Activity Base Costing in Banking & Finance Industry

Activity Base Costing  in Banking & Finance Industry

How to use activity Base Costing  in Banking & Finance Industry.

Banking & Financing industry is one of the highly regulated industries in any country and highly govern by Central Bank or the National Bank of that respective country. Financial products mainly consist of lending products such as leasing, vehicle loans, mortgage loans and barrowing products such as Fixed Deposits and savings.

In Sri Lankan context most of the barrowing products are govern by Central Bank of Sri Lanka. Lending rate is the main component which determines the price of the product. That is the benefit which customer gets. In lending, lending interest rate is the main component which determines the price of the product.

The above rates are established in many ways. Some of the criteria are, Central Bank lending rate cap, competitor rates and prices, based on fixed cost and variable cost, financial objectives of the group of Directors etc.

In the following analysis, how activity base costing can be used to determine the price of the final lending products and its long term implication and barriers of implementing it to the industry have been discussed.

How activity base costing has been used in deciding barrowing rate and how it can be improved further.

To identify the rates of financial products first all the activities have been classified according its product. All the activities are rated according to product level. All the resource requirements according to product level are taken. Top down approach, Recycling approach and Interview or participative approach have been used to identify and classifying activities for the activity dictionary.

For a lending product following costs were identified

Indirect Cost	Cost Driver
Administrative cost & Back office cost	No of hours dedicated for completing a task
Training development cost	No of individuals from each department participated
Audit	No of audits conducted for each department
Transportation cost	No Kilo Meters per job
Material Cost- Stationary, computers, Calculators etc	No of units used by each individual
Building/Electricity/Water cost	Square footage Utilized
Minor staff and clerical staff wages	Total no of employees occupied in a building
Phone, Mobile & Internet charges	Consumption by each individual(respective of department)

Secondly cost associated with each activity is been identified. Following costs have been identified- employee labor for maintenance & production, physical resources such as computers, It equipment and such as building and other cost. The total cost of each activity is calculated by using each employee data from personal interviews and other forms of discussions.

Thirdly cost driver rate for each activity is been calculated. In this scenario cost driver rate is the estimate cost of resource consumption per unit (Rs 100 of lending and borrowing). Once the activity of cost and activity volume (total lending amount and total barrowing amount) are determined, the cost- driver rates are calculated by dividing the total activity cost by the total activity volume. Following sources were taken to calculate the cost driver rate- historical budget data, head count data, occupancy and transactional cost information maintained by the company.

Fourthly, cost driver rates prepared in the third step was used to identify cost for each lending and borrowing products were used to determine the final cost of product.