Page 47 - MA - May 2017

Strategy 2 is also not a full proof concept for the branch to break even, hence there is need for to look at Strategy
3, which is, improve (P – V), i.e. the Interest Margin available at the branch. The (P – V) at the break even point is:
Qp = F’/ (P – V)’
Or, (P – V)’ = F’/ Qp = 38.93/ 1114 = 0.0349, i.e. an increase of 0.88% in interest margin will bring
about the break even level for the branch without any increase in Business-Mix or Reduction in Fixed cost.
To pursue Strategy 3 is to do the following:
Increase the Yield on Advances by going for more High Quality High Yielding Advances and Reducing NPAs
(Increase CD Ratio).
Reducing the Cost of Deposits by improving the Deposit-mix by going for more Low-No cost Deposits.
In reality a combination of all the Three Strategies are required to be pursued.
I: Increase Business-Mix by Rs378 lakhs

Zone of
Feasible
Solutions

II: Reduce Fixed Cost by Rs10 lakhs III: Improve Interest Margin 0.88%

Hence for the Branch has a combination of above three Strategies I, II and III, depending on the SWOT of the
Branch, it can work out the following possibilities:
1. Increase Business Mix say by 15% i.e. 15% of Rs1114 or Rs170 lakhs of additional business mix over the
previous year, which could be little higher than the previous years;
2. Reduce the Fixed Cost by Rs5 lakhs by increasing Non-interest income, along with transfer of one MMG III
officer from the branch and cost reduction by 10 % in overheads; and
3. Improve Interest margin from existing 0.0261 to 0.03, and increase CD ratio from present 8% to 20%

The Branch will earn a profit of:
Profit = Q’’(P – V)’’ – F’’
= [1114 + 170][0.03] – [38.93 – 5.00]
= 38.52 – 33.93
= Rs4.59 lakhs

Activity Wise Costing Initiatives:
Sometime in 195-96 the Reserve Bank of India directed banks to conduct an ongoing costing exercise and apprize
the Reserve Bank of the results of such studies at periodical intervals. The objectives of the study were:
1. To analyze cost trends for cost control;
2. To enable comparison of cost results of the bank with the industry level and to take necessary corrective
measures to control avoidable cost;
3. To appropriately price various services offered by the banks;
4. T0 enable systematic profitability analysis for finding out the cost of concessions offered to customers;
5. T0 facilitate cost-benefit analysis of different ; and undertaken by the bank;
6. To aid critical review of bank’s systems and procedures; and
7. To work out break-even analysis of bank’s various services/ activities.

The cost of each activity is generated in terms of three indicators as under:-
(i) Cost per voucher, i.e., cost per credit/debit entries;

www.icmai.in May 2017 l The Management Accountant 47