Activity‐based cost management in financial services industry

Abstract

The rapid advancement of enormously expanding information technologies and vigorous global competition have caused the irrelevance of conventional management accounting systems (MAS) in providing useful information to assist management’s decision making, planning and control in both service and manufacturing organizations. The shortcomings of traditional MAS, in terms of validity, accuracy, completeness, consistency, understanding and relevance, increase the need for modern MAS, like activity‐based costing (ABC). In growing inadequacies of traditional MAS, ABC can be used as a tool for planning, control and decision making in service management. ABC traces costs to activities rather than products, which provides a more accurate and correct picture of the cost consumption. Furthermore, ABC uses a larger number of cost drivers instead of one or two volume‐based cost drivers in a traditional cost management. However, activity based management (ABM) helps management to make decisions and formulate plans to provide new services, improve existing services and measure performances in order to achieve overall competitive strategies advantages of organizations. Thus, this study attempts to demonstrate the shortcomings of traditional MAS, and the usefulness of ABC and ABM in making decisions on product profitability and performance measurement in services with a particular reference to the financial industry.