Question

“Implementing Activity-BasedCosting in the Banking Industry”

Required:

(a)Extract the main/salient features in this article and elaborate on this quotation:‘Before engaging in a major ABC system implementation project, an organization should consider the appropriateness of an ABC system?’

(b) Select a commercial bank which have implemented ABC to find out the challenges and benefits from such system of costing.

5. Article - based Assignment on Activity – Based Costing systems

“Implementing Activity-BasedCosting in the Banking Industry”

Required:

(a)Extract the main/salient features in this article and elaborate on this quotation:‘Before engaging in a major ABC system implementation project, an organization should consider the appropriateness of an ABC system?’

(b) Select a commercial bank which have implemented ABC to find out the challenges and benefits from such system of costing.

Answer 1

(a)Extract the main/salient features:-

‘Before engaging in a major ABC system implementation project, an organization should consider the appropriateness of an ABC system?'

The bank’s cost accounting manager introduced the concept of ABC to senior management because the cost accounting manager thought that an ABC sys tem would be a viable solution for the bank’s product profitability concerns. Although the bank was able to determine how much revenue each of its various  products and services generated, it was not able to  determine with any level of certainty how much it cost
to provide these products and services. At best, senior management was confi dent that the commercial side of the bank’s business was profi table, while the retail side was not as profi table. In addition, bank management was intrigued by the possibility of gaining a better
understanding of the cost associated with the activities performed in the bank and the resources dedicated to performing these activities. Senior management thought that there may be some duplication of activities within the organization and that an ABC system would help identify these areas of duplication.

Six specific benefits were to be realized with the implementation of ABC (Exhibit 1). Each would interact with others to create synergies.The first administrative step of the project was to create a steering committee that would defi ne the planning, design and implementation of the system and make important decisions at all stages. During the design phase of the project, a cost accounting software system was identifi ed through an RFP (“request for proposal”) process. After reviewing several ABC applications, software was chosen, primarily because the bank was already using this software in its human resources area, and the two systems could interface. Recognizing that the bank lacked the requisite skills to implement the ABC system, the steering committee identifi ed a consulting  firm that could assist in the implementation of the sys-
tem, especially with the more technical matters. After interviewing representatives from several consulting firms, one fi rm was chosen, primarily because of its extensive implementation experience. The fi rm
was given a wide-reaching role within the project, assisting the steering committee with the design of the system to best match the software’s functionality, designing and preparing the software and processes,
modifying and loading cost-driver information into the new system and assisting in the gathering and loading of cost allocations into the system. For cost accounting support, the bank decided to use mostly
existing internal resources, while hiring some new finance employees to assist with the project. While  some of the consulting firm’s resources were used  in a cost accounting capacity, this was intentionally
kept to a minimum in an attempt to control costs and avoid potential confl icts of interest. The new team of analysts was given the responsibility of introducing the principles of the ABC project to cost
center managers, conducting cost center interviews and creating and recording the new cost allocations. It took approximately a year and a half to conduct all of the cost center interviews, create cost allocations and gain approval for the allocations. Full implementation in sup-
porting centers and cleanup took another six months.

(b)Select a commercial bank which have implemented ABC to find out the challenges and benefits from such system of costinSelectg.

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 benefi ts 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 reshuffl e 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 along line of special initiatives and cost-savings
programs that resulted in uncertain benefi ts. Thebank 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 inter-
view responsibilities. After all the cost center allocations were created and entered into the systems, the most difficult 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 be performed 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 operatingmanagers with specific product profi tability responsibilities, the approval process then requireda approvalfrom the project steering committee ande executive level management.