ACCTING 7014 Management Accounting

Recommendation:

It is visible from the above table that amongst the four categories of cheque accounts, the accounts with the balance greater than AED 2767 and balance between AED 500 – AED 1000, have generated net profit on per account. The net earnings from the other two types of accounts are lower than the average cost per account of the cheque accounts. The total net earnings per account from cheque account products are also not sufficient to cover the average cost.

The bank can improve the position by following the stated recommendations, mentioned below:

• For the balances less than AED 500, the bank should increase the service charge rate or the interest earning rate, to cover the average cost.

The interest earning rate of the accounts with the balance between AED 1000 and AED 2767, should be increased further or the interest payment rate can be reduced also. It will be help the bank to increase the net earnings per account and turn the net loss into net profits.

The Bank of Al Ain uses to follow the traditional costing method to allocate the various overhead expenses into its five products. It allocates the overhead expenses in proportion to the direct costs. The management often faces trouble to compute the individual actual cost of each product under this process. The bank is also facing tough competition from various other banks due to this improper costing system.

Hence, the activity costing system is introduced to allocate the overheads to different products in accordance to the benefits, derived from different cost pool activities. It would be very helpful for ascertaining the proper and accurate cost of each product. Thus, the management can set proper price for each product and give tough competition to other banks (Lanen 2016).

The report is prepared to explain how activity based costing would be more effective for the bank than the traditional costing method.

Benefits of Activity Based Costing Method:

The traditional costing method would be applicable for the overhead allocation if all the overhead costs would be equally distributed to each cost pool activity and the cost pool activity would be effective to the products in accordance to the proportion of direct cost (Öker and Ad?güzel 2016). However, the cost details of the bank indicate the following issues:

• There are some expenses, which are solely attributable to one particular cost pool activity. Other expenses are also not equally distributed amongst the five cost pools.
• The requirement or the involvement of each cost pool activities is not same for each product. For example, the ATM transaction is majorly involved with the cheque accounts and savings accounts.
• Hence, it is cleared that the products are not responsible equally for any particular overhead cost.

For this reasons, the traditional cost method has failed to provide the actual cost of each product. It is only based on the assumption that the all the products are equally responsible for every expense, which is not true in reality.

Therefore, it would be better to apply activity based costing which would identify the individual cost pool and cost drivers for each cost and distribute the cost on the basis of the relation between the cost pools and the products (Stouthuysen et al. 2014).

For example, the administration staff expenses are fully consumed by administration cost pool, which is related to the customer transaction. The most numbers of customer transactions are made for cheque products. Therefore, it can be stated that the major proportion of administration staff cost should be allocated to cheque products, as highest amount of the particular cost has been incurred for the cheque products than other product.

The management has allocated the administration staff cost to every product on the basis of the direct costs. In such scenario, if any other products would incur higher direct costs than cheque product then administration staff costs would be allocated to that product at higher product than cheque product. For such illogical allocation process, the cost of that other product would get increased unnecessarily, which would lead the management to set higher price for that product. On the other hand, the costing of cheque product would be lower and the price would also be set lower. Due to this lower price, the bank would ultimately suffer from loss or lower amount of profit (McLaughlin et al. 2014).

From the table, presented above, it is evident  also that due to improper overhead allocation, the price of the cheque products had not been set properly, for which the bank is presently suffering loss for this product.  

Conclusion:

From the above discussion, it can be suggested that the bank should immediately adopt the activity based costing system and revise the product price accordingly.

Reference:

DRURY, C.M., 2013. Management and cost accounting. Springer

Groot, T. and Selto, F., 2013. Advanced management accounting. Pearson Higher Ed

Hemmer, T. and Labro, E., 2016. Productions and Operations Management & Management Accounting

Lanen, W., 2016. Fundamentals of cost accounting. McGraw-Hill Higher Education

McLaughlin, N., Burke, M.A., Setlur, N.P., Niedzwiecki, D.R., Kaplan, A.L., Saigal, C., Mahajan, A., Martin, N.A. and Kaplan, R.S., 2014. Time-driven activity-based costing: a driver for provider engagement in costing activities and redesign initiatives. Neurosurgical focus, 37(5), p.E

Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56

Stouthuysen, K., Schierhout, K., Roodhooft, F. and Reusen, E., 2014. Time-driven activity-based costing for public services. Public Money & Management, 34(4), pp.289-296