Company Overview
Courtney Archibald
Cost 341
Dr. Reis
Buckeye National Bank started with the foundation of providing checking account services
to the small businesses in the area. Although the company had services for individual
customers, the focus was providing services for business accounts. During the latest
economic downturn, the company refocused its goal around an increased market share of
retail customers. Despite the increased number of retail customers, Buckeye’s profits were
declining.
Current System
Currently, Buckeye National Bank allocates costs to retail or business accounts based on a
total dollar value of checks processed. Currently, the indirect costs of their checks processed
equals to $2.85 million divided by $95 million; the company is allocating $.03 per dollar on
each check. Business accounts are assigned 90% of the indirect costs, while retail customers
are absorbing 10% of the costs. Originally, the bank assumed their primary customers
would be businesses, but the company currently holds 150,000 retail customers and 50,000
business customers. Buckeye assumed the dollar amount of checks would be equally
divided out between the two customer types. However, businesses currently hold 90% of
the cost burden.
This has a significant impact on the indirect costs that are allocated to each customer.
Buckeye believes that each business account has a cost of $51.30 while retail accounts are
$1.90. This is quite contrary to what ABC costing allocates. This is a large indication of why
Buckeye cannot gain market share with small business. And conversely why they have a
competitive advantage with retail accounts. The current costing system makes it very
inexpensive to bank there, at $1.90 per customer. Because labor is one of their biggest
expenses, the amount of time that the tellers spend servicing non-business customers has
increased, causing a significant decrease in profit margins for Buckeye.
New Costing System
Under the new costing system, Buckeye has developed three cost activities. These include:
paying checks, providing teller services, and responding to customer account inquiries.
Through the use of these new activity drivers and rates, Buckeye realized that retail
accounts related to $1,672,500 of the indirect costs, whereas business accounts related to
1,177,500 (Exhibit 1). Compared to the original proportions based on paying checks,
Buckeye can see that the new costing system proportions are much more distorted than
they thought (Exhibit 2). The costs per customer account also varied compared to the
traditional costing system. With old rates of $1.90 per customer, they are now $11.15 per
customer. Business rates were thought to be at $51.30 and currently are at $23.54 (Exhibit
3). Overall, this different perspective compared to the old costing system, will make it more
affordable for businesses to bank with Buckeye.
Recommendations
Based on the new costing system, we are able to distinguish margins through a customer
profitability analysis. Through the use of the customer profitability analysis, Buckeye could
identify actions that would potentially increase profits for businesses. For example, high
rates for check processing on business accounts are causing them to lose market share
within that customer group. Changing to an ABC system that allocates the primary expense
of employee salary more adequately could lower business account costs. The reactions of
business customers would be beneficial to Buckeye’s lower rates. Overall, increasing
business accounts would parallel with the company’s original goal.
Buckeye National Bank should consider changing management goals. Instead of giving
bonuses for a gain of new customers, retail or business, the company should only give
bonuses for business customers gained. If they could raise business customers to 75,000, it
would be a 33% decrease in indirect cost per customer. Buckeye bank should also consider
trimming costs in the service call area. Before ABC, management didn’t realize the
implications of adding a service call center. These service calls are primarily from retail
customers. Without ABC, the company was focused around adding retail accounts, which
was causing a larger service call cost. With 95% of the service calls focused on retail,
businesses should not have to pay for those costs (Exhibit 2). Overall, Buckeye National
Bank should continue to grow the business account services, focusing on higher profits.
APPENDIX
Exhibit 1
Assigned to Activity
Paying Checks
Providing Teller Services
Responding to Customer
Account Inquiries
Total Indirect Costs
Total Indirect Cost for Retail Total Indirect Cost for Business
.40(570) = 228
.40(2,280) = 912
6.0(160) = 960
6.0(40) = 240
5.10 (95) = 484.5
5.10 (5) = 25.5
228 + 960 + 484.5 = 1672.5
912 + 240 + 25.5 = 1177.5
Exhibit 2
Activity
Paying Checks
Providing Teller Services
Responding to Customer Account Inquiries
Exhibit 3
Account
Retail
Business
Total Indirect Costs
(1,000s)
228+ 960+ 484.5 = 1672.5
912+ 240+ 25.5 = 1177.5
Retail Proportion
228/1140 = 20%
960/1200 = 80%
484.5/510 = 95%
Business Proportion
912/1140 = 80%
240/1200 = 20%
25.5/510 = 5%
Number of Customers
Indirect Cost Customer
150,000
50,000
1672.5/150,000= 11.15
1177.5/50,000= 23.54