Question

Discuss how cost allocation or transfer pricing and activity-base cost applies to banking industry and financial institution. Once you have identified the subject of interest, your post should focus on an assessment of the situation. What do you believe are the key issues? If there are problems, what solutions do you see? If this is a post that illustrates a successful resolution of a challenge, how was this success achieved?

Answer 1

Answer:

Transfer valuing or pricing in banking industry is utilized to quantify profitbility of various administrations, a few branches, their administration and financial performance of various banking units. Through transfer pricing, net interest income is dispensed or allocated in various authoritative units of a bank. On the off chance that one unit needs funds to run business, other productive unit gives supply funds. The rate of transfer funds between units of bank is controlled by the transfer pricing component.

Activity based costing considers a solitary help as opposed to looking whole division to assess the benefit of the establishment. Banks give various kinds of savings a/c, current a/c, different sorts of loans and insurance items. Diverse direct and indirect expenses are estimated in ach unit of a banking institutuon. Distinguishing proof of overhead costs so certain expenses can't be assigned to a few operations.

Drawback of activity based-costing is that this technique requires lots of data and in this way this procedure is moderately costlier and complex.

Some significant issues and dillemas that financial division or banking sector faces in transfer pricing component is wrong allocation of resources.

utilization of various strategies for computing margins, which can't be looked at between two various items or services.

Erroneous or incorrect estimation of by and large interest rate of ant banking organization

Wrong determination in regards to credit risk & interest rate.