Page 44 - MA - May 2017

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performance of activities, products, and customers. that identifies activities in an organization and assigns
ABC assigns resource costs to cost objects such as the cost of each activity with resources to all products
products, services, or customers based on activities and services according to the actual consumption
performed for the cost objects. ABC was also identified by each. ABC tries to ascertain the factors that cause
as a post-mechanistic cost management approach in each major activity, cost of such activities and the
management accounting. ABC accurately reflects the relationship between activities and products produced.
resource consumption in production and distribution It is the main accounting tool to measure the cost of
by attempting to trace costs to products or processes. products and services of any bank.
ABC achieves this by accurately recognizing a causal
relationship of cost drivers to activities. It identifies Evolution of Adoption of Cost Accounting in Indian
activities which consume resources, attaches costs to Banks
them, and assigns costs to products or processes that The Banking Commission Report 1972 and the
use these activities. Narasimhan & Thampy study in 2002, both have
8
Rui Vieira and Keith Hoskin in their research mentioned inadequate adoption of cost accounting
paper, “The Implementation of Activity BasedCosting in a methods in Indian Banks. Though as on date there is
Portuguese Bank” have observed that, “After it was made a greater awareness of adoption of costing accounting
clear that ABC was an importantfeature to provide techniques in the Indian Banks, which we will be
the bank with cost information about unitary cost discussed in detail in this article, yet it has been a slow
information to provideprofitability by product, customer evolutionary process in the Indian Banks. There were
segment, and channel, some attitudes changed, reasons for this slow progress.
andmanagers began to accept it as they claimed the If we look at the profit & loss statement of three banks
project as their own. Part of the problemmight have selected at random we will find that interest expenses
been that the accounting department initially did not are, in the range at 50-55% of the total expenses and
feel they owned or managedthe project.” It was felt by the operating expenses are in the range of 18-26%,
the researchers that the usual resistance to introduction hence focus of the banks has been to reduce cost of
of a new concept faced initial resistance within the bank, deposits by bringing in more low cost deposits such as
but continuous persuasion from th top management current and savings bank deposit customers.
and the motivated team work resulted in adoption of
Activity Based Costing in place of conventional cost Banks Indian ICICI Bank HDFC Bank
accounting system. Bank
Douglas T. Hicks,Edmond J. Olejniczak III, and
Bradley A. Curell in their paper, “Measuring Customer Interest Ex- 57.73% 46.30% 49.4%
and Product Profitability at Community and Regional penditure
Banks in USA”found that in most cases, activity costs is Operating 18.45% 18.63% 25.7%
assigned as either a cost per transaction or a percentage Expenditure
add-on. Those activities most suited for percentage
add-ons are general fund-raising, market/customer [Source: Published Profit & Loss Statements of the Banks
support, product/product line support and general and 2015-2016]
administrative activities. Those most effectively handled It is not to mention that reducing operating expenses
as a cost per transaction are transaction fund-raising, was not a priority. However, alternate methodologies
outside contractor support, and transaction fund- like relying more and more on technology, closing
using.” down unviable branches, restricting the operational
Banks over time have come to this understanding processes/systems and inculcating the habit of “a rupee
that the conventional cost system of banking service saved is rupee earned” were followed more rigorously
is inadequate and inaccurate.The adoption of ABC than to adopt cost accounting techniques to analyse the
system helps in calculating the costs of banking services actual cost incurred in various operations of the bank.
in commercial banks more accurately.The adoption of The other cost factors such staff salary and selling,
ABC system helps in the pricing of banking services administrative and miscellaneous cost were reduced by
more competitive and scientific. increasing business per unit, thereby reducing over all
It is also understood that ABC is a costing methodology cost.

44 The Management Accountant l May 2017 www.icmai.in