Barriers of Implementing ABC costing in Banking & Finance Industry

Barriers of Implementing ABC costing in Banking & Finance Industry

Biggest challenge of implementing ABC costing in this industry is the resistance of Operational Managers for this new accounting system. Many managers have a perception unless this mechanism reduces some of the unwanted cost it will only time and resources used for dedicating the implementing of this system. Further most of the Branch managers have a marketing and sales background and hardly have an accounting background. So it is difficult to convince them to switch from traditional cost method to activity cost method.

Another barrier is, most of the time branch managers are given a target or a average lending rate which they need to maintain for a month. Another barrier of implementing ABC costing is that when organization starts to collecting information about various processes,managers tend to take it as way of trying reduce workforce and other privileges enjoyed by them currently. For an example when records about travelling is collected, they would take that as a step taken to reduce the transportation cost accordingly. So managers tend to provide information about their privileges as they would think company will reduce some of it in future.

Another barrier of implementing ABC costing is to lack of knowledge of identifying proper cost drivers. Instead of identifying proper cost drivers managers tend to estimate it. This will not help to calculate the proper figures for each activity. If it becomes evident that driver information is not available new driver should be selected by managers.

Once all the information is gathered and set to finalize the cost structure, gaining approval from the senior management and board of directors. According to new cost structure some of the products can be given for less than it is given currently. For an example current annual interest rate of the Gold loan is 19% but if a proper ABC costing is done this can be reduced to 12%.

Strategic objectives of the management also plays a vital role in ABC costing. For an example some products are used to generate profit for the company and management purposefully takes decisions on increasing the interest rates of certain products. Micro finance is such a product and it is a highly profitable product when it comes to lending. Interest rates of such products are not sensitive for ABC costing as it would reduce the total profit earned by the company. Average Interest rate of Micro Finance is more than 21%, this high interest rate is mainly based on credit ratings of the customer segment.

Further, company cannot implement ABC cost system due to market conditions and competitor rates and prices. If the overall market rate is lower than the estimated ABC cost then managers are force to lower the rate irrespective of the ABC costing. Since the manager are expected to maintain an average of lending rate, they are eligible to reduce interest rates of certain products which are sensitive to market and competitor rates. When maintaining an overall interest rate, the branch manager has the liberty to decide the rate given for each product by complying with minimum rate given by the company. Ultimately, product price is influence by the managerial decisions and not align with ABC costing method.

Central Bank rules and regulations are also another barrier when it comes to deciding the borrowing rate. Unlike other industries banking & finance is highly regulated barrowing interest rates are regulated by Central Bank. In this case even if the ABC costing recommends to high interest rate, still the organization cannot increase barrowing interest rates. (Barrowing interest rates includes rates given for fixed deposits and Savings). For an example if the total average lending rate is 21% per annum, a finance company can grant a 18% (per annum) interest for barrowing. But this cannot be implemented due CB rules and regulations.

Internal politics is also another barrier that Sri Lankan organization face when it comes to implementing ABC system. There can be various cost reduction initiatives take after ABC system to make some products profitable. Staff members who are affected by this will not support this new ide due to that. As a nation, Sri Lankans are resistant to change and this makes new systems such as ABC hard to be implemented. Further major difficulty in implementing ABC arise when department within the company disagree with the costs allocated to their cost centers. There can be disputes with in department to where each department will deny to accept certain cost for their product or department.