Expert answer:case study

Solved by verified expert:The case should have the following structure:Summary of the Young Reader CaseRelationship of the Case to your work experienceRelationship of the Case to material covered in class.SummaryI proved you a 3 examples of my classmates work from the different cases.Finally, when you write about (Relationship of the Case to your work experience) I used to work at the large bank as a customer service and also I worked at a big inference company as a salesman.Last point when you write about (Relationship of the Case to material covered in class.) we covered four chapter 1-Introduction to Managerial Accounting2-Job Order Costing3-Activity-Based Costing and Cost Management4-Cost BehaviorThe number of pages 4 to 5 pages.
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Case​ ​ABC​ ​Trends​ ​in​ ​the​ ​Banking​ ​Sector​ ​–​ ​A​ ​Practitioner’s
Perspective
Summary
In​ ​the​ ​case​ ​study​ ​entitled,​ ​ABC​ ​Trends​ ​in​ ​the​ ​Banking​ ​Sector​ ​–​ ​A​ ​Practitioner’s​ ​Perspective,​ ​the
author​ ​discusses​ ​the​ ​ever-changing​ ​methods​ ​of​ ​tracking,​ ​gathering​ ​and​ ​application​ ​of​ ​costing​ ​in​ ​the
banking​ ​industry.​ ​ ​Costing​ ​among​ ​firms​ ​in​ ​the​ ​financial​ ​services​ ​industry​ ​has​ ​undergone​ ​a​ ​transition​ ​from
traditional​ ​costing​ ​systems​ ​to​ ​activity​ ​based​ ​costing​ ​models.​ ​ ​Like​ ​most​ ​service​ ​industries,​ ​costing​ ​is​ ​an
extremely​ ​cumbersome​ ​and​ ​challenging​ ​task,​ ​but​ ​as​ ​the​ ​author​ ​describes​ ​in​ ​the​ ​article,​ ​it​ ​is​ ​particularly
difficult​ ​in​ ​the​ ​banking​ ​sector.
There​ ​exists​ ​a​ ​culture​ ​among​ ​the​ ​investor​ ​community​ ​of​ ​imposing​ ​increasing​ ​demands​ ​on​ ​firms
and​ ​their​ ​ability​ ​to​ ​grow​ ​profitability.​ ​ ​Corporate​ ​leaders​ ​manage​ ​to​ ​the​ ​profitability,​ ​cost​ ​management,
overhead,​ ​and​ ​earnings​ ​of​ ​firms​ ​in​ ​an​ ​effort​ ​to​ ​deliver​ ​favorable​ ​reporting​ ​to​ ​shareholders,​ ​analysis,​ ​and
other​ ​stakeholders.​ ​ ​In​ ​order​ ​to​ ​deliver​ ​favorable​ ​results​ ​aligned​ ​with​ ​stakeholder​ ​expectations,​ ​corporate
executives​ ​have​ ​recognized​ ​the​ ​value​ ​that​ ​activity​ ​based​ ​costing​ ​provides​ ​to​ ​more​ ​accurately​ ​determine
the​ ​costs​ ​of​ ​processes​ ​and​ ​services​ ​as​ ​they​ ​relate​ ​to​ ​each​ ​customer​ ​or​ ​transaction.​ ​ ​It​ ​has​ ​also​ ​helped​ ​them
to​ ​better​ ​identify​ ​profitability​ ​strengths​ ​within​ ​various​ ​business​ ​units​ ​and​ ​more​ ​precisely​ ​identify​ ​the​ ​types
of​ ​customers​ ​that​ ​are​ ​most​ ​profitable.​ ​ ​This​ ​information​ ​is​ ​critical​ ​when​ ​executives​ ​decide​ ​how​ ​to​ ​best
allocate​ ​resources​ ​of​ ​the​ ​firm​ ​to​ ​market​ ​to​ ​and​ ​attract​ ​those​ ​high​ ​profit​ ​customers.​ ​ ​These​ ​advantages​ ​have
caused​ ​banks​ ​to​ ​make​ ​greater​ ​technological​ ​advancements​ ​and​ ​attract​ ​more​ ​skilled​ ​labor​ ​as​ ​they​ ​pertain​ ​to
the​ ​activity​ ​based​ ​costing​ ​capabilities​ ​of​ ​the​ ​firm.
Activity​ ​based​ ​costing​ ​has​ ​also​ ​aided​ ​corporate​ ​leaders​ ​in​ ​their​ ​pricing​ ​decisions.​ ​ ​By​ ​determining
which​ ​customers​ ​are​ ​most​ ​profitable​ ​(and​ ​which​ ​are​ ​not),​ ​executives​ ​can​ ​devote​ ​more​ ​financial​ ​and
human​ ​capital​ ​to​ ​those​ ​services​ ​that​ ​profitable​ ​customers​ ​desire​ ​most.​ ​ ​Services​ ​that​ ​attract​ ​lower​ ​profit
customers​ ​can​ ​be​ ​abandoned​ ​altogether​ ​or​ ​priced​ ​higher​ ​to​ ​improve​ ​margins.​ ​ ​There​ ​are​ ​many​ ​examples​ ​of
these​ ​types​ ​of​ ​shifts​ ​in​ ​customer​ ​platforms​ ​taking​ ​place​ ​in​ ​the​ ​banking​ ​industry​ ​with​ ​companies​ ​like​ ​Bank
of​ ​America,​ ​PNC,​ ​and​ ​Capital​ ​One​ ​to​ ​name​ ​a​ ​few.
Another​ ​benefit​ ​of​ ​activity​ ​based​ ​costing,​ ​as​ ​it​ ​pertains​ ​to​ ​larger​ ​banking​ ​institutions,​ ​is​ ​the
consistency​ ​in​ ​accounting​ ​models​ ​across​ ​business​ ​units​ ​within​ ​the​ ​same​ ​company.​ ​ ​The​ ​largest​ ​banks
today​ ​are​ ​comprised​ ​of​ ​business​ ​units​ ​such​ ​as​ ​retail​ ​banking,​ ​residential​ ​and​ ​commercial​ ​lending,​ ​credit
card​ ​services,​ ​wealth​ ​management,​ ​investment​ ​banking,​ ​underwriting,​ ​insurance​ ​and​ ​proprietary​ ​trading.
Individual​ ​business​ ​units​ ​conduct​ ​their​ ​own​ ​profit​ ​and​ ​loss,​ ​and​ ​often​ ​operate​ ​as​ ​independent​ ​businesses
with​ ​little​ ​integration​ ​or​ ​coordination​ ​with​ ​other​ ​units.​ ​ ​Having​ ​an​ ​activity​ ​based​ ​costing​ ​method​ ​that​ ​all
lines​ ​of​ ​business​ ​integrate​ ​into​ ​their​ ​accounting​ ​operations​ ​would​ ​help​ ​to​ ​synchronize​ ​units​ ​within​ ​the​ ​firm
leading​ ​to​ ​greater​ ​efficiencies,​ ​lower​ ​overhead,​ ​and​ ​more​ ​profitability.
The​ ​transition​ ​from​ ​traditional​ ​costing​ ​to​ ​activity​ ​based​ ​costing​ ​is​ ​not​ ​a​ ​seamless​ ​one.​ ​ ​There​ ​are
many​ ​obstacles​ ​that​ ​organizations​ ​face​ ​including​ ​time​ ​sequence​ ​of​ ​reporting,​ ​technological​ ​capabilities,
integrity​ ​of​ ​data​ ​gathering​ ​and​ ​reporting,​ ​and​ ​having​ ​a​ ​costing​ ​system​ ​that​ ​can​ ​adapt​ ​to​ ​the​ ​various
services​ ​offered​ ​to​ ​customers​ ​by​ ​an​ ​institution.​ ​ ​For​ ​example,​ ​ATM​ ​costs​ ​per​ ​customer​ ​are​ ​extremely
difficult​ ​to​ ​assess​ ​when​ ​considering​ ​the​ ​costs​ ​of​ ​purchasing,​ ​installation,​ ​electric​ ​utility​ ​to​ ​operate,​ ​paper
supplies​ ​for​ ​receipts,​ ​and​ ​ongoing​ ​maintenance.​ ​ ​It​ ​then​ ​becomes​ ​a​ ​matter​ ​of​ ​spreading​ ​the​ ​combined​ ​costs
over​ ​the​ ​number​ ​of​ ​transactions​ ​per​ ​day,​ ​customers​ ​served​ ​per​ ​day,​ ​and​ ​the​ ​types​ ​of​ ​transactions.​ ​ ​This
type​ ​of​ ​costing​ ​can​ ​be​ ​accurately​ ​assessed​ ​with​ ​activity​ ​based​ ​costing​ ​models​ ​or​ ​software,​ ​however,​ ​it​ ​is
not​ ​straightforward​ ​to​ ​say​ ​the​ ​least.
Relationship​ ​of​ ​Case​ ​to​ ​Work​ ​Experience
More​ ​banks​ ​continue​ ​to​ ​enhance​ ​their​ ​costing​ ​capabilities​ ​and​ ​manage​ ​the​ ​profitability​ ​of
customer​ ​relationships.​ ​ ​One​ ​company​ ​entrenched​ ​in​ ​such​ ​strategic​ ​pursuits​ ​happens​ ​to​ ​be​ ​Capital​ ​One
Financial​ ​Corporation,​ ​where​ ​I​ ​currently​ ​serve​ ​as​ ​Regional​ ​Manager​ ​of​ ​its​ ​investing​ ​unit​ ​for​ ​New​ ​Jersey,
New​ ​York​ ​and​ ​Connecticut.​ ​ ​Capital​ ​One​ ​is​ ​the​ ​eighth​ ​largest​ ​bank​ ​by​ ​total​ ​assets​ ​in​ ​the​ ​United​ ​States.
The​ ​company​ ​employees​ ​nearly​ ​50,000​ ​associates​ ​throughout​ ​its​ ​business​ ​units​ ​which​ ​include​ ​credit​ ​card,
retail​ ​bank,​ ​investing,​ ​business​ ​banking,​ ​middle​ ​market​ ​banking​ ​and​ ​lending,​ ​residential​ ​lending,​ ​and
online​ ​banking.​ ​ ​Initially,​ ​the​ ​company​ ​exclusively​ ​offered​ ​credit​ ​card​ ​and​ ​merchant​ ​services​ ​to
customers;​ ​but​ ​with​ ​a​ ​series​ ​of​ ​acquisitions​ ​the​ ​company​ ​has​ ​transformed​ ​over​ ​time​ ​into​ ​a​ ​full​ ​service
financial​ ​institution.​ ​ ​Some​ ​notable​ ​acquisitions​ ​were​ ​ING​ ​Direct,​ ​Chevy​ ​Chase​ ​Bank,​ ​and​ ​North​ ​Fork
Bank.
Capital​ ​One​ ​was​ ​one​ ​of​ ​the​ ​early​ ​banks​ ​to​ ​first​ ​adapt​ ​to​ ​the​ ​changing​ ​trends​ ​in​ ​how​ ​customers​ ​bank.​ ​ ​They
successfully​ ​recognized​ ​the​ ​impact​ ​these​ ​trends​ ​would​ ​have​ ​on​ ​its​ ​business​ ​and​ ​so​ ​reevaluated​ ​how​ ​it
serviced​ ​its​ ​customers​ ​and​ ​for​ ​which​ ​customers​ ​it​ ​serviced.​ ​ ​One​ ​major​ ​trend​ ​in​ ​customer​ ​behavior
included​ ​no​ ​longer​ ​needing​ ​to​ ​transact​ ​at​ ​a​ ​physical​ ​branch.​ ​ ​The​ ​significant​ ​decline​ ​in​ ​branch​ ​traffic​ ​is
attributed​ ​to​ ​online​ ​banking​ ​capabilities​ ​and​ ​ATM​ ​services.​ ​ ​Customers​ ​increasingly​ ​conduct​ ​banking
transactions​ ​online​ ​to​ ​pay​ ​bills,​ ​transfer​ ​funds,​ ​and​ ​apply​ ​for​ ​credit​ ​cards​ ​and​ ​loans.​ ​ ​ATMs​ ​allow
customer​ ​to​ ​cash​ ​transact​ ​without​ ​having​ ​to​ ​get​ ​out​ ​their​ ​car​ ​or​ ​walk​ ​into​ ​a​ ​branch.​ ​ ​In​ ​light​ ​of​ ​these
changing​ ​behaviors,​ ​Capital​ ​One​ ​has​ ​made,​ ​and​ ​is​ ​in​ ​the​ ​process​ ​of​ ​making,​ ​shifts​ ​in​ ​their​ ​strategy​ ​to
focus​ ​efforts​ ​on​ ​servicing​ ​the​ ​needs​ ​of​ ​profitable​ ​customers​ ​as​ ​well​ ​as​ ​operational​ ​adjustments​ ​derived
from​ ​cost​ ​management​ ​analysis.​ ​ ​These​ ​measures​ ​included​ ​branch​ ​closures,​ ​branch​ ​transformations,
increased​ ​focus​ ​on​ ​customer​ ​service,​ ​and​ ​technology​ ​investments​ ​and​ ​enhancements.​ ​ ​We​ ​will​ ​now
analyze​ ​these​ ​measures​ ​in​ ​greater​ ​detail.
Capital​ ​One​ ​realized​ ​that​ ​branches​ ​with​ ​high​ ​foot​ ​traffic​ ​and​ ​large​ ​transaction​ ​volumes​ ​(deposits,
withdrawals,​ ​loan​ ​payments,​ ​etc.)​ ​did​ ​not​ ​generate​ ​sufficient​ ​revenues​ ​to​ ​justify​ ​the​ ​high​ ​costs​ ​associated
with​ ​maintaining​ ​and​ ​operating​ ​the​ ​branch.​ ​ ​The​ ​costs​ ​associated​ ​with​ ​operating​ ​a​ ​bank​ ​branch​ ​include
rent,​ ​direct​ ​labor​ ​(tellers​ ​and​ ​bankers),​ ​indirect​ ​labor​ ​(manager),​ ​utilities,​ ​supplies,​ ​and​ ​miscellaneous
expenses.​ ​ ​The​ ​company​ ​found​ ​that​ ​the​ ​high​ ​transaction​ ​customers​ ​predominantly​ ​domiciled​ ​in​ ​these
branches,​ ​did​ ​not​ ​have​ ​the​ ​need​ ​for​ ​more​ ​profitable​ ​services​ ​the​ ​bank​ ​offered​ ​such​ ​as​ ​auto​ ​lending,​ ​home
lending,​ ​collateralized​ ​credit,​ ​financial​ ​advisory,​ ​and​ ​business​ ​banking.​ ​ ​The​ ​bank​ ​ultimately​ ​decided​ ​to
permanently​ ​close​ ​these​ ​branches.​ ​ ​Upon​ ​such​ ​branch​ ​closures,​ ​the​ ​bank​ ​observed​ ​that​ ​most​ ​of​ ​the​ ​high
transaction​ ​customers​ ​decided​ ​to​ ​close​ ​their​ ​accounts,​ ​whereas​ ​the​ ​high​ ​balance​ ​low​ ​transaction​ ​customers
(high​ ​profit​ ​customers)​ ​maintained​ ​their​ ​relationship​ ​with​ ​the​ ​bank​ ​even​ ​though​ ​the​ ​accounts​ ​had​ ​been
redomiciled​ ​to​ ​another​ ​branch.​ ​ ​In​ ​conclusion,​ ​the​ ​result​ ​of​ ​the​ ​branch​ ​closures​ ​was​ ​a​ ​reduction​ ​in​ ​the
bank’s​ ​costs​ ​and​ ​removal​ ​of​ ​a​ ​customer​ ​segment​ ​it​ ​had​ ​little​ ​incentive​ ​to​ ​continue​ ​serving,​ ​all​ ​while
retaining​ ​the​ ​high​ ​profit​ ​customers.
​ ​As​ ​for​ ​other​ ​branches​ ​that​ ​did​ ​not​ ​have​ ​high​ ​transaction/low​ ​profit​ ​customers​ ​and​ ​instead​ ​served​ ​mostly
low​ ​transaction/high​ ​profit​ ​customers,​ ​Capital​ ​One​ ​determined​ ​that​ ​the​ ​optimal​ ​strategy​ ​would​ ​be​ ​a​ ​branch
transformation​ ​rather​ ​than​ ​a​ ​branch​ ​closure.​ ​ ​These​ ​branches​ ​would​ ​come​ ​to​ ​be​ ​known​ ​as​ ​Select​ ​Service
branches.​ ​ ​These​ ​branches​ ​are​ ​cashless​ ​and​ ​typically​ ​limited​ ​to​ ​two​ ​bankers​ ​on​ ​the​ ​platform.​ ​ ​They​ ​found
that​ ​these​ ​customers​ ​typically​ ​utilized​ ​the​ ​branch​ ​to​ ​meet​ ​with​ ​bankers,​ ​financial​ ​advisors,​ ​business
bankers​ ​and​ ​loan​ ​officers.​ ​ ​Cash​ ​transactions​ ​are​ ​minimal​ ​and​ ​so​ ​there​ ​is​ ​no​ ​need​ ​for​ ​tellers.​ ​ ​The​ ​Select
Service​ ​branch​ ​allows​ ​the​ ​bank​ ​to​ ​eliminate​ ​the​ ​direct​ ​labor​ ​costs​ ​associated​ ​with​ ​teller​ ​labor,​ ​having​ ​one
manager​ ​manage​ ​multiple​ ​branches,​ ​and​ ​service​ ​high​ ​profit​ ​customers​ ​in​ ​the​ ​ways​ ​those​ ​customers​ ​want
to​ ​be​ ​serviced.
At​ ​the​ ​start​ ​of​ ​2017,​ ​Capital​ ​One​ ​rolled​ ​out​ ​a​ ​new​ ​metric​ ​of​ ​how​ ​it​ ​would​ ​rate​ ​the​ ​performance​ ​of​ ​all
associates​ ​in​ ​its​ ​lines​ ​of​ ​business.​ ​ ​The​ ​metric​ ​is​ ​known​ ​as​ ​Net​ ​Promoter​ ​Score​ ​(NPS)​ ​and​ ​is​ ​the​ ​sole
measurement​ ​the​ ​company​ ​uses​ ​to​ ​verify​ ​whether​ ​or​ ​not​ ​the​ ​company​ ​mission​ ​was​ ​being​ ​delivered​ ​to​ ​its
customers.​ ​ ​The​ ​Net​ ​Promoter​ ​Score​ ​gages​ ​the​ ​customer’s​ ​experience,​ ​the​ ​associate’s​ ​demeanor​ ​and
competencies,​ ​overall​ ​customer​ ​satisfaction,​ ​and​ ​most​ ​importantly​ ​whether​ ​the​ ​customer​ ​would​ ​refer
Capital​ ​One​ ​to​ ​friends​ ​and​ ​family.​ ​ ​The​ ​Net​ ​Promoter​ ​Score​ ​is​ ​Capital​ ​One’s​ ​customer​ ​relationship
management​ ​system,​ ​which​ ​helps​ ​the​ ​company​ ​collect​ ​customer​ ​profitability​ ​information​ ​along​ ​with​ ​other
internal​ ​tracking​ ​systems.
Relationship​ ​of​ ​Case​ ​to​ ​Material​ ​Covered
Activity​ ​based​ ​costing​ ​is​ ​clearly​ ​the​ ​optimal​ ​method​ ​for​ ​banks​ ​to​ ​assign​ ​the​ ​multitude​ ​of​ ​indirect​ ​costs​ ​to
the​ ​services​ ​offered​ ​based​ ​on​ ​the​ ​activities​ ​those​ ​services​ ​require.​ ​ ​The​ ​information​ ​that​ ​activity​ ​based
costing​ ​provides​ ​executives​ ​with​ ​the​ ​clarity​ ​of​ ​precise​ ​costs​ ​associated​ ​with​ ​the​ ​activities​ ​to​ ​deliver
services,​ ​and​ ​the​ ​ability​ ​to​ ​apply​ ​that​ ​data​ ​to​ ​improve​ ​company​ ​performance​ ​through​ ​operational​ ​changes,
cost​ ​reductions,​ ​and​ ​activity​ ​reductions​ ​(as​ ​we​ ​saw​ ​in​ ​the​ ​case​ ​with​ ​Capital​ ​One).
The​ ​real​ ​challenge​ ​with​ ​activity​ ​based​ ​costing​ ​is​ ​the​ ​differentiation​ ​of​ ​business​ ​models​ ​within​ ​the
organization.​ ​ ​Determining​ ​the​ ​time​ ​sequence​ ​is​ ​also​ ​a​ ​variable​ ​that​ ​may​ ​differ​ ​among​ ​business​ ​units
within​ ​a​ ​company.​ ​ ​Once​ ​these​ ​items​ ​are​ ​addressed,​ ​the​ ​benefits​ ​of​ ​activity​ ​based​ ​costing​ ​for​ ​banks​ ​result
in​ ​significantly​ ​improved​ ​data​ ​accuracy​ ​and​ ​better​ ​insight​ ​into​ ​customer​ ​profitability​ ​and​ ​the​ ​selection​ ​of
optimal​ ​platforms.​ ​ ​Activity​ ​based​ ​costing​ ​in​ ​the​ ​financial​ ​services​ ​industry​ ​helps​ ​large​ ​corporations
manage​ ​their​ ​costs​ ​across​ ​multiple​ ​business​ ​units​ ​more​ ​efficiently​ ​and​ ​accurately.​ ​ ​Furthermore,​ ​the
costing​ ​method​ ​also​ ​increases​ ​a​ ​company’s​ ​ability​ ​to​ ​focus​ ​on​ ​high​ ​profit​ ​activities​ ​and​ ​service​ ​high​ ​profit
customers.
Summary
Today,​ ​banks​ ​devote​ ​increasing​ ​amounts​ ​of​ ​financial​ ​capital​ ​to​ ​technological​ ​investments​ ​in​ ​activity​ ​based
costing​ ​systems​ ​and​ ​processes.​ ​ ​Corporate​ ​leaders​ ​of​ ​the​ ​largest​ ​banks​ ​in​ ​the​ ​country​ ​recognize​ ​that​ ​such
focus​ ​is​ ​pivotal​ ​to​ ​their​ ​survival​ ​with​ ​the​ ​rapidly​ ​changing​ ​needs​ ​of​ ​customers,​ ​broadening​ ​of​ ​banking
capabilities,​ ​and​ ​rising​ ​investor​ ​demand.​ ​ ​As​ ​each​ ​bank​ ​has​ ​its​ ​own​ ​operational​ ​complexities​ ​and
challenges,​ ​the​ ​ability​ ​to​ ​attract​ ​and​ ​train​ ​skillful​ ​engineers​ ​and​ ​accountants​ ​is​ ​equally​ ​as​ ​critical​ ​to​ ​the
bank’s​ ​longevity.​ ​ ​Regardless​ ​of​ ​the​ ​financial​ ​services​ ​institution​ ​and​ ​its​ ​business​ ​model,​ ​there​ ​i …
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