ABC costing

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THE OZ BANK STORY
1. Technically good accounts/service
2. Accounts maintained and serviced well.
3. Satisfied customers
4. Profitability around or above branch average
5. Very successful growth in the first years after being founded not enough accounts to be profitable
6. Times are harder now
7. Accounts are maintained for too low a price

Falling profitability for OZ BANK
ANNA'S Objectives
1. An increase in Accounts does not necessarily increase profit
2. Some accounts are moneymakers and some are money losers
3. There are too many money losers
4. Nobody is sure where money is being made and lost
5. To determine the "true" cost for a cost object (account, job, service, or customer)
6. To identify money makers / money losers
7. To finding an economic break-even point
8. To compare different options
9. To discover opportunities for cost improvement
10. To prepare and actualize a business plan
11. To improve strategic decision making

OZ Conundrum
Competitors ?
Customer Value ?
Note: "true" account costs (e.g. total cheque processing cost) have only a minor importance in final market price determination
Direct Cost (salaries, teller, facilities and other)

+ Overhead Cost ?
-----------------------------------------
= Total Object Cost ?
Traditional Cost Accounting (TCA) which OZ is following does this:
1. Arbitrarily allocates overhead to the cost objects
2. Total company's overhead is allocated to the accounts based on volume based measure e.g the total value of the cheques cleared.
3. Assumption: Relation between overhead and the volume based measure
Activity Based Costing (ABC) as proposed by Anna leads to
1. More accurate cost management methodology
2. Focuses on indirect costs (overhead)
3. Traces rather than allocates each expense category to the particular cost object
4. Makes "indirect" expenses "direct"
ABC Basic Premise
1. Cost objects consume activities
2. Activities consume resources
3. This consumption of resources is what drives costs
4. Understanding this relationship is critical to successfully managing overhead
ABC Steps
1. Identify activities
2. Determine cost for each activity
3. Determine cost drivers
4. Collect activity data
5. Calculate account cost

Closer comparison of the two processes
In order to achieve the major goals of business ...