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Indian Banks adopt functional costing system.
www.icmai.in
However, M S Narasimhan and Ashok Thampy
3
observed in 2002, “There is no evidence to suggest
that Indian Banks have adopted at least functional
cost accounting system recommended by the ICWAI”.
Worldwide, there have been considerable interests
shown to find out the appropriate costing structure
suitable for service industries, especially banks. Ideas
have moved from calculating direct and indirect costs
to absorption and variable costing to treatment of
joint costs to overheads and overhead allocation issues
4
to applicability of activity based costing . Developers
5
of Activity Based Costing (Kaplan and Cooper, 1998)
suggest that service companies are ideal candidates
for ABC.
Activity Based Costing
The conventional costing system was used mainly
to find value of the closing stock of a trading/
manufacturing firm to financial accounting to
arrive at the profit of that period. The conventional
accounting system was not designed to provide cost
information for strategic decisions . The limitation of
6
conventional costing system to provide information
required for developing strategy was brought about by
7
Kaplan . Activity based costing was then found useful
in using costing information for strategic decisions.
ABC is as a method of measuring costs and
performance of activities, products, and customers
(Gunasekaran, Marri, & Yusuf, 1999; Hilton, et al.,
2008). ABC assigns resource costs to cost objects
such as products, services, or customers based on
activities performed for the cost objects (Cooper and
Kaplan, 1992; Chartered Institute of Management
Accountants- CIMA, 2005). Wickramasinghe and
Alawattage (2007) identify ABC as a post-mechanistic
cost management approach in management
accounting. ABC accurately reflects the resource
consumption in production and distribution by
attempting to trace costs to products or processes.
ABC achieves this by accurately recognizing a causal
relationship of cost drivers to activities (Holmen,
1995; Drury, 2004; Hilton, et al., 2008). It identifies
activities which consume resources, attaches costs to
them, and assigns costs to products or processes that
use these activities (Ismail, 2010).
Activity Based Costing in Banks
In commercial banks it was gradually accepted
that ABC is a method of measuring costs and
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