巴黎银行-2013-C5_solution

1- Identify the activities which are at the groundings of the system. Activities should be grouped according to whether they are performed by unit, batch, product, customer, or for the organization as a whole. Different types of activities have to clearly be separated. 2- Assign total overhead costs to the identified activities (it is called a “first stage allocation”) 3- Determine the activity measure (allocation base) for each activity according to what is driving its costs. Determine also the number of units of the activity base which are expected to be used for each activity over the period. To determine the activity rate of each activity, divide the total cost of each activity by the total expected activity units to get an overall per unit rate for the activity. 4- Assign costs to Cost Objects (products or customers) using the Activity Rates and Actual Activity Units (units of activity that the cost object consumes) for a given Cost Object (called “Second Stage Allocation”).
Case 5 - Solution / expected an Nhomakorabeawers
Note: For extreme precision, all intermediate computations have been carried out with exact values. Figures of intermediate results in this solution may be rounded for simplicity of notation only. Final results are the only ones to be rounded according to the rules of the game. Part 1: Question 1: The correct text is as follows: Suppose that A, B, and C are three bank customers. They require different activities from the bank: • A uses exclusively internet banking; • B visits the teller daily to make deposits, withdrawals; • C deposits foreign currency as well as calls the branch frequently to ask for information about currency rates. Using actual allocation bases, the customer A will be overcosted and appear less profitable than he should. Customer B may be undercosted and appear More profitable than he should. Customer C may be undercosted and appear More profitable than he should. A common mistake in such cost accounting systems is that high-volume services produce losses and low-volume services produce significant profits. This was the case at the bank. The expenses that were required to support low-volume services were often not accurately assigned to these services but instead spread to high-volume services. These low-volume, unique services were generally provided to fulfill the requests of wealthy customers. To avoid these problems, the final report by the management control department concludes that the most appropriate method to meet BNP Paribas new needs is Activity-based costing, because it allows to better analyze the working processes and to determine which services are unprofitable and uncompetitive and which products are profitable and underdeveloped. Without this knowledge, the bank was not able to compete successfully against larger rivals in the retail banking sector.
Activity-based costing (“ABC”) is widely recognized as a better method for allocating overhead costs. For banks, in particular, the potential benefits of ABC implementation can be numerous. These include the proper costing of transactions, the ability to trace specific costs to bank customers and the ability to measure customer and product profitability. The end result of these benefits is the ability to improve decision-making and help organizations meet their strategic objectives. Explanations These answers simply rephrase the definitions stated in technical document 1. Here are some additional explanations: • The current allocation bases divides up branch overheads to accounts based on account balances or equal amounts per account. A (who never makes any demands on the branch and deals with everything online) is thus overcosted and appears less profitable than (s)he should. B and C (who require personal contact with branch employees) may be undercosted and appear more profitable than they really are. • The current costing system is not suitable for the bank. Low-volume services are allocated with a relatively small amount of costs (undercosted). On the contrary, highvolume services are overcosted. o Product undercosting: a product consumes a relatively high level of resources but is reported to have a relatively low total cost. o Product overcosting: a product consumes a relatively low level of resources but is reported to have a relatively high total cost. • The products that are unprofitable are also uncompetitive compared to other products which earn profits; the profitable products may generate even more earnings to the bank, thus should be developed further to increase the margins and demand. • Direct tracing requires that a cost is easily and accurately related to a cost object. The difference between allocation and tracing is that allocation is arbitrary whereas tracing is based on 'cause and effect' relations. Question 2: The four steps of ABC implementation are: 1- Identify and classify the activities related to the bank operations 2- Estimate the cost of activities 3- Calculate a cost-driver rate for each activity 4- Assign activity costs to products or customers Explanation: