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ACTIVITY-BASED COSTING Increasing the Efficiency and Profitability of Rural Banks through ABC

ACTIVITY-BASED COSTING Increasing the Efficiency and Profitability of Rural Banks through ABC. National Roundtable Discussion March 29-30, 2004 Marco Polo Hotel, Davao City. Internal and External Challenges. Keeping financial cost low

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ACTIVITY-BASED COSTING Increasing the Efficiency and Profitability of Rural Banks through ABC

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  1. ACTIVITY-BASED COSTINGIncreasing the Efficiency and Profitability of Rural Banks through ABC National Roundtable Discussion March 29-30, 2004 Marco Polo Hotel, Davao City

  2. Internal and External Challenges • Keeping financial cost low • Offering multiple products while moving towards sustainability • Increasing competition

  3. Why is it important to properly cost our products? • To determine the cost structure of the products. • To know the profitability and contribution of the products to the overall operation of the bank. • To make informed decisions pertaining to better product design, rational product pricing, and delivery of the product.

  4. What is Activity Based Costing? Activity Based Costing or ABC A method that measures cost of a product/service, based on activities performed to produce the product or service.

  5. Cost Allocation Method Identify costs to allocate Estimate time spent of personnel for the product Use percent estimates to distribute costs to product ABC Method Ascertain core processes and activities Conduct staff time estimates for each activity Calculate costs per activity Assign cost drivers and determine unit activity costs Drive activity costs to product Product Costing Methods

  6. Traditional Costing vs. ABC Traditional Costing Activity Based Costing Costs Costs Consumed by Consumed by Activities Products Consumed by Products

  7. Why ABC? • Determines the full cost of delivering the products and improves delivery mechanisms and customer service. • Sheds light on the profitability and contribution of products to bank operation. • Contributes to better product design and promotes more rational product pricing. • Instills cost consciousness among staff.

  8. Why ABC? • Increases awareness of cost structure of products and assists in decisions regarding selection of products. • Reveals hidden costs and excess capacity, and contributes toward increased efficiency. • Provides management another management information system tool for better cost management. • Provides the basis for business planning and investment decisions.

  9. ABC Activities • Management orientation • Creation of the costing team (Team members: Representatives from Operation, Accounting, Human Resource, MIS, and Audit) • Choosing the representative branch and period of activity • Creation of the activity dictionary

  10. ABC Activities • Pre-testing of the ABC Tool • Conducting time estimates • Cost calculation and determining the cost of delivering the products • Viability analysis of the result of the exercise • Decision-making

  11. MABS Piloted ABC January 15-17, 2004 • ABC Workshop in Butuan City. • Participated by Three (3) Rural Banks, and Three (3) Cooperatives. • Conducted by Punla Sa Tao Foundation, the only CGAP accredited institution teaching ABC in the Philippines. Feb 1-March 25, 2004 • Post workshop activities at the three pilot rural banks with assistance from Punla

  12. Challenges Encountered by the Pilot ABC Rural Banks • Time availability of the costing team • Decision on what product to cost • Determination of the core processes, sub-activities, and cost-drivers • Time availability of interviewees • Length of time required to complete the exercise • Availability of information required by the exercise

  13. Excellence Through ABC Any company can achieve excellence through ABC if they can assure themselves of: • Top management’s commitment • A well trained costing team • Relevant software support • Experienced people facilitating the implementation

  14. XYZ RURAL BANK, INC. Activity Based Costing Summary of Cost Per Activity

  15. XYZ RURAL BANK, INC. Activity Based Costing Summary of Cost Per Activity

  16. XYZ RURAL BANK, INC. Activity Based Costing Summary of Cost Per Activity

  17. XYZ RURAL BANK, INC. Activity Based Costing Summary of Cost Per Activity

  18. Activity Based Costing “ IF YOU CAN NOT MEASURE COST, YOU CAN’T MANAGE IT”

  19. Activity Based Costing or ABC ROAD TO COST MANAGEMENT

  20. Thank you!!!!

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