Activity based costing in Service Sector – Part III

Overall View of ABC

The mapping is self-explanatory. Using this method of ABC, we can identify costs per activity whether it is inside branch of a bank or in virtual bank like internet banking or in insurance company etc. When customer using these activities can be analyzed for costs and these costs can be compared with the revenues they give to the service sector thus profitability per consumer can be worked out. Product profitability is also easy to calculate. The only major problem is to identify the activities properly using cost and activity drivers and assign to products / customers / channel etc. Direct costs can be assigned directly. Only indirect costs can be identified with activities using resource drivers and cost objects like customers, products, channel etc. can be identified with activity drivers.

What happens when ABC is done in service sector:

When Activity based Costing is implemented, then every department head will be required to oversee activity costs and he will be on tenterhook to reduce the costs. He will voluntarily surrender idle assets to improve his bottom-line. He will say “I have space which I do not need and use, please use it for some other activity.”

Someone will say “I have surplus people, so take them away. I am having machines, I am   not like to use it most of the time, it is inherited, take them away or allow it to share with others. ”

If we see the substitute in banking, it is electronic payments which cost very meagure amount per transaction. It is swift and smart. It is extremely customer centric without seeing the customer in the bank. Customer stay at home and we will look after his interests. At a negligible cost, great personal relationship gained. But of course, chances of cross selling the products are lost. Any this can be managed with frequent visit by officers to the residence of good customers. Because at branch if valued customer comes, tea or coke offered, bank time was spent for transactions and it all cost bank Rs.80/-.Activity base has converted a deliverable to the bottom-line. If deliverables go to bottom-line which is the least incidence of costs, bank can maximize those transactions with least incidence of cost.

If the electronic data processing’s are cheaper for most of the activities with less manpower, it is better to go for software .The  banks can seek system administrator rather than clerks as customers have to pay high for clerks for improving their competitiveness and cost reduction. ABC helps to identify the areas. Live contacts with customers are also a must as cross selling is catching up to prop up the revenues of the service sectors. So Marketing dept of service sector should be geared to analyze the customer trends based on ABC and identify the existing good customers where there is chance to cross sell more products. It’ll cost you 5 times more to attract a new customer than it is to bring one of your past customers back to you. It is still cheaper to cross sell to your existing customers. If you’re a smart business owner, you’ll understand that every cent you invest in advertising is going towards acquiring new customers. You’ll also realize that once you’ve acquired the customers, you just can’t afford to let them go.

More Banks are now opting for ABC due to its utility in complex product mixing as in banks products are sold as bundles from different segments.

C.R. Venkata Ramani


(This article by Mr. C.R. Venkata Ramani is extracted from his article published earlier in “The Chartered Accountant” magazine.)

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