Academic journal article Issues in Accounting Education

Activity-Based Costing in the Service Sector: The Buckeye National Bank

Academic journal article Issues in Accounting Education

Activity-Based Costing in the Service Sector: The Buckeye National Bank

Article excerpt

ABSTRACT: The U.S. Bureau of the Census projects that by 2006, the service sector will employ 74 percent of the workforce. This case illustrates why a major segment of the service sector-banks--needs accurate cost information to make strategic decisions, and how more refined accounting systems help fulfill this need.

Buckeye National Bank is a hypothetical bank that has suffered falling profits despite a shift in customer base toward retail customers, which the current information system reports are more profitable than business customers. Following a step-by-step approach, you will develop the Bank's average cost of serving a retail customer account and a business customer account, under (1) the Bank's traditional single allocation base system, and (2) a (pilot test) activity-based costing system. You will analyze these results to determine how and why costs reported by the activity-based system differ from the costs reported by the traditional system, and what this difference means for the Bank's business strategy. Finally, you will consider how the Bank's managers can use the new, more refined activity-based cost data in strategic decision making, including controlling costs and developing more profitable business strategies.

INTRODUCTION

The Buckeye National Bank began operations in the mid-1980s. The bank quickly grew by providing checking account services to many small businesses that preferred to do business with a "local" bank. Although Buckeye initially offered checking account services for individual accounts (retail customers), the bank primarily focused on serving its business customers. During the economic slowdown of the early 1990s that weakened the local economy, growth in business customer accounts began to decline. In response, Buckeye's senior management adopted a new strategy, focusing on increasing the number of retail customer accounts. By aggressively marketing individual retail accounts, Buckeye continued to grow. Today, the Buckeye National Bank strives to maintain a stable base of business customers, while actively competing for an increased market share of retail customers.

Recent income statements (Exhibit A) reveal a decline in the bank's profits. The bank's primary (noninterest) expense consists of salaries and employee benefits. Most full-time employees' first priority is providing services to customers; these employees conduct their administrative responsibilities during slack times. The Bank schedules additional part-time employees to work during peak demand times, from 11 AM-2 PM and Friday afternoons. Flexibility in scheduling part-time employees means that the bank's staff is lean and fully utilized. Buckeye's CEO, Rob Garrison, believes that this staffing arrangement allows the bank to provide speedy customer service, while operating at practical capacity. (That is, the bank's staff is fully utilized in efficient operations, after allowing for bank holidays and other scheduled staff activities such as training.)

To counter falling profits, Buckeye's directors took two actions last year, both aimed at increasing the bank's retail customer base. First, Buckeye established a service call center to respond to customer inquiries about account balances, checks cleared, fees charged, and other banking concerns. Second, Buckeye's directors authorized year-end bonuses to branch managers who met their branch's target increase in the number of customers. However, even though 80 percent of the branch managers met the targeted increase in customer accounts, the Bank's profits continued to decline. CEO Rob Garrison does not understand why profits are declining, given that the Bank is serving more customers. Buckeye's southeast regional manager, Erik Larsen, has also noticed that while small retail customers flock to the bank, the number of business customers is barely stable.

Erik Larsen suspects that Buckeye's costing system may be part of the problem. …

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