Page 46 - MA - May 2017

COVER ST OR Y

What is basically argued here is that banks though might not have consciously opted for a particular
costing method/ technique/ model but were aware of the significance of costing in all aspects of the
expenditure side of the Profit & Loss Accounts Statement of the bank. Various models were developed
to suit bank’s requirement. A case in point is using the same Break Even concept for bank branches,
both newly opened as well as loss making branches. We give below an example of a branch case:

Break Even Analysis: The Case of a Personal Banking Branch
To start with: Profit = Income – Expenditure (Variable cost + Fixed cost)
= Sales – Variable cost – Fixed cost
= [No of units sold x price per unit] – [No. of units produced x cost per unit] – Fixed cost
p = QP – QV – F
Where, Q is the no of units sold
P is the price per unit
V is the variable cost per unit
p is the profit
At the Break Even Point Profit is Zero, therefore,
0 = Q’P – Q’V – F
or, Q’P – Q’V = F
or, Q’(P – V) = F, where Q’ is the no. of units sold at Break Even Point,
or, Q’ = F/ (P – V), (P - V) is also known as Contribution.
At the Bank Branch Q is nothing but the Business Mix i.e. Deposits + Advances
For Personal Banking Branch, Qp, i.e. the present Business Mix is = 1031 + 83 = Rs1114 lakhs;
And F = Salaries + other overheads – Non-interest income = [41.47 – 6.73*] + 6.40 – 2.21
* the amount of staff arrears paid in this year was deducted from the salaries paid at the branch
= Rs38.93 lakhs
And (P – V) = [Interest Income on Advances + Net interest income on Head office balances] –[Interest paid on
Deposits]
= [7.67 + 104.97] – 83.60
= 112.64 - 83.60
= Rs29.04 lakhs
Now this (P – V) of Rs29.04 lakhs is for a business mix of Rs1114 lakhs at the branch. We have to find out the
(P – V) for a rupee of business-mix, which is
= 29.04/ 1114 = 0.0261
Therefore the Break Even Point Business Mix of Personal Banking Branch is
Q’ = F/(P – V) = 38.93/0.0261 = Rs1492 lakhs, i.e. with the existing CD ratio of 8% the business mix can
be divided as [Deposits of Rs1372lakhs + Advances of Rs120lakhs].
For the Branch to Break Even, Strategy 1 available is to increase Rs378 lakhs [1492-1114 = 378] @ CD Ratio
of 8%, to increase Deposits by Rs348 lakhs and Advances by Rs30 lakhs.
Looking into the past performance of the branch, an increase of Business Mix of Rs378 lakhs in one year appears
to be of a bit of a tall order.
Let us therefore look at Strategy 2: To reduce F, i.e. the Fixed Cost at the Branch. Let us find out the breakeven
Level of F’ at the Branch:
Qp = F’/(P – V)
Or, F’ = Qp x (P – V) = 1114 x 0.0261 = 29.04 lakhs;

i.e. Strategy 2 is to reduce Fixed cost from Rs38.93 lakhs to Rs29.04 lakhs, which may be possible with a
combination of the following three strategies:
Increase Non-interest income, say by Rs2 lakhs;
Reduce Staff; and
Expenditure Management (A Rupee Saved is a Rupee Earned).

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