Costing in Banking Service Essay

It does so by describing the break downial tone damage and in full cost organisations in banking institutions. It then looks at the limitations of these approaches to the menses competitive conditions and goes on to consider the applicability of the activity based be system in the allocation of indirect transformation be to branches, products and customers. Finally, we provide look at the findings of a questionnaire to Spanish nest egg banks in send to evaluate how widespread these systems argon and how they be personad in savings banks. We found that direct be systems predominate in customer and products entries whereas full costs systems argon much more than widespread in the slip of paper of branches. Furthermore, we also found that the use of activity based costs systems is in truth limited.Keywords Saving banks Cost structure Management byplay relationship Cost systems action at law based cost. JEL Classification Codes M41 Accounting G21 Banks Other Deposit ory Institutions.1. IntroductionHistorically, charge accounting in banking institutions was introduced considerably later in comparison with companies in other sectors. There are a number of reasons for this limited development. This was due, on the one hand, to external causes. For example, it was not until the 80s that competitive conditions in the banking sector fostered the development of accounting instruction planning and control systems. On the other hand, in that location were also internal conditions that had to do with the temper of the banking avocation and the trading trading trading operations that these companies carry start, which differ signifi orduretly to those of other sectors.This hindered the transfer of models that had essentially been developed for industrial companies to the monetary sector. As regards internal factors, the accounting regulations secure down by regulating bodies of the banking system ready traditionally been the scratch purpose from which banking institutions have drawn up their accounting information. The purpose of he latter(prenominal) was clearly to address the engages of central banks that used this accounting information in order to supervise and control the solvency of the financial system and to control the applicable variables of monetary policy (Ta and Larriba, 1986, p.37 Cates, 1997, p.51-56 Kimball, 1997, p.24). Furthermore, the environment in which these companies had traditionally operated had been sufficiently stable in order for them not to suffer the need to improve their caution accounting systems (AECA, 1994a, p.12-13).On an internal train, Waden-berghe (1990, p.569) Rouach and Naulleau (1992, p. 101-102) and Carmona (1994, p.210) point out that the characteristic features of the products and the production process of banks hinder the application of management accounting techniques the intermediation function they carry out, the permanence on the relaxation sheet of the main sour ces of income and expenses, the problematic definition of out fix ups and input, effrontery that there is no difference mingled with the nature of the raw material obtained via financial markets or deposit taking and the final product (loans), the fixed cost and marginal revenue syndrome, the ticklishy in allocating indirect costs to cost objects or the diffuse figure of the customer-supplier.However, the deep transformation of the banking system, and, more specifically, deregulation, disintermediation and innovation processes, have ushered in changes to the competitive demeanor and the information needs of banking institutions. We send away accordingly assume that the accounting systems of these companies have most probably also evolved and constituted new conceptual frameworks 1. As a consequence of growing tilt in the banking sector and the reduction of financial margins, banking institutions have had to give progressively greater importance to the planning and control o f their non financial costs, which has opened up the debate around the adequacy of the costs systems currently in use in these companies (Scias, 1985, p. 48 Kimball, 1993, p. 5-20 Bos, Bruggink et al., 1994, p.12 Carmona, 1994, p. 213). This essay aims to analyse the characteristics of the costs systems of Spanish savings banks which operate in the universal retail banking segment.In the first place, we provide look at the disparate theoretical models that volition enable us to analyse the financial intermediation activity from a microeconomic viewpoint. Secondly, we ordain go on to describe the characteristics of non financial costs in banking institutions, presumption that they influence the application of management accounting in these companies. Thirdly, we impart put forward a costs classification in savings banks that facilitates the allocation of their non financial costs to different cost objects (centre of responsibility, products, customers and activities). Based on the above, we brook then go on to assess the use of different costing systems, looking at both traditional costing systems ( fond(p) and full) as advantageously as activity based costing. The ask finishes by poseing the results of a questionnaire given to the heads of management control of Spanish savings banks with the aim of finding out which costing systems are currently in use and how they are likely to evolve in the future.2. The Production Process in Banking InstitutionsThis section aims to present an overview of the different theoretical approaches that interpret the fat process of banking institutions. match to Bergs and Soria (1993, p. 17-23) the models that explain the productive process of banking institutions can be class into three groups partial decision models, portfolio guess and run production. Lets look at these in more detail. 2.1. overtone Decision Models Partial models focus either on the assets and investment decisions (loans versus the treasury) or on the piece of the liability structure (capital versus deposits), considering the other part of the equilibrate sheet as an external or exogenous variable. In these models, the banking institutions balance sheet is 1We can identify various development stages in bank accounting and management for example, Chisholm and Duncan (1985, p.27-33) have divided its historical developing into three stages, Faletti (1986, p.88-95) refers to four stages, Rezaee (1991, p.26-28) and Roosevelt and Johnson (1986, p.30-31) have set up five stages, and Ernst & Young (1995, p.25-31) dodging up to 11 phases. Having said this, the different number of stages by different authors reflect differences in nuances but not in fundamental aspects because the evolution of information drawn up by management accounting in banking institutions may be seen as a continuous process root in financial accounting that is evolving towards objectives that are more and more related with tactical and strategic decisio n making. viewed as the key element, because each of its components is modelled distributively (Santomero, 2000, p.4).When loans are regarded as outputs of the banking institution, it is assumed that, given a real level of exogenously determined deposits, which are not subject to optimization, the companys management decision is focused on determine what proportion of deposited funds impart be allocated to the homework of loans and what proportion will be kept in the treasury. This is due to the fact that the banking institution needs to maintain a certain level of liquid re take cares in order to address mathematical detachments of deposits. Obviously, maintenance of this treasury will generate an opportunity cost, so banking institutions will have to minimise this opportunity cost by maintaining the treasury at a minimum level.However, if the treasury that is kept is insufficient, the company exposes itself to a gamy liquidity risk (Baltensperger, 1980, p.3 and Swank, 199 6, p.176). When deposits are regarded as outputs, the problem focuses on determining the optimum balance between deposits and equity (Swank, 1996, p.177). According to this approach, a property of insolvency could be brought on not only by the mass withdrawal of customer deposits, but also if the value of assets drops below that of liabilities. This scenario is slight and less likely the fewer the deposits. It can therefore be minimised by increase the spate of equity (Baltensperger, 1980, p.1011Swank, 1996, p.177). However, given that the opportunity cost of equity is greater than the financial cost generated by deposits, in order to tap lucrativeness the bank need to minimise the banks own funds, which increases the mishap of an insolvency scenario and of fittinging the ensuing costs associated with it (Baltensperger, 1980, p.13). 2.2. Portfolio Theory Based Models The previous models look for to address the structure of assets or liability management whilst considering th e other part of the balance sheet as exogenous. A all-around(prenominal) possible action of the productive process of banking institutions needs to simultaneously account for the structure of assets and liabilities. The efficient portfolios picking model for banking institutions put forward by Markowitz (1959) and developed by Pyle (1971, p.737-747) concomitantly looks at decisions concerning assets as well as liabilities and gives us a more comprehensive view of the interrelations between assets and liabilities.Having said this, it must be acknowledged that although portfolio theory overcomes the limitations of partial models by determining optimum treasury, loans and deposits levels together, it still has its drawbacks. The most relevant to this study has to do with the fact that both partial models and portfolio selection theory regard non-financial costs as irrelevant when it comes to estimating the output level and firearm of banking institutions (Swank, 1996, p. 194). 2.3. Models Based on the Production of Services and Real Resources The provision of financial work entails transformation costs which are not contemplated in the abovementioned models.The work production model advocates that the production processes of banking institutions cannot be properly analysed by exactly looking at the management of its optimal assets and liabilities structure, but that we also need to take into account the fact that both financial intermediation and the provision of other banking services generate transformation costs, which entail the use of real resources both human and technological (Baltensperger, 1980, p. 27-29). The models developed by Pesek, (1970, p. 357-385) Saving (1977, p. 289-303) and Sealey and Lindley (1977, p.1251-1266) are approaches based on production and cost functions, and enable us to study the banking institutions behaviour from the point of view of profit maximisation.According to the above models, the activity of banking institutions c onsists of providing a range of different financial services (both intermediation and other kinds of services), the production of which can be expressed in accordance with a production function. The inputs of this production function are a combination of different types of factors consisting of real resources whereas the outputs are different possible combinations of assets, liabilities and services. accordingly the production function, along with the balancing of the accounts between assets, liquidity and liabilities, interest rate that are externally set by the market and legally established coefficients, make up the restrictions under which banking institutions must operate and try to maximise their profits.These profits will ultimately depend on the difference between revenue generated from the sale of their services on the one hand and the sum total costs of their inputs both financial and non financial on the other (Sealey and Lindley, 1977, p. 1255 Santomero, 2000, p.3). Th e chase sections will discuss the problematic of the costing structure of real resources in banking institutions and look at how these are classified for management accounting purposes. This will be followed by an overview of the different costing systems identified in the literature, partial costs, full costs and activity based costing. And finally, we will present the findings of an empirical research study concerning the costing systems used by Spanish savings banks.3. The Cost Structure of Banking InstitutionsBefore we proceed to assess the different existing cost systems and their application to banking, we would like to highlight some of the characteristic features of the banking business which influence the cost structure of its costing systems. These characteristic features can be summed up as follows (Sloane, 1991, p.76-79 Sapp, Rebischke et al., 1991, p.56-57) Variable work load the volume of operations fluctuates enormously from one moment to the next, which obviates th e problem of capacity management, given that at certain generation there are peaks whilst at other times there are valleys which means that these resources are underused. High fixed costs resources are usually allocated to covering peaks of activity. However, the cost of these resources does not vary with the volume of transactions, because they have a tumescent fixed component. Predictability of the activity although the demand for services tends to be highly variable, it is relatively easy to predict, because it follows a cyclic behaviour pattern, which offers the possibility of turning part of fixed costs into variable ones by means of outsourcing. Mass services production activities a comparison can be drawn between the high volume of crying operations in banking institutions and traditional industrial mass commodity manufacturing, which facilitates the use of methodologies that originated in industry and the setting up of a standard costing system. junction production and an undefined product the banking product is physically indefinable which makes it more complex to identify. For example, when a banking institution issues a loan to a customer, the latter must open up a current account to meet the loan payments. If on top of this the customer orders a cheque have got on his current account and takes out a life indemnification policy, we have four interrelated products. Low cost traceability given that we are dealing with joint production activities with elevated fixed and indirect costs there are many resources that are shared by activities, customers, products and centres of responsibility. As far as we see it, the most epoch-making factors that influence the applicability of different cost systems in banking institutions are on the one hand, the world-shattering weight of indirect costs in relation to cost objects, which makes it difficult to trace them in relation to cost objects. Similarly, given that a large part of the operations carried out by banking institutions are of a repetitive nature and susceptible to standardisation, this makes it feasible to consider calculating the costs of these operations and allocating them to cost objects, and to introduce the use of standard costs as a planning and control instrument.4. Costs Classification in Banking InstitutionsThe classification of the non financial costs of banking institutions may prove useful in studying the applicability of different cost systems to banking institutions. Although we can make different classifications of these costs, the most relevant for our purposes is the difference between transformation and command processing overhead costs (AECA, 1994a, p.61-62) transformation costs are costs that are generated in profit centres and in usable cost or general services centres. In general, the costs of these centres are directly or indirectly related to the outgo of products and services on the part of customers.At the same time, transformation costs can be divided into direct and indirect costs, depending on their relation to cost objects (AECA, 1994a, p.61) curb costs, are those costs that can be unequivocally and directly allocated to cost objects, in other words their allocation is controlled economically in an individualised fashion. Indirect costs, are costs that cannot be directly allocated to cost objects because there is no exact allocation of funds that enables us to estimate the consumption of these costs by cost bearers, It should be noted that a significant number of transformation costs of banking institutions are dual in nature when viewed from the previous classification criterion, to the extent that certain transformation costs can be direct with respect to the branches network but indirect in relation to products and customers (De la Cuesta, 1996, p.85-87).In banking institutions, transformation costs basically look into to personnel costs, depreciations and other general costs, which although they are diffic ult to allocate to customers and products, are generally easier to allocate to responsibility centres (Cole, 1995, p.152). The second costs category corresponds to overhead costs, which are generated in the banks organisational centres. These costs are generated by the various functions related to management, administration, organisation and control. In general, these are indirect in relation to all the cost objects. These costs are treated as costs assigned to support all the companys functions, and as such they are independent of production volume, the existing product lines and of the markets they serve (AECA, 1994b, p.58).