The Bank Of Al Ain
The Bank of Al Ain has operated for many years under the assumption that profitability could be increased by increasing dollar volumes. Historically, BAA's efforts had been directed towards increasing total dollar sales and total dollars of account balances. In recent years, however, BAA's profits were eroding. Increased competition, particularly from Mortgage Lenders, Credit Unions and Building Societies, was the cause of the difficulties. Also BAA's managers had no idea what their products were costing. Upon reflection, they realised that they had often made decisions to offer a new product, which promised to increase dollar balances, without any consideration of the actual cost to provide the service. To clarify costs, the bank's managers calculated the cost of the products using a traditional costing approach.
Managers at the bank are not certain that the costing is a true reflection of the products' contribution to profit. They have been advised that there is an alternative method to costing known as ActivityBased Costing. After some discussion, the bank decided to hire a consultant management accountant to compute the costs of the products: cheque accounts, personal loans, the standard M/C card, and the gold MC card.
In view of the new cost information, Brenda Miller, the General Manager, wants to know whether a decision made two years ago to modify the bank's cheque account product was sound or not. At that time the service charge was eliminated for accounts that had an average balance greater than $1,000. Based on increases in the total dollars in cheque accounts, Brenda felt very pleased about the new product at the time. This cheque account product is described as follows:
- Cheque account balances greater than $500 earn interest of 2% per year, and
- A service charge of $5 per month is charged for balances less than $1,000.
The bank earns 4% on cheque account deposits.
Fifty percent of the accounts are less than $500 and have an average balance of $400 per account. Ten percent of the accounts are between $500 and $1,000 and average $750 per account
Twenty-five percent of the accounts are between $1,000 and $2,767.
The average balance is $2,000. The remaining accounts carry a balance greater than $2,767.
The average balance for these accounts is $5,000. Research indicates that the $2,000 category was by far the greatest contributor to the increase in dollar volume when the cheque account product was modified two years ago.
Your consulting appointment requires you to create a computer spreadsheet and provide a report that addresses the following:
1. Calculate the rates for each activity.
2. Using the rates computed, calculate the cost of each product.
3. Evaluate the cost and profitability of the cheque account product.
- Are all accounts profitable? Identify any products that could be dropped/cancelled.
- Compute the average annual profitability per account for the four categories of accounts described.
- Make recommendations to increase the profitability of the cheque account product.
4. Discuss the advantages of adopting an Activity Based Costing system for the activities of the bank.
Your management report should follow the basic structure of a business report. That is, you should provide the following:
-A cover page (the Topic, the Company, your name);
-An executive summary (a short summary of the main issues/findings/recommendations) ;
-An introduction (why you are doing the analysis - the problem in brief);
- The body of the report - items 1 to 4 above;
- Appendices
Attachment:- Template and Project.rar