148 ACCOUNTING FOR MANAGERS
Example 2: financial services
Serving customers in a bank involves many different personnel in many different
departments. A customer service employee may open an account and arrange
cheque books and bank cards. The teller will process deposits. A loans officer will
take the details of loan applications. These are ‘front office’ or customer-facing
personnel. In the ‘back office’, cheques will be processed by data-entry operators,
the production of cheque books and bank cards will take place, customer funds
will be invested, statements printed and so on.
For most of these services (the exception is the loan, where a separate charge
may be made) a single bank charge covers the bank’s administration costs. Some
banks no longer charge fees to non-business customers as their costs are absorbed
against the interest earned by the bank on their customers’ bank balances (less
any, usually smaller, interest payment to the customer).
Given this complexity, banks need to understand the profitability of different
branch locations and different types of customers (market segments, see Chapter 8).
In order to do this, an activity-based approach can be used. The cost drivers for
each major activity can be identified, e.g. the number of new customers (for
account-opening costs); the number of cheque and deposit transactions (for the
teller and data-entry costs); the number (or value) of loans (for loan-processing
costs); and the number of accounts (for account-maintenance costs). The number
of transactions for each branch and type of customer multiplied by the direct
labour cost per transaction (see earlier in this chapter) can then be compared with
the income earned from bank charges and interest.
In banking, understanding these costs has led to the introduction of automatic
teller machines (ATMs) to reduce the cost of front-office staff who previously
cashed cheques in the bank branch. ATMs increased bank profitability as many
employees were made redundant, although more recently there has been an
attempt (impeded by the competition authorities) to impose charges for the use of
ATMs by customers.
The following case studies show the impact of an activity-based approach to
labour costs and capacity utilization.
Case study: The Database Management Company – labour
costs and unused capacity
The Database Management Company (DMC) is a call centre within a multi-
national company that has built a sophisticated database to hold consumer buying
preferences. DMC contracts with large retail organizations to provide information
on request and charges a fixed monthly fee plus a fee for each transaction (request
for information). DMC estimates transaction volume based on past experience and
recruits employees accordingly, to ensure that it is able to satisfy its customers’
demands without delay.
Employees are on a mix of permanent and temporary contracts. Labour costs
are separated into variable (transaction-processing costs, which can be directly