Implementing Activity-Based Management in the Banking Industry

By McGuire, Brian L.; Kocakulah, Mehmet C. et al. | The Journal of Bank Cost & Management Accounting, January 1, 1998 | Go to article overview

Implementing Activity-Based Management in the Banking Industry


McGuire, Brian L., Kocakulah, Mehmet C., Wagers, Leonard G., The Journal of Bank Cost & Management Accounting


by Brian L. McGuire*, Mehmet C. Kocakulah** and Leonard G. Wagers***

INTRODUCTION

The rapid pace of change that began in the banking industry during the eighties has continued into the nineties. Competition has increased not just between banks but also between banks and insurance companies, finance companies, brokerage houses and other non-bank institutions. Increased competition has brought about an increased awareness of profitability. Banks need to increase profitability not only in order to increase shareholder value but also to stay independent. In these days when a bad year (or even a bad quarter) can lead to a takeover attempt, increased profitability has become a condition for survival. This paper will explore activitybased costing (ABC) and how it might be implemented in order to help a company such as Midwest Banking, Inc. (named changed for confidentiality reasons), to identify ways to reduce waste and increase profitability.

Midwest Banking, Inc. (MBI) is a three-state bank holding company that has grown from $659 million in assets in 1984 to $3.6 billion in assets at the end of 1995. It has six banks with ninety-one offices, along with a finance company, a trust company and an insurance company. In its efforts to grow and compete, MBI could benefit from activity-based costing.

There was little, if any, competition between banks during the period prior to bank deregulation. Federal regulations placed limits on the amount of interest that a bank could pay on deposits. This artificially low cost of funds, coupled with the fact that the banks charged a market-based rate of interest on loans, allowed banks to maintain a healthy interest rate spread and eam an almost monopoly-type profit. The reforms of 1982 changed this by deregulating the banking industry and permitting savings and loans to offer negotiated instruments of withdrawal (NOW) accounts. This brought an end to the monopoly that banks had as providers of checking accounts. Additional changes in laws led to banks expanding beyond their local boundaries and the emergence of the interstate multibank holding company like MBI. All of this has resulted in competition as never before seen in the banking industry.

ACTIVITY-BASED COSTING CONCEPTS

In general, the purpose of cost accounting is to provide management with information that will help to improve profits, control expenses, and identify profitable and unprofitable areas of business.1 Cost accounting allocates direct and indirect costs to the services or products that are provided or produced.

The concepts of Activity-Based Costing (ABC) have grown significantly during the past decade. ABC departs from traditional cost accounting in that it focuses on the costing of activities that are required to produce a product or provide a service.2 The key to ABC is that it identifies the activities that cause (or drive) the associated costs of using a company's resources. These activities are referred to as "cost drivers." ABC then uses these cost drivers to allocate costs to the defined activities.3 ABC's goal is to identify the costs (both direct and indirect) that are associated with a product or service.

Information is gathered in order that indirect costs (administrative, executive, accounting, human resources, etc.) can be assigned to the activities that consume these resources. If a cost cannot be assigned to an activity in a manner that is both easily and economically identifiable, then it is not assigned. Those costs that do not contribute to producing a product or providing a service should be classified as business sustaining activities instead.4 If an activity is not utilized in the production of a service, then its cost should not be allocated because the resulting number would mislead management.5 ABC's benefit lies in providing information that is more accurate in the allocation of overhead (with regard to product or service costs) than traditional cost accounting. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Implementing Activity-Based Management in the Banking Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.