Abc Costing in Banking

Powerful Essays
Activity-Based Costing in Banking

Jessica Phinney
ACC522: Budgeting and Cost Accounting
Professor Guenther
April 15, 2013 Activity-based costing (“ABC”) is considered one of the best and most popular tools for allocating costs by identifying individual activities as cost objects. Originally, activity-based costing was mainly used in manufacturing industries but, due to its preciseness, this system has recently grown popular in the service industries as well, including banking. Activity-based costing provides bank mangers with a better and more accurate understanding of costs and true profitability associated with the daily operations of the bank and can be utilized in all aspects of banking.
As mentioned previously, activity-based costing has proved to be an effective measure to accurately determine costs associated with products and services of a company. “ABC systems identify activities in all functions of the value chain, calculate costs of individual activities, and assign costs to cost objects such as products and services on the basis of the mix of activities needed to produce each product or service.” ABC is further defined as: “1) a more accurate cost management methodology, 2) mostly focuses on indirect costs (overhead), 3) traces rather than allocates each expense category to the particular cost object, 4) makes ‘indirect’ expenses ‘direct.’”
Activity-based costing is best to use in an industry where competition is prevalent. According to Mehmet Kocakulah, “The competitive environment in the banking/financial institution industry has made it very difficult to increase revenues and market share that is sufficient in growth and maximizing shareholder’s wealth. The minimal growth in the area plus the over saturation of banks, financial institutions and other sectors (mortgage companies, insurance agencies, internet companies, etc.) competing for the traditional banking products has forced banks to look at ways to control



Bibliography: Hicks, Douglas T., Edmond J. Olejniczak III, and Bradley A. Curell. "Measuring Customer & Product Profitability at Regional & Community Banks." Journal of Performance Management. 2009. no. 1: 3-18. Business Source Premier, EBSCOhost (accessed April 6, 2013). Hornfren, Charles T., Srikant M. Datar and Madhav Rajan. Cost Accounting: A Managerial Emphasis, 14th edition (New Jersey: Pearson Prentice Hall, 2012) 146. Kocakülâh, Mehmet C. “Usage of Activity-Based Costing on a Commercial Loan Portfolio in a Small Bank.” (accessed April 6, 2013). ----. "Using Activity-Based Costing (ABC) to Measure Profitability on a Commercial Loan Portfolio." Journal of Performance Management 2007, no. 3: 29-46. Business Source Premier, EBSCOhost (accessed April 6, 2013). Max, Mitchell. "ABC Trends in the Banking Sector A Practitioner 's Perspective." Journal Of Performance Management. 2008. no. 1: 32-47. Business Source Premier, EBSCOhost (accessed April 9, 2013). McGuire, Brian L., Mehmet C. Kocakulah, and Leonard G. Wagers. "Implementing Activity-Based Management in the Banking Industry," The Journal of Bank Cost & Management Accounting 11, no. 1 (1998). Sharman, Paul A. Management Accounting: Activity-Based Costing Provides Insights into the Economics of Banking. Wallace, Vanessa and Andrew Herrick, The Future of Banking: Reappraising Core Capabilities after the Crisis (Booz & Company Inc.: 2009) 17-18. Witherite, Jeffrey and Il-woon Kim. “Implementing Activity-Based Costing in the Banking Industry” Bank Accounting & Finance. 2006. no. 3: 29-34. Business Source Premier, EBSCOhost (accessed April 6, 2013).

You May Also Find These Documents Helpful

  • Better Essays

    Activity based costing

    • 1566 Words
    • 7 Pages

    Marx, C. (n.d.). Activity Based Costing (ABC) And Traditional Costing Systems. Retrieved April 4, 2014 from http:/financialsupport.weebly.com…

    • 1566 Words
    • 7 Pages
    Better Essays
  • Good Essays

    Activity Based Costing

    • 2757 Words
    • 12 Pages

    Activity based costing is a strategy used by managers to determine where to spend money. This contrasts the traditional costing system (Marx, 2009). Activity based costing provides a lot more benefits for the company and displays a more clear look at how the company is doing economically (Cooper, 1991). It allows managers to see where to spend money, and on which resources to focus their spending (Cooper, 1991). Managers should cut back spending on resources, and at the same time increase the output of their products (Cooper, 1991). There are several benefits to using the activity based costing method, and that is why it is growing in popularity. Though, in order for managers to optimize the benefits that activity based costing can provide, they will need to fully understand how it works. Activity based costing in most basic terms is spending money on specific recourses depending on the activity they serve the company economically (Cooper, 1991). This is in contrast to the standard per-unit costs. A per-unit cost is not a beneficial to know, appose to knowing how much money a specific production line would bring in per year (Cooper, 1991). Knowing how much each section brings in will allow the managers to know how…

    • 2757 Words
    • 12 Pages
    Good Essays
  • Good Essays

    Abc Company - 1

    • 1244 Words
    • 5 Pages

    3) The McGraw-Hill Companies, Inc., Chapter 9: Activity-Based Costing, csus.edu, 2011, pdf. Retrieved 18 December 2012 from http://www.csus.edu/indiv/p/pforsichh/documents/ACCY121FinalExamInstrManualchs9_11_13_16_Appendix.pdf…

    • 1244 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    Activity based costing (ABC) is an accounting method that identifies the activities a firm performs creating the real cause of the overhead, and then assigns the indirect costs of those activity only to the products that are actually demanding the activities. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods.…

    • 2327 Words
    • 9 Pages
    Powerful Essays
  • Good Essays

    BUSI 601 DB 1 response

    • 530 Words
    • 2 Pages

    Discussion Board One asks the student to select a recognized company and a Contemporary Management Technique from Cost management: A Strategic Emphasis by Blocher, Stout, Juras, and Cokins (2013). The student is instructed to draw a parallel between the chosen company and technique, and elaborately describe how the technique would effectively aid in maximizing the company’s success. To complete this assignment, Johnathan Bradley describes the Ford Motor Company and activity-based costing. He describes the Ford Motor Company as a dominant company within the automotive manufacturing industry, and uses research performed by Eggers and Bangert (1998) to define activity-based costing as a tool that measures costs based on segmented activities. Jonathan effectively uses the study to capture the advantages of activity-based costing, and gainfully applies these findings to Ford Motor Company. He illustrates how the use of activity-based costing would support the company’s critical success factors by increasing quality levels and improving cycle time. Additionally, Jonathan explains how the utilization of this Contemporary Management Technique would aid Ford Motor Company in effectively dividing costs based on activity, which would allow the company to ensure maximum efficiency throughout all activities.…

    • 530 Words
    • 2 Pages
    Good Essays
  • Better Essays

    Jet2 Task 4

    • 2238 Words
    • 9 Pages

    The main difference between activity based costing and the traditional system is that activity based costing requires four steps to build its cost point. Traditional costing uses one rate where first, activity based costing must identify each activity and estimate its total and indirect cost. Second for activity based costing is that the cost driver for each activity must be estimated along with the total quantity of each driver’s allocation base. Third the cost allocation for each activity must be computed. Fourth costs to cost object are allocated. Activity-based costing focuses on activities. The costs of those activities become the building blocks for measuring (allocating) the costs of products and services. (Horngren, Harrison, Jr & Oliver, 2008) This method of costing does require more time to compute the cost to the activity yet it earns that money back plus dividends by having a more accurate forecast of the true costs that are associated with each activity.…

    • 2238 Words
    • 9 Pages
    Better Essays
  • Satisfactory Essays

    Acc349 Reflection Summary

    • 297 Words
    • 2 Pages

    One advantage of Activity-Based Costing system is it has more accurate overhead cost allocation because there are more cost pools, the costs in each pool are more similar, and allocation is based on activities that cause overhead costs. It is more effective overhead cost control by focusing on processes or activities and focuses on relevant factors by assigning costs to any cost object that is of interest to management. Lastly, it allows better management of activities by helping managers identify the causes of costs and the activities driving them. The disadvantages of Activity-Based Costing are its cost to implement and maintain ABC requires management commitment and financial resources and its uncertainty with decisions remain and management must interpret ABC data with caution in making managerial decisions.…

    • 297 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Managerial Accounting Essay

    • 2261 Words
    • 10 Pages

    How does activity-based costing differ from the traditional costing approach? When would it give more accurate costs than traditional costing systems?…

    • 2261 Words
    • 10 Pages
    Powerful Essays
  • Powerful Essays

    Activity Based Costing Method (ABC). ABC determines and allocates cost by activities a company executes. This generally happens in four steps: identify each activity and its associated costs, both total and indirect; estimated cost driver and quantity; allocation computation; and cost allocation to the respective activity. ABC refines the way indirect costs are allocated to production and focuses on the costs of each individual activity. Costs are also further assigned to each product within the activities and each activity has its own cost driver. Because of the specificity, active based costing provides a…

    • 1900 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.…

    • 1474 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Activity-based costing (ABC) gives a true cost for the bank compared to traditional costing, which allocates most of the expenses. Banking has become very competitive, and it has become imperative that banks like any other businesses allocate their resources to the most profitable areas. For banking industry, in particular, the potential benefits of activity-based costing (ABC) implementation can be numerous. These include the proper costing of transactions, the ability to trace specific costs to bank customers and the ability to measure customer and product profitability. The end result of these benefits is the ability to improve decision-making and help organizations meet their strategic objectives. These three cases from three different countries use activity-based costing (ABC) in their banking system. It provides a picture to analyze the performance of banking industry using activity-based costing. Summarizing from findings based on the analysis of these three case studies, the objectives of this research can obtain the clear explanations.…

    • 836 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    Managerial Accounting Case

    • 6132 Words
    • 25 Pages

    References: Ali, M.F. (2003). Activity Based Costing/Management in Service Industry. Retrieved June 9, 2008, from http://www.aimamc.com/staci/articles/abcm.htm…

    • 6132 Words
    • 25 Pages
    Powerful Essays
  • Powerful Essays

    Owens

    • 2185 Words
    • 9 Pages

    Activity-Based Costing at O&M (introduced at O&M in 1994) Several activites (= Cost Drivers) affect costs per customer and hence customer profitability:…

    • 2185 Words
    • 9 Pages
    Powerful Essays
  • Powerful Essays

    Noreen, E. 1991. Conditions under which activity-based cost systems provide relevant costs. Journal of Management Accounting Research, 3 (Fall): 159–168.…

    • 26309 Words
    • 106 Pages
    Powerful Essays
  • Good Essays

    -Activity based costing seeks to account for the departmental overhead rate's shortcomings. Activity-Based Costing (ABC) is a technique that attempts to assign overhead costs more accurately to products than the simpler methods discussed thus far.…

    • 2038 Words
    • 9 Pages
    Good Essays

Related Topics