"The Measurement, Control and Management of Operating Costs in Banks"

The main content of the chapter is the application of Activity Based Costing techniques to banking sector. After the introduction, in the second paragraph the importance of a correct cost measurement in banks is illustrated. From one hand, the worsening of competitive pressures requires an improvement in bank efficiency; from the other hand, the use of cost information are many: profitability measurement, product mix decisions, resource allocation decisions, investment evaluation, strategic and tactical pricing, managerial accounting, planning and control, process improvement, managerial evaluation, etc. Notwithstanding the importance of cost information, the most widespread techniques of cost accounting in banks are weak. The main problem regards the indirect operating costs. A numerical example, referring to a simplified bank branch, shows the negative effects of the most common techniques: single-parameter cost allocation. The effects are mistaken profitability measurement, cross subsidisation between products, customers and branches, and consequent wrong decisions and corrective actions. In the third paragraph, the innovative activity based costing technique is explained. Its application at the same case-study, shows how the knowledge about indirect cost absorption is improved, the effective profitability of different branches is assessed, and the right actions can be adopted. The fourth paragraph illustrates the passage from (activity based) cost accounting to (activity based) cost management. New (activity based) information about costs are added and this allows the management of costs, the improvement of costs performance and the control of cost functions (service units). The last step consists in the passage from activity cost management to process cost management. In the final paragraph, a case study is described and critically analysed (the cost management system at the Unicredito Italiano)