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Activity-Based Costing in the Service Sector: The Buckeye National Bank.

ABSTRACT: The U.S. Bureau of the Census projects that by 2006, the service sector will employ 74 percent of the workforce. This case illustrates why a major segment of the service sector-banks--needs accurate cost information to make strategic decisions, and how more refined accounting systems help fulfill this need.

Buckeye National Bank is a hypothetical bank that has suffered falling profits despite a shift in customer base toward retail customers, which the current information system reports are more profitable than business customers. Following a step-by-step approach, you will develop the Bank's average cost of serving a retail customer account and a business customer account, under (1) the Bank's traditional single allocation base system, and (2) a (pilot test) activity-based costing system. You will analyze these results to determine how and why costs reported by the activity-based system differ from the costs reported by the traditional system, and what this difference means for the Bank's business strategy. Finally, you will consider how the Bank's managers can use the new, more refined activity-based cost data in strategic decision making, including controlling costs and developing more profitable business strategies.


The Buckeye National Bank began operations in the mid-1980s. The bank quickly grew by providing checking account services to many small businesses that preferred to do business with a "local" bank. Although Buckeye initially offered checking account services for individual accounts (retail customers), the bank primarily focused on serving its business customers. During the economic slowdown of the early 1990s that weakened the local economy, growth in business customer accounts began to decline. In response, Buckeye's senior management adopted a new strategy, focusing on increasing the number of retail customer accounts. By aggressively marketing individual retail accounts, Buckeye continued to grow. Today, the Buckeye National Bank strives to maintain a stable base of business customers, while actively competing for an increased market share of retail customers.

Recent income statements (Exhibit A) reveal a decline in the bank's profits. The bank's primary (noninterest) expense consists of salaries and employee benefits. Most full-time employees' first priority is providing services to customers; these employees conduct their administrative responsibilities during slack times. The Bank schedules additional part-time employees to work during peak demand times, from 11 AM-2 PM and Friday afternoons. Flexibility in scheduling part-time employees means that the bank's staff is lean and fully utilized. Buckeye's CEO, Rob Garrison, believes that this staffing arrangement allows the bank to provide speedy customer service, while operating at practical capacity. (That is, the bank's staff is fully utilized in efficient operations, after allowing for bank holidays and other scheduled staff activities such as training.)

To counter falling profits, Buckeye's directors took two actions last year, both aimed at increasing the bank's retail customer base. First, Buckeye established a service call center to respond to customer inquiries about account balances, checks cleared, fees charged, and other banking concerns. Second, Buckeye's directors authorized year-end bonuses to branch managers who met their branch's target increase in the number of customers. However, even though 80 percent of the branch managers met the targeted increase in customer accounts, the Bank's profits continued to decline. CEO Rob Garrison does not understand why profits are declining, given that the Bank is serving more customers. Buckeye's southeast regional manager, Erik Larsen, has also noticed that while small retail customers flock to the bank, the number of business customers is barely stable.

Erik Larsen suspects that Buckeye's costing system may be part of the problem. Buckeye developed its simple costing system when the bank began operations in 1985. The bank does not trace any costs directly to individual customers. It simply treats all (noninterest expense) operating costs identified in the Income Statement in Exhibit A as indirect with respect to the customer line. The bank allocates these indirect costs to either the retail customer line or the business customer line, based on the total dollar value of checks processed (which is readily available because each branch must provide the dollar values of daily transactions for internal control). For the current period, Buckeye processed a total of $95 million in checks, of which $9.5 million was written by retail customers, and $85.5 million was written by business customers. This costing approach was fairly typical of banks and other financial institutions at the time Buckeye developed its cost system.

In college, Erik learned about an alternative costing approach called activity-based costing (ABC). However, the examples he remembered involved manufacturing firms. He wondered whether Buckeye could develop an ABC system, with the business account customer line and the retail account customer line as the two primary cost objects. Erik approached Rob Garrison with this suggestion. Rob was skeptical, exclaiming, "Our profits are going down the tubes and you want me to spend money developing a new accounting system?" However, Erik persisted, and Rob eventually authorized a pilot ABC study using three local branches of the bank.

The ABC implementation team included Erik, the managers of each of the three bank branches, a bank teller, and a representative from the customer service call center. The team began by identifying the activities Buckeye National Bank performed. To start a simple pilot study, the team identified the three most important activities:

1. Paying checks

2. Providing teller services

3. Responding to customer account inquiries at the customer service call center

If this pilot study turned out to be successful, then the team planned to refine the system by conducting a more detailed activity analysis the following year.

The ABC team began by determining the costs that are associated with each of the three activities. The team quickly discovered that, as is typical in service industries like banking, labor (personnel) costs dominate. The ABC team asked each employee to fill out a short questionnaire to find out how the employee spends his or her time. The team then followed up with an in-depth personal interview with each employee. The ABC team used this combined information to estimate the percentage of time each employee spent on each of the three activities: (1) paying checks, (2) providing teller services, and (3) responding to customer account inquiries.

The team then estimated the other (nonlabor) resources that each of the three activities consumed. For example, they traced to the "responding to customer account inquiry" activity: (1) the cost of toll-free telephone lines at the customer service call center, and (2) depreciation on other equipment and facilities the call center personnel use. Similarly, the ABC team estimated the percentage of time the bank's information system was used for check processing and providing teller services (vs. other uses such as compiling periodic financial statements), to determine how much of the equipment's depreciation to assign to the activities "paying checks" and "providing teller services."

To complete the pilot study in a timely fashion, the ABC team based their estimated activity costs on last year's actual data, which were already available. If the pilot study succeeded, then the ABC team planned to develop budgeted indirect cost rates for each activity the following year. The advantage of budgeted rates over actual rates based on the prior year's data is that budgeted rates (budgeted cost associated with the activity divided by the budgeted quantity of the activity's cost driver) can incorporate expected changes in costs and operations.

After examining the three branch banks' indirect costs (that is, the cost items making up the branch banks' noninterest operating expenses), the ABC team classified the annual costs in each activity's cost pool (hereafter, all numbers are in thousands) [1] as shown in Exhibit B.

The team identified the following cost drivers [2] for each activity cost pool:
Activity Cost Pool         Activity Cost Driver
Paying checks              Number of checks processed
Providing teller services  Number of teller transactions
Responding to customer     Number of account inquiry calls
 account inquiries         to customer service call center

The ABC team estimated that for the three pilot-test bank branches, the retail and business customer lines experienced the annual activity levels (in thousands) as shown in Exhibit C. For example, Exhibit C reveals that retail customers had 160,000 teller transactions and made 95,000 account inquiry calls to the customer service call center.

Buckeye National Bank currently services 150,000 retail customer checking accounts and 50,000 business customer checking accounts. The bank earns net interest revenue on the balances that customers keep in their checking accounts. [3] On average, the bank earns the following annual revenue from each type of account:

Average annual revenue per retail customer account $10

Average annual revenue per business customer account $40


Your task is to assist Erik Larsen and his ABC team by providing the following information:

1) Under the original (old) cost system:

A) Compute the single indirect cost allocation rate that the bank would use to allocate the total indirect costs presented in Exhibit B.

B) Use your answer to part A to determine the total annual indirect cost assigned to:

(i) the retail customer line, and (ii) the business customer line. What drives these allocations?

C) What proportion of the total indirect cost is assigned to: (i) the retail customer line, and (ii) the business customer line? Why? That is, what is the underlying rationale for indirect cost allocation under the old system? What assumption must hold approximately true for the original cost allocation procedure to generate "accurate" customer cost information?

D) Use your answer to part B and data on the number of retail and business accounts to determine: (i) the indirect cost per retail account, and (ii) the indirect cost per business account.

E) Assuming there are no direct costs or other indirect costs, compute the average contribution to profit per account for retail customers and for business customers. What business strategy would a manager using the original cost allocation system likely adopt? Why?

2) What are the signs that Buckeye's original cost system is "broken," such that it needs refinement or improvement?

3) Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities:

A) Paying checks

B) Providing teller services

C) Responding to customer account inquiries

4) Use the following schedule to compute the total indirect cost allocated to each customer line (show your computations beside the activity description):
                                Total Indirect  Total Indirect Cost
                                Cost Assigned       Assigned to
                                  to Retail          Business
Activity                        Customer Line      Customer Line
Paying checks
Providing teller services
Responding to customer account
Total Indirect Costs

5) What proportion of each activity is attributable to: (i) the retail customer line, and (ii) the business customer line?

6) Using the ABC data from Requirement 4, compute (i) the indirect cost per retail customer account and (ii) the indirect cost per business customer account.

7) Explain why the results in Requirement 1, Part D, and Requirement 6 differ. Be specific.

8) Using the ABC data, compute the average contribution to profit per account for both retail and business customers. What business strategy would a manager using the ABC cost system likely adopt? How does this result compare to your response to Requirement 1, Part E?

9) Recall Buckeye National Bank's bonus-based incentive plan to increase the number of customers. Do you believe this strategy is wise? Would you suggest any change in strategy based on the ABC analysis?

10) Activity-based management (ABM) refers to managers' use of ABC data in making business decisions. How can Buckeye's managers use the ABC data to plan more profitable marketing strategies? How can Buckeye's managers use ABC information to identify opportunities to trim costs while still satisfying customers' needs?

11) Why might Erik Larsen have suspected that the benefits of ABC would likely outweigh the costs of implementation at Buckeye National Bank?

12) Why do you think it is important for a CEO or a bank branch manager to understand ABC?


Background and Purpose

Textbook illustrations and pedagogical cases on activity-based costing (ABC) typically focus on manufacturing applications. [4] However, the U.S. Bureau of the Census projects approximately 74 percent of the workforce will be employed in the service sector by 2006 (U.S. Bureau of the Census 1999). Furthermore, ABC and customer costing are increasingly popular among service organizations such as financial institutions and health care organizations.

This structured case uses a customer-costing context to help instructors introduce ABC to undergraduate students in the initial sophomore- or junior-level management accounting or cost accounting course (although we have also successfully used adaptations of the case in introductory M.B.A. courses). First, the case presents a structured and straightforward ABC illustration that is more comprehensive than examples found in most undergraduate texts. Structured cases like Buckeye National Bank (BNB) provide an educational bridge between textbook problems and more in-depth and intentionally ill-structured Harvard Business School-style cases that students may encounter later in their educational experiences. Second, this case integrates the conceptual advantages of ABC over traditional allocation systems with the computational steps necessary to' implement ABC, and also requires students to consider how managers use ABC and customer cost information in making strategic decisions (activity-based management). Final ly, the BNB case illustrates ABC and customer costing in a nonmanufacuring environment, focusing on an important industry in the service sector--banking.

The case provides students with the opportunity to apply their (cost allocation) accounting knowledge to address real-world problems. The Accounting Education Change Commission's (AECC) Position Statement Number One (AECC 1990) lists the ability to apply accounting knowledge in realistic situations as one of the capabilities accounting students must acquire. Assigning parts or all of the case as group work provides opportunities to apply problem-solving skills, to work with others, and to better understand how changes evolve in an organization. These educational opportunities help students develop intellectual, interpersonal, and general business skills (AECC 1990).

The structured flow of the BNB case requirements leads the student through the cost-allocation process, first under a traditional system, then under ABC. This explicit contrast helps students understand how these two costing approaches affect strategic corporate decisions, and reinforces the importance of accurate cost information in a competitive industry. The banking scenario and banking activities are designed to be familiar even to introductory accounting students.

This case assumes the introduction to ABC occurs early in the cost/managerial course following job costing. Many students will not have covered capacity considerations at this point. Consequently, the case avoids capacity issues by stipulating that actual activity levels approximate practical capacity. [5] In addition, because the case focuses on introducing ABC, consideration of activity-based management (ABM) occurs near the end of the case's requirements, in conjunction with a discussion of how managers can use ABC data to make strategic business decisions.

Suggested Teaching Strategy

The BNB case is quite flexible. It can be used as an in-class lecture exercise, as an out-of-class individual or group assignment, or some combination of these. Table 1 classifies requirements 1-12 by teaching objective. Instructors may choose to assign only a subset of requirements 7-12, depending on the desired emphasis. The teaching notes for requirements 2 and 7-12 are intended to facilitate class discussion. Our experience suggests that undergraduate students' responses to items 2 and 7-12 are less developed than responses of graduate students (enrolled in introductory management accounting courses) who have the benefit of work experience. However, these requirements prompt students at all levels to consider how managers actually use accounting information in making strategic business decisions.

To spark student interest in why banks would use ABC, we suggest assigning the Wall Street Journal article by Brooks (1999), reprinted as an Appendix to this case, prior to covering the BNB case. The article explains that, in an effort to attract and retain profitable customers, banks are providing extra services and benefits targeted specifically to their most profitable customers. However, to identify which customers provide the bank the most profit, the bank must first assign costs to customers based on their usage of bank services. The BNB case illustrates how banks can design ABC systems to provide such customer cost information.

The BNB case is specifically designed for undergraduate students early in their accounting education. It has been used in a number of educational venues, including undergraduate introductory management accounting, junior-level cost/managerial accounting, and even introductory M.B.A. management accounting courses. The case has been used by instructors at four different institutions, ranging from a small private university to large state universities. We have used the case as an in-class exercise, as an out-of-class assignment, and as part of an examination. Most recently, we used the case in a junior-level cost/management accounting course as an out-of-class assignment that we then discussed in class. A survey of the students indicated that they believed the case met its learning objectives. Following are the mean responses of 81 students on a five-point Likert scale where 1 = strongly disagree, 2 = disagree, 3 = neither agree nor disagree, 4 = agree, and 5 = strongly agree: "The case helped me understand how a service firm would implement and then use ABC" (4.2); "The case helped me understand how to compute ABC costs" (4.1); "The case helped me understand why costs reported by an ABC system may differ substantially from costs reported by traditional single-allocation base systems" (4.1); "The case helped me understand why service firms need accurate cost information" (4.2); and "The case helped me understand how managers can use ABC information to control costs and to develop more profitable business strategies" (4.1). Students also agreed that the case was realistic (3.9).

Other instructors who have used this case indicate that it is more comprehensive than examples in the assigned textbooks, while the students enjoy the realistic scenario. One instructor commented that "the case helped students to understand that 'activities' could be interpreted broadly and that ABC applies to service institutions. It also helped them to see that customers have costs, and that organizations can form strategy around the services they offer and the type of customers they try to attract....These customer cost and strategy issues are seldom discussed in initial accounting classes, even though they figure significantly in strategy or marketing. So I think this case helped students tie in the ABC decision effects to issues they considered in other classes."

The case is designed to efficiently illustrate ABC and customer costing, and their strategic decision implications, to accounting (and nonaccounting) students who are not sophisticated users of accounting information. When we use the case in M.B.A. and Executive M.B.A. (introductory) management accounting courses, we typically make the case less structured and thus more challenging by replacing requirements 1 and 3-8 with the following simple instruction:

Compute the profit (loss) per account for: (1) the retail customer line and (2) the business customer line, under both (a) the original cost system and (b) the ABC system.

The discussion can then rapidly focus on how business decisions depend on accurate cost information and the advantages of implementing ABM. [6]


Requirement 1

Requirement 1 reviews indirect cost allocation in a conventional costing system. Students must understand a single allocation-base system before attempting ABC. Requirement 1 shows students how the original, single-cost-pool system allocates indirect costs to the retail and business customer lines. The results provide a basis for comparison with the ABC system in Requirement 3.

A) The indirect cost allocation rate:

$2,850 total indirect costs/$95,000 total value of checks processed = $0.03 per dollar processed.

B) The total indirect cost assigned to (i) the retail customer line, and (ii) the business customer line:
                      (i) Retail Line  (ii) Business Line   Total
$ value of checks
  processed               $9,500            $85,500        $95,000
Cost per $ processed      x 0.03             x 0.03         x 0.03
Total indirect cost         $285             $2,565         $2,850
These allocations are driven by the
dollar value of the checks processed.

C) The proportion of the total indirect cost assigned to: (i) the retail customer line, and (ii) the business customer line:
(i) Retail line       $ 285  10%
(ii) Business line    2,565  90%
Total indirect cost  $2,850

The original system assumed that indirect costs are incurred in direct proportion to the dollar value of the checks processed. Since retail customers wrote only 10 percent of the dollar value of the checks ($9,500/$95,000), the original cost system assigned the retail line only 10 percent of the total indirect costs tabulated in Exhibit B. Similarly, the original system allocated 90 percent of the indirect costs to the business customer line because business customers wrote 90 percent of the dollar value of the checks processed. This allocation is approximately accurate only if the indirect costs in Exhibit B are incurred in direct proportion to the dollar value of the checks each customer line writes.
D) The annual indirect cost per (i)
retail account, and (ii) business
                                    (i) Retail      (ii) Business
Total indirect cost                          $285           $2,565
[divided by] Number of accounts  [divided by] 150  [divided by] 50
Indirect cost per account                   $1.90           $51.30
E) The average annual profit
per account for retail
custoemrs and for business
                            Retail   Business
Revenue per account         $10.00    $40.00
Cost per account           ($ 1.90)  ($51.30)
Profit (loss) per account   $ 8.10   ($11.30)

The original cost system suggests retail customers are profitable, but business customers are not. This suggests BNB should pursue a strategy of increasing the retail-customer base (e.g., awarding bonuses for attracting and retaining new retail customers, pampering retail customers). BNB also should try to make business customers more profitable, perhaps by increasing fees for services, requiring businesses to hold higher account balances (to increase the interest revenue the bank earns from the business accounts), or increasing the "interest spread" on business accounts. This interest spread (as explained in case note 3) is a major source of banks' profits.

Figure 1 summarizes how the original cost system assigns costs to the retail and business customer lines. We suggest reproducing Figure 1 on an overhead transparency, handout, or PowerPoint slide, and then using its visual structure as a benchmark for comparison to the subsequent ABC analysis.

Requirement 2

Broken cars and computers simply stop running. In contrast, "broken" or outdated cost systems continue spewing out (potentially misleading) costs. Consequently, managers need to recognize clues that the cost system needs refinement.

The original cost system was developed when the bank primarily served business customers. BNB then shifted its focus to increasing its retail customer base. This shift significantly changed the relative proportions of total bank resources expended on the two types of customers, with retail customers consuming relatively more resources, and business customers consuming relatively less. For example, the bank established a customer account inquiry call center, a service used primarily by retail customers. However, despite the significant change in BNB's customer mix, the original cost system remained intact.

Other symptoms that BNB's original cost system may be "broken" include:

* Profits are declining even though the bank is serving more customers. Use the Income Statement in Exhibit A to illustrate this point. Although net interest income is growing at a modest rate as a result of the expanding retail customer base, noninterest expense (largely the indirect costs on which the case focuses) is growing more rapidly. This is one reason that net income declines from 20x3 to 20x5.

* The original cost system (Requirement 1) suggests retail customers are more profitable than business customers, but profits are declining despite a shift in the mix of customers toward retail customers.

* The cost system is an old (1985), single-allocation-base system.

* The cost system has not changed since BNB added the new customer account inquiry call center. Retail customers are more likely than business customers to use the account inquiry call center, so establishment of this center suggests that BNB's cost of serving its two customer lines may have changed significantly.

* The manager (Erik Larsen) does not trust the accounting system's numbers.

* CEO Rob Garrison does not understand the results.

Cooper (1987) provides a straightforward discussion of the symptoms of a "broken" cost system; this reading can be assigned to advanced undergraduate or graduate classes. However, keep in mind that although the above bulleted points are often symptoms that the cost system needs refinement, they are not rigid guidelines. For example, profits could decline even though the number of customers is increasing if the business environment is becoming increasingly competitive. While none of the symptoms provides conclusive evidence that the cost system is to blame, the pattern of several symptoms suggests that BNB should consider whether its cost system would benefit from refinement.

Requirements 3 and 4

To help students see the big picture, we suggest walking through the case in class to explicitly relate your textbook's "steps in performing ABC" to the BNB case. You can easily adapt the following steps to match those in your textbook. If time is short, simply focus on steps 5 and 7 (computing the indirect cost allocation rates for Requirement 3 and allocating the costs for Requirement 4).

Step 1: In ABC, the first step is identifying the activities. BNB's ABC team identified three activities:

1. Paying checks

2. Providing teller services

3. Responding to customer account inquiries

Step 2: The second step in ABC is estimating the aggregate costs, or cost pool, associated with each activity. The ABC team used activity analysis as explained in the case to identify the personnel, equipment, and other costs of each of the three activities:

1. Paying checks: $700 + $440 = $1,140

2. Providing teller services: $1,000 + $200 = $1,200

3. Responding to customer account inquiries: $450 + $60 = $510

Steps 3 and 4: The third step in ABC is identifying the cost driver for each activity that will link the cost of that activity with the customers who use the activity. The fourth step is estimating the total quantity of each cost driver. The ABC team identified the following cost drivers and estimated quantities for each of the three activities: [7]
                                                     Total # Units
Activity                   Activity Cost Driver      of Cost Driver
Paying checks              Checks processed              2,850
Providing teller services  Teller transactions             200
Responding to customer     Account inquiry calls to
 account inquiries          customer service               100
                            call center

Because the pilot study is based on last year's actual data, step 4 uses the total actual number of units of each cost driver. In the future, however, BNB's ABC team has decided that the calculation in step 4 will use estimated (budgeted) activity-level information, so that the activity cost allocation rates can reflect expected changes in each activity (see Kaplan and Cooper 1997).

Step 5: The fifth step is computing the indirect cost allocation rate for each activity. (Divide activity costs in step 2 by the quantity of activity cost driver in step 4.)

Paying checks: $700 + $440/2,850 = $1,140/2,850 = $0.40 per check processed

Providing teller services: $1,000 + $200/200 = $6 per teller transaction

Customer account inquiry: $450 + $60/100 = $510/100 = $5.10 per account inquiry call

Step 6: The sixth step in ABC is obtaining the actual quantity of the cost driver each cost object uses in order to estimate the resource demands of each cost object. In this case, the two cost objects are the retail customer line and the business customer line. The ABC team estimates that each customer line will use the following quantities of the cost drivers: [8]
                         # of Units       # of Units
                        of Activity      of Activity
                        Cost Driver      Cost Driver
Activity               Used by Retail  Used by Business
Cost Driver              Customers        Customers
Checks processed            570             2,280
Teller transactions         160                40
Account inquiry calls
  to customer service
  call center                95                 5
Activity               Total # Units
Cost Driver            of Cost Driver
Checks processed           2,850
Teller transactions          200
Account inquiry calls
  to customer service
  call center                100

Step 7: The seventh step in ABC is allocating the cost of each activity to the cost object. BNB allocates the costs to the retail and business customer lines, by multiplying the activity's indirect cost allocation rate from step 5 by the number of units of the activity's cost driver in step 6:
                                           Total Indirect
                                           Cost Assigned
                                             to Retail
Activity                                   Customer Line
Paying checks [$0.40 x (570; 2,280)]          $ 228.00
Providing teller services [$6 x (160; 40)       960.00
Responding to customer account
  inquires [$5.10 x (95; 5)]                    484.50
Total indirect costs                         $1,672.50
                                           Total Internet
                                           Cost Assigned
                                            to Business
Activity                                   Customer Line
Paying checks [$0.40 x (570; 2,280)]          $ 912.00
Providing teller services [$6 x (160; 40)       240.00
Responding to customer account
  inquires [$5.10 x (95; 5)]                     25.50
Total indirect costs                         $1,177.50

Figure 2 summarizes how the ABC system assigns costs to the retail and business customer lines. Compare the visual structure of the ABC system in Figure 2 with the original system in Figure 1. The ABC team uses the activity analysis described in the case to identify the cost of personnel, equipment, and other resources required for each of these activities. BNB then assigns the costs of each activity, for example the "paying checks" activity, to the retail and business customer lines, based on how much of the "paying checks" activity the customer line actually used. Thus, each customer line receives three indirect cost allocations, based on its actual usage of each of the three activities. We use transparencies, handouts, or PowerPoint slides of Figure 2 to trace the flow of resources to the activities, and then on to the customer line cost objects.
Requirement 5
The proportion of each activity that is
attributable to: (i) theretail customer
line, and (ii) the business customer line:
               Paying Checks  Providing Teller Services
(i) Retail        570 (20%)           160 (80%)
(ii) Business   2,280 (80%)            40 (20%)
     Total     2,850 (100%)          200 (100%)
               Responding to Customer
                 Account Inquiries
(i) Retail            95 (95%)
(ii) Business          5 (5%)
     Total           100 (100%)
Requirement 6
The ABC annual indirect cost
per retail and business customer
account is:
                           (i) Retail  (ii) Business
Total indirect cost         $1,672.50      $1,777.50
+ Number of accounts             +150            +50
Indirect cost per account      $11.15         $23.55

Requirement 7

Use Requirements 1C and 5 to illustrate why costs shifted as they did. The original cost system allocated all indirect costs based on the dollar value of the checks processed. Retail customers wrote 10 percent of the value of checks processed and business customers wrote 90 percent of the dollar value of checks processed. Thus, the original cost system allocated 10 percent of the indirect costs to retail customers and 90 percent to business customers. We use overhead transparencies, handouts, or PowerPoint slides of Figure 3 to help students visualize the allocation under the original system.

The ABC analysis shows that retail customers use much more than 10 percent of the three activities: (1) paying checks, (2) teller services, and (3) responding to customer account inquiry calls. The solution to Requirement 5 shows that retail customers wrote 20 percent of the (number of) checks processed, made 80 percent of the teller transactions, and 95 percent of the account inquiry calls to the customer service call center. Whereas the original costing system suggested that retail customers consumed only 10 percent of these resources, the ABC analysis clearly shows that retail customers consumed significantly more than 10 percent of these three activities. The new ABC system allocates the indirect costs to the retail and business customers based on the proportion of each activity's resources that the customer line consumed. Because retail customers wrote 20 percent of the checks processed, the ABC system considers these customers as consuming 20 percent of the bank's "check paying" resources, so they are allocated 20 percent of the costs associated with the paying checks activity. Retail customers make 80 percent of the teller transactions, so they are assigned 80 percent of the costs associated with the teller services activity. Retail customers are assigned 95 percent of the customer account inquiry costs because they make 95 percent of the account inquiry calls. We use overhead transparencies, handouts, or PowerPoint slides of Figure 4 to show how this more refined assignment of these activities' costs allocates 59 percent ($1,672.50/$2,850) of the total indirect costs to retail customers and only 41 percent ($1,177.50/$2,850) to business customers.

Comparing Figures 3 and 4 helps students see why ABC shifts costs out of the business customer line and into the retail customer line. This shift arises because retail customers use a much greater proportion of the teller transactions (80 percent) and customer account inquiry (95 percent) activities than of the dollar value of checks processed (10 percent). The original system that allocated all the indirect costs based on the dollar value of checks processed assigned too little cost to the retail customers (failing to recognize that they make 80 percent of the teller transactions and 95 percent of the calls), and too much cost to the business customers, who write 90 percent of the dollar value of the checks, but make only 20 percent of the teller transactions and only 5 percent of the customer account inquiry calls. The more refined ABC system more accurately estimates the costs of serving each type of customer, based on the customer's use of BNB's resources.
Requirement 8
Using the ABC data, the average annual profit
per account for retail and business customers is:
                          Retail   Business
Revenue per account       $10.00    $40.00
ABC cost per account      (11.15)   (23.55)
ABC profit (loss) per
 account                  $(1.15)   $16.45
Original system's profit
 (loss) per account        $8.10   $(11.30)

The ABC customer cost data suggest business customers are profitable, but retail customers are not, which is exactly opposite the conclusion reached using the original cost data. This example illustrates how ABC can significantly affect management's strategy. The ABC data suggest BNB should emphasize business customers (e.g., awarding managers bonuses for attracting and retaining business customers, pampering business customers). The bank can also try to make retail customers more profitable, perhaps by increasing fees for services, requiring retail customers to maintain higher account balances, or increasing the interest spread on retail accounts.

Requirement 9

The ABC customer cost data suggest that management's strategy to increase the retail customer base rather than the business customer base was unwise. Management made this decision based on the assumption that the bank's original cost system provided accurate cost information. Unfortunately, the ABC data show that the retail customers are not currently profitable for BNB. Given the existing revenue and cost structure (and assuming the largely labor-related indirect costs are mostly variable), BNB may want to provide a bonus for attracting and retaining new business customers only. For retail customers, the bank should consider changing the revenue structure (e.g., increasing the required minimum balance for retail checking accounts) or the cost structure (e.g., developing methods that deliver the same level of service at a lower cost, such as encouraging retail customers to use ATMs or online banking rather than expensive teller services, or possibly cutting back service at the customer account inquiry center ).

Requirement 10

ABC provides more accurate cost information that managers can use in making important business decisions. Activity-based management (ABM) refers to using ABC information to make decisions that increase profits while satisfying customer needs. Managers use ABC information in making pricing and product or customer mix decisions, in identifying opportunities to cut costs, and in routine planning and control.

ABC customer cost data can help BNB's managers develop more effective marketing strategies by more appropriately pricing their services and assessing the profitability of different mixes of customers and/or services. For example, after recognizing that attracting and retaining business accounts is the key to profitability (given the existing cost and revenue structure), BNB may want to add special services for business customers. In a recent Wall Street Journal article, reprinted as an Appendix to this case, Brooks (1999) highlights new services that banks provide to retain their most profitable customers--from special expedited toll-free phone lines to waiving certain fees. In contrast, BNB should be wary of encouraging retail customer growth unless it increases the revenues or reduces the costs of serving retail customers.

BNB's managers can also use ABC data to pinpoint opportunities to improve production (or service) processes and trim costs by reducing: (1) the cost per unit of the activities, or (2) customers' consumption of the activities. For example, highlighting the costs of each activity may help BNB find ways to trim the indirect cost per unit of the cost driver. The bank may train customer account inquiry representatives to handle more calls per hour. This can reduce the cost per call if the bank can then handle the call load with fewer customer service representatives. To cut the per-check cost of paying checks, BNB might purchase more efficient check-processing systems. ABM can also help the bank reduce customers' consumption of activities that drive costs (while maintaining their business). For example, teller services, a relatively high-cost activity, provides a promising starting point for managers looking for significant cost savings. Management may be able to develop creative lower-cost alternatives to reduce customers' use of expensive teller services, such as encouraging customers to use Automatic Teller Machines (ATMs) or to switch to Internet banking. The bank may also develop a web-based account information site that allows customers to access their accounts through the Internet, thereby answering many of their own questions, and reducing the number of inquiries to the customer service call center.

Requirement 11

For BNB, the benefits are likely to outweigh the costs of ABC. First, BNB operates in a highly competitive environment. In competitive industries, accurate cost information is essential for setting competitive prices that still allow the company to earn a profit. Competitors will capitalize on a company's mispricing, especially by cherry-picking high-volume profitable products, services, or customers that the company overprices. In this case, BNB is vulnerable to losing its business customers, whose costs are far less than the revenues they provide BNB. In addition, ABC can pinpoint opportunities for cost savings, which increase the bank's profit or are passed on to customers in lower "sale prices" (for example in this context, by reducing the amount of the minimum required account balances). Second, most of BNB's costs are indirect. ABC is most valuable to companies with high indirect costs, because if indirect costs are low, it does not matter how they are allocated. Third, ABC has a material effect when d ifferent customers/products/services use different amounts of the company's resources. At BNB, retail and business customer lines use different amounts of the bank's resources for paying checks, teller services, and customer account inquiry services. Finally, costs of ABC include information technology and accounting expertise to implement the system and to record cost driver data. Given the magnitude of the data processing requirements, banks typically possess advanced information technology and accounting expertise. All these factors suggest that for BNB, the benefits of ABC are likely to outweigh the costs.

Requirement 12

ABC is not just an accounting exercise. Managers outside the financial function need to understand ABC so that they can use the resulting cost information when making important decisions such as setting prices, analyzing product and customer profitability, and identifying opportunities to trim costs. As requirement 10 briefly discusses, managers engaged in ABM use ABC information to guide strategic product emphasis, process improvement, and cost-reduction decisions. Finally, nonaccounting managers need to understand ABC because they often serve on ABC teams. These cross-functional teams typically include managers actively engaged in the firm's core operations, in addition to accountants.

Linda Smith Bamber is a Professor at the University of Georgia and K E. Hughes II is an Assistant Professor at Louisiana State University.

We appreciate the helpful suggestions and comments from Barbara Apostolou, Michael Bamber, Tom Harrison, Charlene Henderson, Sue Ravenscroft (associate editor), David E. Stout (editor), and two anonymous reviewers.

(1.) An activity's cost pool is simply a grouping, or aggregation, of all the individual costs associated with that activity. The bank's ABC team created separate activity cost pools for the costs associated with each of the three activities: (1) paying checks, (2) providing teller services, and (3) responding to customer account inquiries.

(2.) A cost driver is a factor, such as the number of checks processed, that causally affects costs. For example, the costs associated with the activity "paying checks" rise and fall as the quantity of the cost driver (the number of checks processed) rises and falls.

(3.) The bank earns net interest revenue by managing the "interest rate spread." This spread is the difference between the interest rate the bank earns on customer deposits (say 5 percent), less the interest rate the bank pays the customer on the average checking account balance (say 4 percent).

(4.) Pedagogical ABC cases set in the manufacturing sector include Adams (1997), Albright et al. (1992), Tabor and Stanwick (1996), Wisner and Roth (1998), Brewer et al. (2000), and Platt and Towry (2001).

(5.) Cooper and Kaplan (1992) and Kaplan and Cooper (1997) discuss the importance of capacity in ABC. In their teaching note, Kaplan and Cooper (1997) describe ABC systems as resource usage models in which:

Activity Availability = Activity Usage + Unused Capacity

The left-hand term measures the resources acquired by the firm. The first right-hand term measures the firm's usage of its available resources. The difference between resources acquired and resources used is unused capacity. Kaplan and Cooper (1997) suggest that firms set the denominators of activity-cost allocation rates to activity availability (i.e., the firm's practical capacity). Since these rates are multiplied by actual usage, the cost of unused capacity is not assigned to products and customers. This approach highlights unused capacity costs for future management action (for example, future elimination of unused capacity or putting the capacity to productive use).

(6.) We have also modified the case by adding additional activities (such as ATM transactions and processing returned checks), and by adding additional cost line items to Exhibit B that require students to split the cost across activity cost pools. For example, salaries of check-processing personnel might be split across the "paying checks" activity and a new activity for processing returned checks.

(7) In more advanced classes, you may want to link BNB's pilot ABC study to the activity-cost hierarchy. Horngren at al. (1999) describe the following four-level hierarchy:

(1.) Unit-level activities are performed for each unit of product or service. Erik Larsen considers "paying checks" and "providing teller services" as unit-level activities.

(2.) Batch-level activities are performed for groups of products or services rather than for individual units. For example, setting up machines to produce a batch of a specific product is a batch-level activity. For simplicity, BNB's ABC pilot study does not identify any batch-level costs. Thus you may want to provide examples of batch-level activities from manufacturing (e.g., setups, material handling), and ask whether students would expect to find more or fewer batch-level activities in service firms (especially where each service represents a unique demand on resources, such as in this case) or in manufacturing.

(3.) Product-sustaining activities, service-sustaining activities, and customer-sustaining activities support individual products, services, or customers. Erik considers "responding to customer account inquiries at the customer service call center" to be a customer-sustaining activity.

(4.) Facility-sustaining activities are general activities that support the organization as a whole, but that cannot be traced to individual products or services, such as the CEO's activities. Because it is not possible to identify cost drivers for facility-sustaining costs, many ABC systems exclude these costs, or allocate them using a general allocation base. For simplicity, the BNB ABC team excluded this type of activity from the pilot study.

(8.) Students may ask whether step 4 is out of order, in that the total quantity of the cost driver is used in step 4, while its components by customer class are used in step 6. The pilot study is based on historical data, so total costs and quantities of the cost drivers are already available. If the pilot study succeeds and BNB implements ABC firm-wide, then BNB's ABC team has decided that the calculation in step 4 will use data that are budgeted (and therefore available at the beginning of the period). The advantage of budgeted rates is that they can reflect expected changes in the costs or activity levels associated with each activity (see Kaplan and Cooper [1997] for a discussion of the use of budgeted rates in ABC). Step 6 will continue to use the actual amounts of each cost driver consumed by the two customer classes, which is not known until after the activity has occurred. Therefore, for this particular example, the two steps are in the proper sequence.


Accounting Education Change Commission (AECC). 1990. Objectives of education for accountants: Position statement number one. Issues in Accounting Education (Fall): 307-312.

Adams, S. J. 1997. Quality dairy case. Issues in Accounting Education (Fall): 385-398.

Albright, T. L., R. W. Ingram, and M. A. Lawley. 1992. The Beville manufacturing case: Using factory-simulation software to teach the concepts of activity-based costing and nonfinancial performance measures. Journal of Accounting Education (Fall): 329-348.

Brewer, P., R. Campbell, and R. McClure. 2000. Wilson Electronics (A) and (B): An ABC capstone experience. Issues in Accounting Education (August): 413-458.

Brooks, R. 1999. Unequal treatment: Alienating customers isn't always a bad idea, many firms discover. Wall Street Journal (January 7): A1.

Cooper, R. 1987. Does your company need a new cost system? Journal of Cost Management (Spring): 45-49.

-----, and R. Kaplan. 1992. Activity-based systems: Measuring the costs of resource usage. Accounting Horizons 6 (3): 1-13.

Horngren, C., G. Foster, and S. Datar. 1999. Cost Accounting: A Managerial Emphasis. Upper Saddle River, NJ: Prentice Hall.

Kaplan, R., and R. Cooper. 1997. Using Activity-based Costing with Budgeted Expenses and Practical Capacity. Harvard Business School Case 9-197-083. Boston MA: HBS Press.

Platt, D., and K. Towry. 2001. Pecos products: A project introducing complexity into the study of activity-based costing. Issues in Accounting Education (February): 99-124.

Tabor, R. H., and S. D. Stanwick. 1996. Instructional case: Griffen textile company. The Accounting Educators' Journal (Fall): 122-145.

U.S. Bureau of the Census. 1999. Statistical Abstracts of the U.S. 1999. Washington, D.C.: Government Printing Office.

Wisner, P. S., and H. P. Roth. 1998. Metalworks company. Issues in Accounting Education (November): 1043-1057.
Case Requirements Classified by Selected
Teaching Objectives
Case         Traditional   Step-by-Step    Conceptual     Group
Requirement    Costing    Implementation  Requirements  Discussion
 1                X                                         X
 2                X                            X            X
 3                              X
 4                              X
 5                              X
 6                              X
 7                              X              X            X
 8                                             X            X
 9                                             X            X
10                                             X            X
11                                             X            X
12                                             X            X
Case          Class
Requirement  Time a
 1              P
 8              A
 9              A
10              A
11              A
12              A
(a)P = completed prior to class; A = completed after class.
Buckeye National Bank
Consolidated Income Statement
For the three years ending December 31, 20x5
                               20x5    20x4    20x3
                              ($000)  ($000)  ($000)
Net interest income a         $3,486  $3,417  $3,349
Provision for credit lasses      484     475     465
Net interest income after
 provision for credit losses   3,002   2,942   2,884
Noninterest income             1,207   1,199   1,190
Income prior to noninterest
 expenses and income tax       4,209   4,141   4,074
Noninterest expenses           3,805   3,539   3,362
Income before income taxes       404     602     712
Income tax expense               130     194     230
Net income                     $ 274   $ 408   $ 482
(a)Net interest income equals interest
income less interest expense. The bank's
primary income is from interest-bearing
checking accounts. Noninterest income
includes fees charged for varoius services,
such as checking account fees charged if the
account falls below the required minimum
level. Noninterest expenses are all of the
bank's operating costs, including those
associated with paying checks, providing
telles services, and responding to customer
account inquires.
Assignment of Indirect (Noninterest
Expense) Costs to Activity Cost
Pools a
                              Activity Cost Pool to which
Indirect Cost                  Indirect Cost is Assigned
Salaries of Check-processing
 Personnel                    Paying Checks
Depreciation of equipment
 and facilities used in
 check processing             Paying Checks
Teller salaries               Providing teller services
Depreciation of equipment
 and facilities used in
 teller operations            providing teller services
Salaries of customer
 representatives at call      Responding to customer account
 center                       inquiries
Tool-free phone lines plus
 depreciation of equipment
 and facilities in customer   Responding to customer account
 call center                  inquiries
Total indirect costs
                              Estimated Annual
                                Total Costs
Indirect Cost                   (in $1,000s)
Salaries of Check-processing
 Personnel                         $ 700
Depreciation of equipment
 and facilities used in
 check processing                    440
Teller salaries                    1,000
Depreciation of equipment
 and facilities used in
 teller operations                   200
Salaries of customer
 representatives at call
 center                              450
Tool-free phone lines plus
 depreciation of equipment
 and facilities in customer
 call center                          60
Total indirect costs              $2,850
(a)These indirect costs are part of
the $3,805 "noninterest expenses"
in the bank's 20x5 Income Statement
in Exhibit A. The rest of the
noninterest expensesin the Income
Statement shown in Exhibit A
pertain to other operating
costs that are excluded from
the pilot ABC study, such as
CEO's salary. (The costs listed
in Exhibit B are indirect with
respect to the retail customers and
business account customers.)
Activity Cost Drivers by
Customer Line
                       Annual Number of Units
                      of Activity-Cost Driver
Activity Cost         Used by Retail Customers
Driver                      (in l,000s)
Checks processed                570
Teller transactions             160
Account inquiry
 calls to customer
 service call center             95
                        Annual Number of Units
                       of Activity-Cost Driver
Activity Cost         Used by Business Customers
Driver                       (in 1,000s)          Total
Checks processed                2,280             2,850
Teller transactions                40               200
Account inquiry
 calls to customer
 service call center                5               100
Cost Allocation under BNB's
Original Single-Allocation
Base System
Dollar Value of Checks Processed
Business  90%
Retail    10%
Note: Table made from pie chart.
Dollar Value of Indirect Costs Allocated
Business  90%
Retail    10%
Note: Table made from pie chart.
Cost Allocation under BNB's
ABC Pilot Study
Checks Processed
Business  80%
Retail    20%
Note: Table made from pie chart
Teller Transactions
Business  20%
Retail    80%
Note: Table made from piechart
Customer Calls
Business   5%
Retail    95%
Note Table from pie chart
Dollar Value of IndirectCosts Allocated
Business  41%
Retail    59%
Note: Table made from pie chart



Banks, Others Base Service On Whether an Account Is Profitable or a Drain

'Redlining in the Worst Form' By Rick Brooks Staff Reporter of The Wall Street Journal

CHARLOTTE, N.C.--Fielding phone calls at First Union Corp.'s huge customer-service center here, Amy Hathcock is surrounded by reminders to deliver the personal touch. Televisions hang from the ceiling so she can glance at the Weather Channel to see if her latest caller just came in from the rain; a bumper sticker in her cubicle encourages, "Practice random kindness & senseless acts of beauty."

But when it comes to answering yes or no to a customer who wants a lower credit-card interest rate or to escape the bank's $28 bounced-check fee, there is nothing random about it. The service all depends on the color of a tiny square--green, yellow or red--that pops up on Ms. Hathcock's computer screen next to the customer's name.

For customers who get a red pop-up, Ms. Hathcock rarely budges; these are the ones whose accounts lose money for the bank. Green means the customers generate hefty profits for First Union and should be granted waivers. Yellow is for in-between customers: There's a chance to negotiate. The bank's computer system, called "Einstein," takes just 15 seconds to pull up the ranking on a customer, using a formula that First Union declines to detail of minimum balances, account activity, branch visits and other variables.

The Non-Egalitarian Approach

"Everyone isn't all the same anymore," says Steven G. Boehm, general manager of First Union's customer-information center, where agents will handle about 45 million customer calls this year.

After years of casting a wide net to lure as many consumers as possible, banks and many other industries are becoming increasingly selective, limiting their hunt to "profitable" customers and doing away with loss-leaders. Wielding ever-more-powerful computer systems, they are aggressively mining their vast databases to weed out losers, or at least to charge them more, and to target the best customers for pampering.

Paging Network Inc., a paging-services provider that for several years essentially gave away its pagers in a race to build market share, now is trying to chase away heavy users who receive a flurry of messages but often pay only a rock-bottom monthly fee. "The power users are the ones you need to get away from," a PageNet spokesman says.

Sending Bad News

After bringing in consultants to sift through data on individual customers, PageNet sent letters to marginal subscribers, telling them their rates were being increased. The company, under new management and in the process of restructuring most of its operations, also got tougher on companies that resell its pagers.

The results so far are significant: PageNet's domestic subscriber base shrank by almost 138,000 in the third quarter of 1998 to about 10.2 million. Last month, the Dallas company said it expected to lose as many as 325,000 additional customers in the fourth quarter.

"There's just no free lunch anymore," the PageNet spokesman says. "We've done the research now to feel comfortable walking away with no regrets."

The story is similar at FedEx. Two years ago, the shipping giant began analyzing the returns on its business for about 30 large customers that generate about 10% of its total volume. It found that certain customers, including some requiring lots of residential deliveries, weren't bringing in as much revenue as they had promised when they first negotiated discounted rates with FedEx.

So FedEx went on the offensive, demanding that some customers pay higher rates and imposing double-digit increases in a handful of instances. A couple of big customers who refused to budge were told they could take their shipping business elsewhere.

'Suck It Up'

"We were willing to risk a point or two of market share to correct the problem," says a spokesman for FedEx, a unit of FDX Corp. "You have to be willing to suck it up and walk away."

Of course, some industries have a long tradition of favoring "good" customers over less profitable ones. Airlines, credit-card issuers and mail-order companies have thrown loads of tailored services to so-called platinum and premier customers. And banks several years ago began charging fees for services they wanted to discourage, like visits to the teller. But only recently has technology developed to the point where companies can compare profit-and-loss statements on every customer and weed out the money-losers.

Banks are by far the biggest industry yet to marshal this data-crunching ability. Already, about half of big banks with more than $1 billion in deposits use profit data to make customer decisions, more than double the percentage just a year ago, estimates GartnerGroup Mentis Financial Services, a banking-research firm in Durham, N.C.

For banks, a typical "bad" customer makes frequent branch visits, keeps less than $1,000 in the bank and calls often to check on account balances. The most profitable customers, who keep several thousand dollars in their accounts, use a teller less than once a month and hardly ever use the call center. And while favored customers generate more than $1,000 in profits apiece each year, the worst customers often cost the bank money--a minimum of $500 a year.

What's more, the top 20% of typical bank customers produce as much as 150% of overall profit, while the bottom 20% of customers drain about 50% from the bank's bottom line, according to Market Line Associates, an Atlanta bank-consulting firm.

To help separate the wheat from the chaff, banks have spent about $500 million in the past few years on software and consultants, according First Manhattan Consulting Group in New York. That number is expected to grow to at least $500 million per year in the near future, as many more of the nation's 9,000 or so banks take up the call.

First Union estimates its Einstein system will add at least $100 million in annual revenue, or less than 1% of its 1997 total revenue of about $12 billion. About half of that increase is expected to come from extra fees and other revenue from unprofitable customers, and from holding on to preferred customers who might otherwise leave the bank if not for the extra pampering.

Calculating Profits

First Union, the sixth-largest bank in the U.S., acknowledges that it is still figuring out how to track profits generated by its new strategy. "It's not so much that it can't be done, but we need to refine the mechanism," says Sandy Deem, a First Union spokeswoman. Part of the problem is that most banks haven't married their disparate computer systems. While one database may track how many times a customer visits ATMs, how much the bank spends on marketing to get that person there might be in another system, with a third system estimating how much interest income an account generates.

The profit obsession, of course, has many risks. For one, future profits are hard to predict. A high-school student on his way to a Harvard M.B.A. and a plum job on Wall Street might be worth courting. So might an unprofitable customer who suddenly inherits a lot of money and wants to plunk it in CDs or other products.

"That shabby-looking guy might actually be or become an eccentric billionaire. But as a result of using this technology, do you give him the bum's rush?" asks Srikumar S. Rao, chairman of the marketing department at Long Island University's C.W. Post campus in Brookville, N.Y.

Bristling Over Bank Policy

Even some customers who fit the favored-customer profile bristle at the notion that bankers are bending over backward only for their most profitable clients. "I understand that everybody needs to make a profit, and I can't begrudge them for that," says John B. Warnken, a 47-year-old insurance consultant in Tampa, Fla., who banks with Huntington Bancshares Inc. "To me, this is redlining in the worst form and fashion."

Nancy Moran, a prison consultant in Baltimore, keeps about $500 in her account at NationsBank, just enough to avoid paying a monthly fee. She is irritated that her monthly account statement includes a list of each service she uses, and she fears that the bank, now part of BankAmerica Corp., can track her moves and profitability so closely that soon "every little interaction between me and the bank will be assessed a fee."

It doesn't help matters that the relationship between many banks and their customers is already strained. The biggest merger boom in the industry's history has left countless customers to endure longer lines and more bureaucratic snafus. And there is some customer resistance to the industry's push toward conducting as many transactions as possible via ATM or on-line; banking is still a business that operates largely on trust, and many customers want to speak to a human being when doing important transactions such as depositing large checks or taking out a car loan or mortgage.

Competing for Customers

At the same time, banks, like other businesses, are under attack from all sides. Brokerage firms and mutual-fund empires in particular are trying to grab traditional bank customers, and highly profitable ones are the most attractive. To fend off the assault, banks say they need to identify the customers they should fight hardest to keep.

In many places, the line in the sand between preferred and nonpreferred customers has become strikingly obvious. Bank One Corp., Chicago, the nation's fifth-largest bank, is redesigning its 218 branches in Louisiana so "Premier One" customers, after presenting a special gold card to the "concierge" near the front door, can be whisked away to a special teller window with no line or to the desk of a specially trained bank officer.

"And if that person has a problem or complaint, we are empowering our people to provide no-questions-asked refunds" on fees customers think they shouldn't have to pay, says Ronald Baldwin, Bank One's president of retail delivery. Customers qualify by keeping at least $2,500 in a checking account or a total of $25,000 in a combination of certain bank accounts, loans and investments, or by paying a $17 monthly fee. Bank One estimates the extra attention will go only to the top 20% of its customers.

Need to dial into your bank's customer-service center? At Westamerica Bancorp. in San Rafael, Calif., about 5,000 "VIP" customers get a secret toll-free number allowing them to jump ahead of unprofitable callers. BankAmerica, the second-largest U.S. bank, routes calls from preferred and unprofitable customers to different operators; a personal-identification number entered by each caller allows the bank to determine, among other things, the customer's profitability ranking.

'We Don't Do That Anymore'

Now, talking to a branch manager can also depend on whether a customer is profitable. Gone are the days at Centura Banks Inc., Rocky Mount, N.C., where the manager returned phone messages in the order they were received. "We don't do that anymore," says Bob James, group executive for market planning and customer development. He notes that the bank now rates its 550,000 customers on a scale of one to five, with one being the most lucrative. "I would hope that all of our branch managers, if they recognized a 'one' in there, would call that person first."

Most banks deny they are trying to get customers to leave. "It's not that you don't want to get people as your customers," says Jack M. Antonini, a former credit-card executive brought to First Union to ramp up its information-crunching efforts. "This is just a more efficient model for putting the right product in the hands of the right customer."

But after First Chicago Corp., now part of Bank One, imposed a $3 teller fee in 1995 on some of its money-losing customers, 30,000 of them-or close to 3% of the bank's total customers-closed their accounts. Some customers became profitable by boosting their account balances high enough to avoid the fee or by visiting ATMs instead of tellers, the bank says.

Meanwhile, some competitors are making a nice living on the throwaways. David Ness, president of Raymond James Trust Co. and Sound Trust Co., both units of Raymond James Financial Inc., St. Petersburg, Fla., says "dozens" of his firm's 1,177 trust accounts came from traditional banks that told their clients they were too small to merit further personal attention.

Says Mr. Ness, "Nobody seems to care anymore, and that is a big part of our marketing effort."

Copyright 1999 by DOW JONES & CO INC. Reproduced with permission of DOW JONES & CO INC from the Wall Street Journal, January 7, 1999, permission conveyed through Copyright Clearance Center.
COPYRIGHT 2001 American Accounting Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001 Gale, Cengage Learning. All rights reserved.

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Author:Bamber, Linda Smith; Hughes II, K. E.
Publication:Issues in Accounting Education
Geographic Code:1USA
Date:Aug 1, 2001
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