Activity-Based Costing is a cost accounting approach that is used to allocate indirect costs to specific products, services, or activities based on the resources they consume. It is an existing method across different industries. It is an important aspect of handling activities in a diverse setting.
WHAT EXACTLY IS ACTIVITY-BASED COSTING IN BANKING
In the context of banking, Activity-Based Costing can be applied to understand the costs associated with various banking products, services, or activities. A banking environment entails a myriad of things to be done and there has to be a way of accounting for it.
Traditional cost accounting, a simple equation of some hours to costs may not be relevant in a banking environment. This approach may not accurately reflect the actual consumption of resources by different products or services, where the range of products and services is diverse and complex. It often may lead to wastage of resources.
Activity-Based Costing, on the other hand, identifies individual activities that go into delivering a product or service and then allocate costs based on the consumption of these activities by each product or service. Here's how it works in the banking context:
Identify activities: The first step is to identify all the activities involved in the banking process, such as loan processing, customer service, account management, ATM services, online banking, etc.
Assign costs to activities: Next, the costs associated with each activity are determined. These costs may include labor, technology, facilities, and other overhead expenses.
Measure activity drivers: Activity drivers are the factors that influence the frequency or intensity of each activity. For example, the number of loan applications processed, the number of customer service calls, or the volume of online transactions could be activity drivers.
Allocate costs to products or services: Once the activity drivers are determined, costs are allocated to each product or service based on its consumption of the respective activities. For instance, the cost of loan processing activity will be issued to different loan products based on the number of loan applications processed for each type of loan.
Calculate product profitability: By allocating costs more accurately, ABC provides a clearer picture of the profitability of different banking products and services. This insight helps banks to make informed decisions about resource allocation, pricing, and product strategy.
ACTIVITY-BASED COSTING IN BANKING
CRM systems are primarily designed to manage customer data, interactions, and relationships. However, some advanced CRM platforms allow for customization and integration with other modules or third-party systems to handle additional functionalities like activity tracking and cost management.
Here's how a CRM system can be utilized to manage Activity-Based Costing in banking:
Activity tracking: A customized module within the CRM can be created to track various banking activities, such as loan processing, customer support interactions, account management, etc. Each activity can be associated with specific activity drivers to measure their frequency or volume.
Cost allocation: The CRM can be integrated with an accounting or cost management system that contains the cost information related to each activity. This integration enables the CRM to allocate costs to different actions based on the consumption of resources.
Linking activities to products/services: The CRM can associate each action with the corresponding banking product or service. This linkage is crucial for accurately attributing costs to specific products or services.
Customer profitability analysis: By combining activity data and cost information, the CRM can provide insights into the profitability of individual customers or customer segments. This analysis helps banks in understanding which customers or customer groups generate the most revenue and which activities contribute to higher costs.
Reporting and analytics: The CRM can generate reports and dashboards to present the ABC data in a meaningful way. These reports can be used by management to make informed decisions regarding pricing, product development, resource allocation, and overall cost optimization.
Process optimization: Analyzing ABC data within the CRM can highlight inefficient processes or activities with high costs relative to their contribution to revenue. Banks can use this information to streamline operations and improve overall efficiency.
It's important to note that while a CRM system can be used for basic ABC in banking, it may not provide the same level of sophistication as dedicated ABC software or ERP (Enterprise Resource Planning) systems. Dedicated ABC software is specifically designed for cost allocation and management, offering more advanced features and analytical capabilities.
Therefore, the suitability of using a CRM for managing ABC in banking would depend on the complexity of the banking activities, the level of granularity required for cost allocation, and the integration capabilities of the CRM platform. In some cases, a combination of CRM and dedicated ABC software or ERP could be the most effective solution.
