Co-op Bank Essays

Co-op Bank Essays Co-op Bank Essay Co-op Bank Essay As the regulation had been more relaxed in the bank industry, cost accounting came more important due to aggressive competition among banks. Traditional volume based costing is obviously inappropriate. Therefore, the Bank changed to activity-based costing (BBC). We find that the implementation of activity-based costing (BBC) enhanced the ability to identify profitable products and customers but it had some weakness as follows: 1. BBC implementation was too costly, time-consuming and complex. 2. Too small sample from past data might affect the accuracy of its cost driver rate and not sufficient for decision making. . The 15% Of banks expense Ewing sustaining costs were not allocated to any products due to irrelevant causing too high administrative cost. Recommendations discussed include: 1. The bank should regroup 235 activities for those with the same characteristics. 2. The team should extend data collecting range since there were a few transactions occurred in three months and use the most recent data. 3. The bank should allocate sustaining cost by using dual-rate cost allocation method. 4. The bank should follow up the service quality to ensure that customers receive what it used to be. 5. The management should increase sales for profitable products. Then unprofitable products, we suggest the firm reduce non-valued added cost. The report also investigates the fact that the analysis conducted has limitations. Some of the limitations include: The article didnt state cost of BBC implementation so we couldnt compare between cost and benefit of using it. Contents Page Company Background Cost Structure Analysis of BBC implementation 3 Recommendation Conclusion 5 Appendices Exhibit 1 : Timeline of Co-pop Bank 6 Exhibit 2 : Major Resource Cost Pools Exhibit 3 : Personal Sector Products (classified by profitability) 7 References 8 The Co-operative bank was founded as an department of the Co-operative Wholesale Society (COWS) serving the treasury needs for its operation. Between late sass and 1 971, the deposit dramatically increased. As a result, the bank was separated to independent entity with COWS holding the whole issue of share capital. Then the first situation for new hired managers was to solve the problem which was from competitive pressure. They decided to focus on personal customers by introducing free banking for customers who maintained credit balances in their current accounts. In 1975, the banks broadened customer base for both assets and deposits as a settlement bank. During 1 sass and ass, the bank expanded the range of products and services for personal and corporate customers by introducing credit cards and launching many saving products to generate growth from internal. In 1988, since the Government deregulates the financial sector, many new players were inspired to move to this area. When there were many banks, customers were willing to switch banks and to take products from several institutions so the competition was very aggressive on price. To compete the market, Managing Director assigned Thomas, one of the management, to solve this problem. He thought that the bank should re-affirm the fundamental values which were Mission Statement and Ethical policy then restructure Co-pop Banks operations by settle Personal Customer Service center serving personal customers and Regional Processing Center serving corporate customers. Moreover, the bank increased cross-selling activities and offered new products such as credit cards, current account and services. Unfortunately this affected on high cost-to-income ratio. In late 1992, the ann. was about to restructure so Thomas launched Project SABER (Sales And Business REengineering) to improve the cost income ratio and the service to customers. This project was to address five corporate needs: 1. Overhead Reduction 2. Re-engineering of business processes, particularly those that did not add value to customers. 3. Product Profitability 4. Customer Profitability 5. Segment Profitability The existing cost system Co-pop Bank used was traditional cost system described as Expense was measured for geographic and departmental cost centers. Headquarter expense was allocated to operating segments by illume and size of business. Revenue measured from fee income and net interest. No estimation for costs of producing the revenue. After 3-month data collecting (March-May 1993) for analysis and decision making to restructure organization, the banks project team decided to implement BBC following the pilot project in check clearing center. BBC implementation steps are as follows: 1 . Identify resource cost pools and divided into three categories: operational staff, infrastructure and miscellaneous. (See the major resource cost pools in Exhibit 2) 2. Identify activities. 3. Match resource cost to activities. . Define activity cost driver and collect the quantities of each activity cost driver. 5. Calculate activity cost driver rate. 6. Trace activity cost to each product with 15% remaining to the sustaining cost. 7. Calculate product profitability. (See the profitable/unprofitable products list in Exhibit 3) After they implemented BBC, they use the result for decision making in many way. L. Product decision The bank used BBC allocating sustaining cost to analyze whether its product were profitable. Its targeted product were financial advice and new investment products which grew in deregulated area. Fortunately they were not successful as they hoped. However; there were high profitable products: Visa credit cards. II. Customer profitability With limited customers data, the BBC team extend the study to the customer- specific expenses based on sample of current accounts. They found that 55% of expense were related to processing transactions and the rest w ere maintaining costs. Revenue measurement was classified by each product for each customer. The analysis showed that current accounts were unprofitable because of low balance so the managers started to find the way to attract this reduce from customers. For Visa credit card, the team divided into two groups: profitable and unprofitable customers. The bank earned interest income from customers who had large unpaid balances and processing fee from customers who transacted frequently. Ill. Overhead reduction and business process reengineering From SABER project, the Co-pop Bank moved their focus to process-oriented organization. This urged managers to figure out which processes were value added to customers and which were not, and to improve efficiency for processes which could help the bank reduce cost and use extra capacity to enervate more income. In detail, analysis showed that high cost was from fixed cost so the bank solved this problem by outsourcing some areas such as computer development and ATM network to replace fixed cost with variable cost. IV. Sustaining Cost Since a large number amount of expenses classified as sustaining cost was a result of property and information technology resources not from products and customers, the management would have to concern more about making a decision on these issues. The main point was to lower cost-to-income ratio. Analysis of BBC implementation. Strength: Expenses were directly allocated to each cost center except for support department expenses. It could allocate cost to each product so cost of product became more accurate leading to identify profitable area and unprofitable area which increases accuracy when top management performed decision making. Weakness: As the project team collecting data for analysis from March to May, 1 993 (3 periods), that might affect the accuracy of its cost driver rate and not sufficient information for manager to do decision making. The 15% of banks expense being sustaining costs were not allocated to any products due to relevant causing too high administrative cost. If the bank can allocate BBC implementation was too costly, time-consuming and complex. The cost of using this BBC might be high comparing with the benefits from it. For example, when there are too many activities, it was time wasted for collecting cost driver data such as service hour. Sahara (1992) described step-by-step why bank should implement BBC: Identify and set up profit centers. Prepare product list associated to each profit center, product list related to activities and non-product list related to activities. Classify non-product list to activities by using unit-specific significance and organization-wide significance. Spread the former activities across all products Comparing Co-pop banks step with Sharmas step above, the banks BBC system was good but it needed some improvements for better efficiency. Our suggestions are as follow; 1. The team should extend data collecting range since there were a few transactions occurred in three months and use the most recent data. We recommend to collecting data from January to December 2012. 2. The bank should regroup 235 activities for those with the same characteristics. For example, Existing Activity Description Activity Cost Driver Clear debit items No. Of debits processed Clear debit and credit items No. Of debits and credits processed Clear credit items NO. Of credits processed Branch operations for debit items No. Of branch counter debits Branch operations for debit and credit items No. Of branch counter debits and credits Branch operations for credit items No. Of branch counter credits Customer inquiries No. F telephone minutes No. Of questions Customer correspondence No. Of customer letters 3. The bank should allocate sustaining cost by using dual-rate cost allocation teeth by classifying all costs into two cost pools: a fixed-cost cost pool and a variable-cost cost pool. Fixed-cost cost pool There are three steps to allocate fixed sustaining cost for bank products. 1 . Evaluate budget for fixed sust aining cost such as hardware maintenance and long term software license 2. Calculate cost allocation formula by using activity cost of each product. This formula will show proportion of all activities of all products. Proportion rate = activity for one product/ activities of all products. 3. Allocate fixed sustaining cost by resource product required. Allocation rate = Proportion rate * Budget for fixed sustaining cost Variable-cost cost pool Variable cost to activity cost driver ratio will generate constant value for period of time which consider significantly. When activity cost driver has changed, the ratio also changed. For example, we identify activity cost driver as the number of cheese book issued. If the number of cheese book issued is increased, relating cost increases. We use two ratios together to calculate total allocated cost for each product. 4. As Co-pop Bank implemented BBC system to reduce cost, they should follow up the service quality to ensure that customers receive what it used to be. This leads to customers loyalty. So, it becomes sustainable competitive advantage. 5. The management should increase sales for profitable products by offering promotions to attract more customers. Then unprofitable products, we suggest the firm reduce non- valued added cost.