Cost Management

Topics: Costs, Sales, Bank Pages: 10 (2519 words) Published: March 16, 2010

Our case study is on the Columbia City Bank. First of all we would like to talk about the general inner workings of a bank. A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on an array of deposit activities and ancillary services. Lending activities, however, still provide the bulk of a commercial bank's income. Beside, Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the cards.

To increase its share of the checking account market, Columbia City Bank in Seattle took two actions: It establish a customer call center to respond to customer inquiries about account balances, checks cleared, fees charge ,etc and it paid year-end bonuses to branch managers who met their branch’s target increase in the number of customers. While 80% of the brunch managers met the target increase in the number of customers, Columbia City Bank ‘s profits continued to decline. John  Diamond, the CEO ,didn’t understand why profits were declining, even though the bank was serving more customers. The Pierce County branch manager , Rose Perez, noticed that while small retail customers flocked to the bank, the number of business customers was declined. Columbia City Bank’s costing system, develop back in 1988, is straightforward. No costs are traced directly to customers. The bank simply assigns the total indirect costs to customer lines (retail customer line or business customer line) based on the total number of checks processed. The definition of a retail customer is basically any customer other than an institutional customer. ( which are: governments, schools, hospitals to name a few)

1A) Old cost system based on number of checks processed:

Number of checks processed: Retail customers = 2280 Business customers= 9120

Total checks processed= 11400

Indirect cost allocation rate: 2850 000/ 11400 000 = RM 0.25 per check processed

1B) Indirect cost for retail customers : 2280 000 x RM 0.25 = RM 570 000

Indirect cost for business customers: 9120 000 x RM 0.25 = RM 2280 000

1C) Proportion of the total indirect cost

Assigned to retail customer: (570 000/ 2280 000) x 100%

= 20 %

Assigned to business customer: (2280 000/ 2850 000) x 100%

= 80%

1D) Indirect cost per retail account:

Number of retail accounts= 150 000

Indirect cost for retail accounts= RM 570 000

570 000/ 150 000 = RM 3.80 indirect cost per retail account

Indirect cost per business account:

Number of business accounts= 50 000

Indirect cost for business accounts= RM 2280 000

2280 000/50 000 = RM 45.60 indirect cost per business account

1E) Average profit per account of retail customer :

Average revenue per retail customer account – average indirect cost per retail customer account

10.00- 3.80 = RM 6.20 average profit per retail customer account

Average profit per account of business customer:

Average revenue per retail business account – average indirect costs per business account

40- 45.60 = - RM 5.60, loss of RM 5.60 per business account

1F) From the traditional cost analysis, amongst the decisions that a manager might take is to increase the number of retail accounts as they generate a high profit margin. This can be achieved by creating superior value and service for customers, which would in turn make them feel at ease with the bank, they know that their money is in good hands. More promotion and advertising would be necessary. Another action that might be taken is to decrease the...
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