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
Checks in $1000s
OH Allocation Rate
OH Costs
$1000s
% Total
Business Account
85500
.03
2,565
90%
Retail Account
9500
285
10%
Total
95000
2,850
100%
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
Indirect Costs
$ in 1000s
# Customers
(1000s)
Cost per Account
Business Accounts
2565 50
51.30
Retail Accounts
285
150
1.90
Total
2850
200
14.25

6. Profit Margin per account: old system
Cost per Account
Revenue per Account
Account Contribution Margin $
Business Accounts
51.30 40
(11.30)
Retail Accounts
1.90 10
8.10
Total
14.25
21.05
6.80

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
Cost Driver
Total
Indirect Costs (1000s)
Costs per unit
Process checks
2850
1140
0.40
Teller Transactions
200
1200
6.00
Service Calls
100
510
5.10

10. ABC: Indirect cost allocation
Activity
Rate / unit
Units Retail
1000s
Retail OH Applied
Units Business 1000s
Business OH Applied
Pay Checks
0.40
570
228
2280
912
Teller Services
6.00
160
960 40
240
Service Calls
5.10 95
484.5 5
25.5
Total
1672.5
1177.5

11. ABC: Indirect cost proportion
Activity
Total Units
1000s
Units Retail
Retail % Total
Units Business 1000s
Business % Total
Pay Checks
2,850
570
20%
2280
80%
Teller Services
200
160 40
Service Calls
100 95
95% 5 5%

12. ABC: Indirect Cost per account
Applied OH
($1000s)
Number Customers
Average Cost per Account $
Business
$1177.5
$50,000
$23.55
Retail
1672.5
150,000
11.15
Total
2850
200,000
14.25

13. Old way vs. ABC indirect cost allocation
Old Way Cost per Account $
ABC Cost per Account $
Delta
% Change
Business
$51.30
$23.55
$27.75
54%
Retail
1.90
11.15
9.25
486%
Total
14.25

14. Old way vs ABC cost allocation
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
Avg Cost per Account $
Avg Revenue per Account $
Avg Contribution margin per Account $
Business
23.55
40.00
16.45
Retail
11.15
10.00
(1.15)
Total
14.25
21.05
6.80

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

19. Single indirect cost allocation rate: old way
$ in 1000s
Indirect costs: $2,850
Total Checks value: $95,000
Number customer: ,000
Cost rate allocation = $2,850 / 200,000 = $14.25 per customer
Based on per customer

20. Old indirect cost allocations: Indirect costs of $2,850,000
Checks in 1000$s
# Customers
OH Allocation Rate
OH Costs
% Total
Business Account
85500
50,000
14.25
712.5
25%
Retail Account
9500
150,000
2,137.5
75%
Total
95000
200,000
2,850
100%
based on per customer allocation