Abc Costing in Banking
ACC522: Budgeting and Cost Accounting
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
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