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3. Article - based Assignment on Activity – Based Costing systems “ABC in Retail Financial Services”...

3. Article - based Assignment on Activity – Based Costing systems
“ABC in Retail Financial Services” or you may choose another article, preferably in the FSS
Required:
(a) Extract the main/salient features in this article and elaborate on the potential benefits that a service organization can obtain from ABC/M, drawing on examples from the article and other sources.
(b) Select a local company and explain the difficulties that it has faced while implementing ABC.

Solutions

Expert Solution

Activity-based costing (“ABC”) is widely recognized as a superior method for allocating overhead costs. Much emphasis has been placed on the implementation of ABC in the manufacturing industry. However, the service industry benefi ts from this system of cost allocation as well, due to the fact that service fi rms usually have high overhead costs and are labor intensive. These characteristics make ABC a logical choice for cost allocation. ABC will help services companies identify and allocate overhead costs and quantify labor costs associated with each activity. For commercial banks, in particular, the potential benefi ts of ABC implementation can be numerous. These include the proper costing of transactions, the ability to trace specifi c costs to bank customers and the ability to measure customer and product profi tability. The end result of these benefi ts is the ability to improve decision-making and help organizations meet their strategic objectives

Benefits of ABC Implementation in Banks

A financial services company, considering an ABC system implementation should carefully assess the following points, which are identified by many ABC experts in determining the appropriateness of ABC for a particular organization:

  • Significant indirect costs
  • Complex goods and services
  • Losses on high-volume products and profits on low-volume products
  • Disagreement by managers over cost allocations
  • Bid results
  • Age of costing system

In the case of the bank, more than half of the bank’s expenses were incurred by support and administrative functions and classified as indirect costs. These functions were broken into three major groups:

  • information technology (IT—providing hardware and software support and application development services);
  • service company (providing general support services such as check processing, wire transfer processing and ATM servicing);
  • and the corporate center (providing services such as fi nance, human resources and legal).

Another consideration in implementing an ABC system

  • Compare Product Performance
  • Determine Accountability Assess Competitiveness
  • Recover Cost of Internal Services Provided
  • Evaluate Organizational Performance Estimate and Track Costs Assess the cost difference between item processing in different locations Compare product profitability of wholesale lockbox vs. retail lockbox Evaluate where competitive cost advantages may be Identify who used services and how much they were charged Identify the driver of certain costs
  • Estimate the resources by Resource Center to meet the projected demand of ACH transactions

Example od ABc based costing

Challenges in ABC Costing faced in a Bank

Difficulty in implementing ABC systems is often encountered when departments within the company disagree with the costs allocated to their cost centers.

  • The biggest challenge to implementing ABC at the bank was generating suffi cient buy-in from operational managers. The major concern expressed by bank managers was whether the benefits of the new costing system would justify the time and resources dedicated to implementing the system. A few managers expressed concern that the new cost accounting system was merely going to reshuffle the bank’s costs and that, unless hard actions were taken to remove costs from the bank, the project would serve no useful purpose.
  • Another concern encountered was that the project was initially viewed as another program in a long line of special initiatives and cost-savings programs that resulted in uncertain benefi ts. The bank had recently completed a major restructuring initiative. While this initiative redefi ned the support areas of the organization and resulted in workforce reductions, it was uncertain whether this program actually resulted in cost savings.
  • During the cost center interview process, another concern encountered was duplication of effort in collecting information. Duplication of effort was most evident when project analysts asked operating managers for cost accounting information that was collected recently as part of prior cost collection activities. In addition, duplication of effort was evident between the project and the recently completed organizational restructuring. If the steering committee had known earlier that much of the same information was collected as part of the restructuring, time could have been saved and aggravation avoided.
  • A further concern was the occasional lack of creativity on the part of the center managers. Managers were often inclined to estimates instead of taking time to identify an appropriate cost driver to charge dollars based on actual usage. Further, when a suitable cost driver was defined, it was often difficult to collect the driver information necessary to support the cost driver. If it became evident that the driver information was not available, a new driver would be selected or possibly a new activity or set of activities would be used as a replacement. To support the entry and coordination of cost-driver information into the system, three analysts focused their attention on data management, with no cost center interview responsibilities.
  • After all the cost center allocations were created and entered into the systems, the mostdiffi cult part of the project was gaining approval for the cost information produced by the new allocations. From a service provider standpoint, many managers were dissatisfi ed with the result of the allocations and requested that the cost center interview process for their respective center beperformed again. While it was diffi cult to gain approval for cost center allocations from the service providers, it proved even more diffi cult to get approval for the allocations from the client center managers. This challenge was especially evident for centers whose assigned costs from a support center increased as a result of the change in cost allocation methodology. After gaining approval from the operating managers with specific product profi tability responsibilities, the approval process then required approval from the project steering committee and executive-level management.

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