Seminar on Cost Management

Reaction Paper ABM Lifts Banks Bottom Line

GROUP 3
Amadila Aigar (1210534003)
Rossy Triana Iskandar(1210534007)
Atikah Galuh Wilandra (1210534013)
Novella Carita Amelia (1210534015)

INTERNATIONAL CLASS OF ACCOUNTING

FACULTY OF ECONOMICS
ANDALAS UNIVERSITY
2015

The implementation of activity-based management leads to process reengineering and

increased profitability. The article focused on the activities, modifications and results of
implementing an activity-based management (ABM) system in the banking industry. The
authors provided limited information regarding First Tennessee National Corporations
implementation of ABM as a real life example. Steps necessary for ABM implementation
were described in the article. Furthermore, differences between banking and manufacturing,
which was first to implement activity-based costing, were described, providing an
understanding of the peculiarities in the banking industry. Finally, the article discussed the
modifications necessary for banking applications of ABC and the future plans of First
Tennessee National Corporation.
According to us, its good that banking industry adopt this ABC concepts. In banking
industry, the sale precedes the processing. Sales occurs when a customer open a checking
account. The balance that customer maintained in the checking account materially affects the
profitability gain by the bank. Then, the major processing occurs after that. In other word,
profit determine by customers activity over time which refer to the ABC concept itself. An
ABC system was implemented to support process analysis, design and reengineering. First
Tennessee recognized that cross-subsidization and cross-functional internal processes
inhibited efficiency and effectiveness. ABC resolved those problems. Furthermore, the
customer volume activity determined the total cost and profitability also.
Another fact that proponents our opinion is that banking derived its revenue in two ways, one
by charging services fees, and two by the spread interest rate, which are irrelevant directly to
customers usage. As in terms of Automatic Teller Machines, those with smaller balances
tend to make numerous but small withdrawals, while in contrast, those with larger balances
draw larger amount infrequently.
Furthermore, ABC concept required the identification and classification of activities. As in
banking industry, its already applied. In banking, activities are classified as customer-driven
activities and ongoing concern activities
Adopting ABC concept already proven successfully gain profitability within banking
industry. The first product applied using ABC concept was Certificate Of Deposit (CDs). The
cost of processing CDs is fixed regardless of the magnitude of the certificate but the revenue
is a function dollar amount of the certificates. Which already explain by the Authors,
applying ABC concept, CD experienced tremendous success. And like the Authors, we fully-

agree that Activity Based Costing is firmly set as a cornerstone of continues productivity
improvements at First Tennessee National Bank.
The company reengineered proof operations and used internal benchmarking to apply the
new methods to other locations. Internal benchmarking involved a "root cause analysis"
comparing a less efficient bank location's proof operations against another location where
ABM had been applied.
We agree with the article because activity-based management can assist sector service such as
banking to reduce cost and increase profitability.