case 5 7 buckeye national bank n.
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Case 5-7: Buckeye National Bank. Group II Aftab Usmani Alexander Derevin Carla Daniels Shantanu Kumar Singh. Single indirect cost allocation rate: old way. $ in 1000s Indirect costs: $2,850 Total Checks value: $95,000

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Case 5-7: Buckeye National Bank


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    1. Case 5-7: Buckeye National Bank Group II Aftab Usmani Alexander Derevin Carla Daniels Shantanu Kumar Singh

    2. Single indirect cost allocation rate: old way $ in 1000s • Indirect costs: $2,850 • Total Checks value: $95,000 • Cost rate allocation = 2,850 / 95,000 = $0.03 per dollar paid Based on $ value of checks paid

    3. Old indirect cost allocations:based on $ checks paid Allocations driven by % of total value of checks written

    4. Indirect cost allocation: old system • Assigns costs based on value of checks processed • Underlying rational: indirect costs are related to $ value of checks written • Assumes consistent averages of business and retail check values • Value of checks must be consistent with number of checks written to hold true

    5. Indirect cost per account: old system

    6. Profit Margin per account: old system

    7. Business Strategy based on old system • Increase retail accounts • Incentives to managers • Ignore business accounts

    8. Signs old system is broken • Revenue increasing at slower rate than expenses • Profits declining while retail accounts increasing • Allocation distorts actual costs • Business customers likely to have more high value checks than retail customers • Retail customers could have larger number of smaller- valued checks • Teller and call center costs not related to check values

    9. ABC method: activity cost allocations

    10. ABC: Indirect cost allocation

    11. ABC: Indirect cost proportion

    12. ABC: Indirect Cost per account

    13. Old way vs. ABC indirect cost allocation

    14. Old way vs ABC cost allocation • Old way • overestimated indirect costs for business account • underestimated indirect costs for retail accounts • distorted by value and number of checks • ABC method • indirect costs based on activities that support each account type

    15. ABC: Profit Margin per Customer

    16. ABC: Business Strategy • Old way: • Led to strategy of increasing retail business • Couldn’t tell retail accounts create loss • Incentives for increasing retail accounts decreasing profits, leading toward losses • ABC: • Can now see that retail accounts losing money • Offer incentives to increase business accounts, decrease retail business • Reduce costs for retail accounts • Focus on reducing service calls • Implement ways to reduce visits to tellers

    17. Indications ABC would be beneficial • Profits declining while seemingly profitable accounts increasing • Revenue increasing at slower rate than non-interest expenses • Operational factors • New call center has been added • Indirect costs associated with different services unknown

    18. Importance of ABC for CEO or bank branch manager • Understand what is driving costs • Better understand contribution margins • Better profitability measures • Better decision and control • Better information for capacity planning • hiring part-time tellers at peak times