THE PRACTICABILITY OF ACTIVITY-BASED COSTING (ABC) IN THE NIGERIAN RETAIL BANKS

Department of Business Administration Bayero University Kano, Nigeria P.M.B. 3011, Kano, Nigeria. Email: aamaiyaki@yahoo.com

2011

Ahmed Audu Maiyaki

351

Ahmed Audu Maiyaki

Abstract
The rapid growth and development of information and communication technology leads to a keen competition in the business environment globally. This compels businesses to discover more efficient ways of doing business. The shortcomings of traditional costing method led to the emergence of Activity Based Costing. This study assesses the practicability of implementing ABC in First Inland Bank Plc of which three branches using non-probability method were selected as the sample size. The study revealed that ABC can be implemented as an effective costing method in the bank, but presently the bank does not practice the system. It was recommended that accounting professional bodies should educate management staff of banks about the importance of the new accounting system. Key words: Retail banking, Activity-Based Cost.

During the last two decades, substantial changes in the services sector have been witnessed. This is due to emerging of new competition as a result of deregulation, which has also given companies greater freedom in setting prices and determining the mix of products to offer. Wellmanaged services firms with a good understanding of their markets, customers and information technologies can become much more profitable in a deregulated and more competitive environment. In manufacturing companies, marketing, selling, distribution, service research and development and general administration functions have become more significant expense categories than in the past. Conventional cost accounting systems, which emphasize inventory valuation, have neglected the huge investments and expenses in an organizations service functions. Again, conventional cost system cannot accurately assign the costs of non-volume-related overhead activities. Assigning overhead costs by using only volume as a basis can supply management with an incorrect picture of how costs are established. Similarly, products cost can be distributed if the non-volume related overhead costs are significant proportion of total overhead costs. The solution to this problem in service firms, as well as in manufacturing is to implement activity based cost management (Hussain & Gunasekaran, 2001). Research works that have been carried out on the activity-based costing (ABC) system in respect of service

firms so far are scanty to some extent. The main focus has been on manufacturing firms, even though the use of ABC in manufacturing firms is not common, most of the firms in this sector stick unto traditional cost accounting system (Kock 1995; & Hussain and Gunasekaran, 2001). ABC can be defined as a method of costing activities that are necessary for the production of products or services (i.e. activities being undertaken) (Dandago, 2003). According to Turney, ABC is a method of measuring the cost and performance of activities and cost objects. Hence, the system assigns cost to activities based on their use of resources, and assigns cost to objects based on their use of activities. Furthermore, ABC was described as a full absorption costing method that gain more and more ground than conventional methods, due to more correct cost assessments and superb tracing of the costs (Emblemgrag, 2001). ABC was also defined (Drive, 2001) as a system that allows organizations to track the cost associated with activities performed to produced products or to deliver services. ABC can be a powerful tool for industrial decision makers (Lere, 2000). Global competition and rapid advancement of information and communication technology have made the irrelevance of conventional management accounting system in providing useful information for managerial decision making, in both service and manufacturing organizations

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(Hussain & Gunasekaran, 2001). The shortcomings of traditional costing system, in terms of validity, accuracy, consistency and relevance, increased the need for modern management accounting system, hence, ABC can be used as a tool for planning, control and decision making in service management. Banking sector is one of the key sectors in the Nigerian economy. And the sector keeps on growing and evolving from one stage to the other. For instance, in 1980s the sector was dominated by few old generation banks, there was little competition if any. At this moment, the armchair banking was the order of the day. However, with the establishment of new generation banks in 1990s, the banking business and customer relationship changed significantly. Aggressive marketing and deposit mobilization replaced the armchair banking. The effect of deregulation in the banking sector resulted in large number of banks with marginal capital base, asset quality problems, thinning spreads, uncompetitive ROE, corporate governance lapses among others. Consequently, the Governor of Central Bank of Nigeria (CBN) announced the banking sector reform on 06/07/2004 of which was designed to ensure a diversified, strong and reliable banking sector. CBN required that all commercial banks should raise at least N25billion as their new capital base through mergers and acquisitions. By January 2006 the number of commercial banks decreased from 89 to 25 that met the requirement. With this development, there are a number of challenges in the areas of: Technology and process integration; human resources upgrade; culture clashes; lower Return on Investment (ROI) in the short-run; requisite experience for managing large business among others. In view of the above therefore, this study focuses attention on the practicability of ABC in First Inland Bank (Nig) Plc, serving as a sample representing other banks in the Nigerian banking industry.

Conceptual Framework and Literature Review

Activity-Based Costing (ABC) traces costs to activities rather than products and this provides a more accurate and correct picture of the cost consumption (Hussain and Gunasekaran, 2001). ABC measures process and activity performance, determines cost of business process outputs, process efficiency and effectiveness. ABC is a technique to quantitatively measure the cost and performance of

activities, resources and cost object, including when appropriate, overhead costs. ABC captures organizational costs for factors of production and administrative expenses, and applies them to the defined activity structure. It was designed to provide more accurate ways of assigning the costs of indirect and support resources to activities. Several benefits derivable from adopting ABC system have been identified. For instance, Adeniyi (2004) describes ABC as a method of, charging overheads to costs units on the basis of benefits received from a particular indirect activity. Additionally, adopting activity-based cost systems within services firms can benefit from using ABC as they have the same set of issues as manufacturing firms, e.g. analysis operating expenses, activities being performed, which services demand resources (Kaplan and Cooper, 1992). In a similar fashion, same principle can be used to develop relevant cost systems for service firms. However, implementation of ABC systems in service firms may cause some problems as it suggests that average costs should be determined for each activity in an organization. Thus, product costs will be built up based on the various combinations of activities required to produce each product (Hussain and Gunasekaran, 2001). Implementing ABC systems in service firms calls for dividing overhead costs into various homogeneous cost pools. A homogeneous cost pool is a collection of overhead costs for which cost driver is computed for that pool and it is known as a pool rate. Secondly, the cost of each overhead pool is traced to products. This is done using the pool rate computed in the first stage and the measure, the quantity of the cost driver used by each product of the amount of resources consumed by each product. And the final step is to attribute the expenses of the unit, batch and the product sustaining activities to individual product using bases that reflect the underlying behaviour of the products demand for analyzing activities. From the above it could be seeing that ABC involves the process of analyzing activities, gathering costs, tracing costs of activities, establishing output measures and analyzing activities. These sequential processes can be adopted and practiced by organizations providing services like banks. Although, ABC is a system that is still evolving, it presents a lot of advantages over the traditional methods. Thus, ABC is a more representative distribution of resource used since the costs allocation are based on the direct cost drivers inherent in each of the work activities that make up

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the organizational structure. The results from firms that have implemented ABC have shown that the system is effective. Those companies achieved a competitive advantage as they are more certain about their costs and consequently they can correctly price their products in a market with keen competition (Knock, 1995). While most of the studies on ABC were done with respect to manufacturing companies, it should be realized that system is applicable to the service sector. According to Zimmernan (1997), while a manufacturing selling is chosen to describe ABC, this technique has also been applied in insurance and banking institutions, nonprofit organizations, and the marketing and distribution department of firms. Traditional cost accounting methods are not useful for financial institutions that must cope with the new intense competitive environment (Hussain & Gunmasekaran). The aforementioned studies however, show that ABC is needed and can be implemented in the service sector, particularly in the banking industry. It is most likely that the system will enable the banking business to be more efficient in order to cope with keen competition from all over the place. Despite all the advantages and benefits highlighted, there are some difficulties faced in the implementation of ABC system. For example, obtaining full information of cost with respect to each activity, the cost of shared resources proves difficult (Cobb, Innes & Mitchell; 1993). The problem of jointness has continued to prevail in the implementation of the system. This impinges upon activity cost pooling and also on the cost driver rates (Maskell, 1988 & Cobb 1993). Additional expense discourages some organizations particularly the smaller ones to adopt the system (Dabor and Eragbhe, 2005). Similarly, it has been observed, that the financial benefits of ABC have not yet been established (Innes & Mitchell 1993).

Results and Discussion

Very close observation into the sample of the study reveals that each branch of First Inland Bank is a cost center, meaning that each branch incurs some operational costs and of course in return the branch generates some revenues to the bank. For instance, in a typical branch there are two units namely credit & marketing and operations. Each of these units performed some peculiar activities upon which costs can be traced to, taking the main activities in the credit and marketing unit, credit appraisal for example we will see the costs involve in carrying out the activity. First of all, the cost attributed to the credit officer doing the appraisal; stationery cost; secretariat cost of typesetting the report and also the communication and postage cost of sending the report to the Head Office for approval. These costs as well as the cost of funds when the credit is disbursed to customer can be used as the basis for charging management and processing fees in respect to a particular credit given to the banks customers. Furthermore, by analysing marketing activity, various costs are traced to it, while marketing mainly involves banks staff moving around sourcing for new clients; the costs here include the staff costs for both the marketing officer as well as for the car driver, depreciation costs of the vehicle used, fuel cost etc. Similarly, when analyze other remaining activities are analysed, it will be revealed that different costs are attached to each activity. For example, other activities in the branch operation such as: cashiers, customer relationship function, funds transfer, cash movement, clearing works have specific costs involved. The investigation also shows that about 90% of the employees do not know about ABC system. On whether the system is practicable, most of the responses are positive. However, they consider the implementation of the system to be difficult because according to them, some tasks/ activities overlap and involve more than a unit/department. On the part of the customers, the study shows 100% of the respondents do not know any thing about ABC. Nevertheless, the customers are satisfied with the costs of services they are being charged at the moment. In some rare occasions, customers contest the bank charges whenever they perceived it to be high.
COST POOL SUGGESTED COST DRIVER

Methodology
Using non-probability sample, three branches of First Inland Bank were purposely selected out of the total brancehes of the bank. The branches are (Ilorin, Bauchi and Kano- I/Taiwo). The purposive sampling method was used because information related to costs and salaries are not easily available in other branches. Additionally, the author used his working experience and observation in the sourcing of information. Besides, non-structured personal interview was used.

Credit

Number of credit appraisal report

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Marketing Customer relationship Funds transfer Clearing Cashier

Number of customers called Number of customers attained to Number of transfer sent and/or received Number of cheques processed and sent to and/or received from CBN Number of customers answered

Major Findings
Consequent to the analysis, the author discovers the following major finding with regards to the practicability of ABC in First Inland Bank Plc: Although the system has not been adopted by the bank yet, but it can be adopted and practice effectively. Majority of the staff as well as the customers of the bank are not aware of the system, however, they can be adequately educated and enlightened about the system. Customers of the bank are satisfied with the banks charges; however, they complain anytime they notice overcharges. Clear identification of cost pool and the cost driver is difficult due to the fact that most of the banks activities are related and interdependent.

Conclusion
First Inland Bank Plc is presently using traditional method of costing, but the bank can adopt Activity-Based Costing as an effective way of cost management. Majority of both the staff and customers of the bank are not aware of ABC because it is a relatively new system. To implement ABC in the bank differentiation and identification of cost pool/cost driver will be a great challenge.

Recommendations
Mass enlightenment campaign should be embarked upon by accounting professional bodies with a view to educate banks executive and directors about the importance of ABC. This in turn will enable the management of banks to educate their staff and customers.

References
Adeniyi, A. A. (2004). An insight into Management Accounting 3rd ed. Value Analysis Consult, Lagos.

Asika, N. (2005). Research Methodology in the Behavioural Sciences, Longman Nigeria Plc., Lagos. Cobb, I., & Mitchell, F. (1993). Activity-Based Costing Problem The British Experience. Advances in Management Accounting, Vol. 2 pp. 63-83. Dabor, E. L. and Eragbhe, E. (2005). Implementing Activity-Based Costing in the Service Industry A Survey of Some Private Clinics in Benin City, Nigeria. Bayero International Journal of Accounting Research, Vol.1 pp. 56-65. Emblemsvag, J. (2001). Activity-Based Lifecycle Costing. Managerial Auditing Journal 16/1 pp. 1727. Hussain, M. M. and Gunasekaran, A. (2001).ActivityBased Cost Management in Financial Services Industry. Managing Service Quality, Volume II, No.3 pp.213-226. Innes, I.C.J, and Mitchell, F. (1993). Activity-Based Costing Problems: The British Experience, Advances in Management Accounting, Volume 2, pp.63-83. Innes J. and Mitchell, F. (1995). A Survey of ActivityBased Costing in the U.Ks Largest Companies, Management Accounting Research, 6, 137-153. Kaplan, R.S and Cooper, R. (1992). The Design of Cost Management System, Englewood, Cliffs Prentice Hall. Kock, S (1995). Implementation Considerations for Activity-Based Cost Systems in Service Firms: The Unavoidable Challenges, Management Decision, Vol.33, pp. 57-63. Lere, J.C. (2000). Activity-Based Costing: A Powerful Tool for Pricing. Journal of Business and Industrial Marketing, Vol. 15 pp. 23-33. Maskell, B. (1988), Relevance Regained An Interview with Robert S. Kaplan, Management Accounting (UK), pp. 38-42. The Electronic College of Process Innovation, ABC Guide Book, Retrieved from http://www. defencelink.mil 24/9/2000. Turney, P.B.B (1996). Activity-Based Costing, The Performance Breakthrough. Kogan Page Publishers UK. Zimmerman, J.L. (1997). Accounting for Decision Making and Control (2nd Ed.). Irwin/McGrawHill.

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