base until 1990 when the bank recorded losses due to the recession in UK.

The bank was in the process of a strategic overhaul. The management identified the need to be much more focused. The bank had too many products for the customer base it was catering. So the target was to identify the profitable and non-profitable products and customers and devise the appropriate strategic plans to increase its profit levels.

THE PROBLEM
The organization is facing with a high cost-income ratio and hence as a result was suffering operational losses. FLAWS IN TRADITIONAL COSTING SYSTEM
Cost centers were geographical and departmental
Center HQ expenses were allocated to operating expenses. This approach couldn’t identify and relate the activity costs to the respective products. So, project SABRE (Sales and Business REngineering) was launched by the organization. The motive of the project was to lower cost-income ratio and increase customer service. The bank decided to follow ‘Activity Based Costing (ABC)’ methodology for the operating cost allocation exercise of the bank. To reduce the cost-income ratio the bank had to focus more on the fixed cost base and relate these costs to the products. RELEVANCE OF ‘ABC’ ANALYSIS

In the case of Co-operative Bank the volume of customers is not as important as the number of transactions processed. Traditional costing is inappropriate in this case. The ABC costing was the right tool for the analysis of the existing situation of the Bank because of two reasons: 1.The business had a large variety of products and services. So the traditional costing system shall not be a right tool for decision making because the high overhead expenses can’t be directly related to the products/services. 2.Direct material and direct labor are not major in the given situation. The high sustaining costs need to be downsized by taking the right managerial decisions.  

PRODUCT DECISION
The Bank has to decide on the right product from the present variety of products to improve the cost-income ratio. Based on the revenue and activity costs (Exhibit 7 & 8) of the various products the bank should pursue the product options of – •Current account Plus

VISA Accounts – Classic, Gold and Affinity
Personal Loans
Current Account Plus: This is the highest revenue generating stream of the bank with 30 % of revenues ($8877370) generated from this product. However, activity costs for this product account for 80.6 % ($7157339) of the revenue. So the bank should plan its operations in a way to reduce this cost. Some of the activities that should be targeted for cost...
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