Chow, Julie Wing Yan

Research Report
Activity based costing: A case study of Raiffeisen
Bank of Luxembourg

EIKV-Schriftenreihe zum Wissens- und Wertemanagement, No. 12

Provided in Cooperation with:

European Institute for Knowledge & Value Management (EIKV), Hostert (Luxembourg)

Suggested Citation: Chow, Julie Wing Yan (2016) : Activity based costing: A case study of
Raiffeisen Bank of Luxembourg, EIKV-Schriftenreihe zum Wissens- und Wertemanagement,
No. 12, European Institute for Knowledge & Value Management (EIKV), Rameldange

This Version is available at:

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 EIKV‐Schriftenreihe zum
Wissens‐ und Wertemanagement

Activity Based Costing

A case study of
Raiffeisen Bank of Luxembourg

Julie Wing Yan Chow

Band 12
IMPRESSUM
EIKV‐Schriftenreihe zum Wissens‐ und Wertemanagement
Herausgeber: André Reuter, Heiko Hansjosten, Thomas Gergen

© EIKV Luxemburg, 2016

European Institute for Knowledge & Value Management (EIKV)

c/o M. André REUTER ‐ 27d, rue du Scheid
L‐6996 Rameldange ‐ GD de Luxembourg
[email protected]
www.eikv.org
Activity Based Costing I

Table of Contents

Table of Contents ............................................................................................................ I

List of abbreviations .................................................................................................... III

List of figures .................................................................................................................IV

List of tables .................................................................................................................... V

1 Scope of the Thesis .............................................................................................. 1

1.1 Thesis Context and Problem ..................................................................... 1

1.2 Thesis Objective ........................................................................................ 2

1.3 Course of the Investigation ...................................................................... 2

1.4 Literature Research Methodology ............................................................. 3

1.5 Research Limitation .................................................................................. 4

2 Theoretical Foundations ..................................................................................... 5

2.1 Definition of Costs .......................................................................................................5

2.2 Types of Costs ........................................................................................... 6

2.2.1 Direct vs. Indirect Costs ................................................................ 6

2.2.2 Variable vs. Fixed Costs ............................................................... 8

2.3 Definition of Cost Allocation ................................................................. 10

3 Concept of Cost Allocation ............................................................................... 11

3.1 Fundamentals of Cost Allocation ............................................................ 11

3.2 Cost allocation methods .......................................................................... 13

3.2.1 Single Plantwide Overhead Rate ................................................ 13

3.2.2 Departmental Overhead Rate ..................................................... 14

3.2.3 Activity Based Costing .............................................................. 15

3.3 Advantages and disadvantages of the various cost allocation methods .. 15

Activity Based Costing II

4 Activity Based Costing ...................................................................................... 17

4.1. Fundamentals of ABC ............................................................................. 17

4.2 Benefits of ABC ...................................................................................... 22

4.3 Limitations of ABC ................................................................................. 24

4.4 Traditional Costing vs. ABC ................................................................... 25

4.5 Activity Based Management ................................................................... 28

5 Case Study: Implementation of ABC to Raiffeisen Bank of Luxembourg . 30

5.1 Company Profile and Organization......................................................... 30

5.2 Industry Analysis .................................................................................... 33

5.3 Company’s Products and Services .......................................................... 34

6 Process of Implementation of ABC in Raiffeisen Bank ................................. 37

6.1 Determination of the Resources .............................................................. 37

6.2 Activity and Process Mapping ................................................................ 41

6.3 Cost Allocation to the Activities ............................................................. 46

6.4 Determination of Cost Drivers ................................................................ 48

6.5 Assignment of the Activity Costs to Cost Objects .................................. 51

7 Conclusion.......................................................................................................... 58

7.1 Findings and Limitations ........................................................................ 58

7.2 Areas for Further Research ..................................................................... 59

8 Reference............................................................................................................ 61
Activity Based Costing III

List of abbreviations

ABC Activity Based Costing

ABC/M Activity Based Cost Management
ABM Activity Based Management
ATM Automated Teller Machine
BCEE Banque et Caisse d'Épargne de l'État (Spuerkeess)
BGL BNP Paribas former Banque Générale de Luxembourg
BHW BHW Bausparkasse AG
BIL Banque Internationale à Luxembourg
B-O/BO Back-Office
BSH Bausparkasse Schwäbisch Hall
CAM-I Consortium for Advanced Management – International
CCSS Centre Commun de la Sécurité Sociale
Com Commercials
CR Caisse(s) Raiffeisen
CSSF Commission de Surveillance du Secteur Financier
DCOAC Direct Costs per Operating Analytical Centre
DP Department
ECB European Central Bank
F&S Facility and Security
FTE Full-Time Equivalent
GC Green Code
GPS Global Positioning System
HR Human Resources
HRD Human Resources Department
IFRS International Financial Reporting Standards
IT Information Technology
KPI Key Performance Indicator
RB Raiffeisen Bank
S.C. Société Coopérative
Struc Structure
user ID user identifier
Activity Based Costing IV

List of figures

Figure 1: Variable Costs

Figure 2: Fixed Costs
Figure 3: A Conceptual View of the Traditional Two Stage Allocation Approach
Figure 4: CAM-I ABC/M Cross
Figure 5: Cost Assignment Network
Figure 6: ABC Implementation
Figure 7: Two stage allocation process for traditional and ABC systems
Figure 8: Operational and Strategic ABM
Figure 9: Evolution of the number of Caisses Raiffeisen
Figure 10: Organisation chart of RB
Figure 11: Evolution of the number of employees 2000-2015
Figure 12: GC Flyers of RB
Figure 13: Tax Optimisation Products
Figure 14: Procedure of ABC of RB
Activity Based Costing V

List of tables

Table 1: Elements of Traditional Costing and ABC

Table 2: Source systems of RB
Table 3: Example of allocation keys
Table 4: Number of T24 Licences
Table 5: Allocated amount of maintenance expenses
Table 6: Fraction of the dashboard of RB
Table 7: Bills encoded in TriBank
Table 8: Pooling of categories
Table 9: Details of the salaries and bonuses perceived by each manager/attaché
Table 10: Account Mapping
Table 11: Applied Categories
Table 12: Example of Mapping
Table 13: Organisational structure of CR Mamer
Table 14: Organisational Structure of RB
Table 15: List of Processes
Table 16: Participation in the processes
Table 17: Consumption of the processes
Table 18: Amount of the relation between the consumer and participant centre
Table 19: Ratio of the relation between the consumer and participant centre
Table 20: Intra-Support Allocation
Table 21: Allocation of Support to B-O, Structure and Commercials
Table 22: Total Costs of B-O, Structure and Commercials
Table 23: Allocation of Back-Office to Commercials
Table 24: Allocation of Structure to Commercials
Table 25: Total Commercials Costs
Table 26: Allocation of Commercials to Commercials
Table 27: Details of process costs
Table 28: Processes of Personal loan for consumption
Table 29: Details of Personal loan for consumption costs
Activity Based Costing 1

1 Scope of the Thesis

1.1 Thesis Context and Problem

Luxembourg is worldwide known for its expertise in finance and it represents one of the
main financial centres in the world. On March 31st 2016, the financial centre of
Luxembourg altogether counts 144 banks, subsidiaries or branches of major bank
institutions from 28 different countries 1 focusing their activities on the international
markets.

With such a high number of financial institutions, competitiveness in this industry is

unquestionable. Furthermore, since the introduction of the negative interest rate by the
ECB, financial institutions have to find profit in an environment of low interest rates,
and thus low net interest margins. Hence, banks are under high pressure and in order to
withstand the competition, it is important for a financial institution to continuously
introduce new products and services that better satisfy the market requirements and to
raise funds that serve as the “raw material” for its product portfolio. Besides, banks also
have to adapt themselves to the new technologies that allow them to keep up with the
pace of the fast moving digital economy.

In order to succeed in the competitive world, a major challenge for a bank in today’s
environment constitutes in finding an accurate and cost-effective way to measure and
manage its product portfolio and its customers. Thus, it is required for a bank to have
the ability to assign its costs to the products and services it offers and to the customers it
serves. Only with the accomplishment of this task, a bank can considerably control its
costs, which is required due to the decline of the revenues, and understand its profit
zone, which helps the bank’s management to make rational decisions and formulate
plans to provide new services, improve existing services and measure performances in
order to achieve sustainable competitive advantages.

1
Cf. CSSF (2016, April 30)
Activity Based Costing 2

1.2 Thesis Objective

The following thesis gives an overview about the complex topic of activity-based
costing (ABC). In order to understand the concept of ABC, it is necessary to define cost
allocation as well as the various methods of cost allocation. Furthermore, there will be a
description of the benefits and the limitations of ABC and in order to further understand
the ABC, an analysis of the differences between the traditional costing system and the
ABC system will be included in this assignment.

In addition, as the author is working in the Luxembourg banking sector, the Raiffeisen
Bank of Luxembourg, the assignment includes a case study of the process of
implementation of the ABC in Raiffeisen Bank of Luxembourg for the purpose of
assisting the bank’s management in their decision-making in order to succeed in today’s
business environment. The case study doesn’t necessarily have to be exhaustive and
include all individual components, but it should reflect the relevant elements of
Raiffeisen Bank. In other words, the author will chose four major selling points of
Raiffeisen Bank, one of each region, that are prone to represent the whole range of
agencies of Raiffeisen bank for the establishment of the process of implementation of
the ABC in Raiffeisen Bank. Last but not least, the author doesn’t intend to suggest new
elements and variables that haven’t yet been analysed in literature.

1.3 Course of the Investigation

To begin, the author has provided a general introduction explaining the context of the
paper and the problem it tries to solve. The following section explains the methodology
of the literature selection and the problems related to this process.

Next, Chapter two will provide the theoretical foundation for the thesis and definitions
of key concepts, such as the different types of cost.

Chapter three focuses on the existing theory of cost allocation. The chapter illustrates
the three various cost allocation methods and the purpose these methods are designed
for. Moreover, it also includes an analysis of the advantages and disadvantages for the
application of the three methods.
Activity Based Costing 3

Chapter four focuses on the Activity-Based Costing model, starting with the
fundamentals before explaining the benefits for applying this model as well as the
limitations that the model comprises. Thereafter, the chapter includes a study of the
differences between the traditional costing model and the ABC model. The chapter then
concludes by the approach of activity-based management, which draws on the ABC
model as its major source of data.

Chapter five constitutes the starting point for the empirical study of the thesis by
describing the company of Raiffeisen Bank of Luxembourg. It comprises an analysis of
the industry in which Raiffeisen Bank is operating. This section terminates with a
description of the various products and services offered by Raiffeisen Bank to its
customers.

Chapter six describes the whole process of ABC implementation to Raiffeisen Bank. It
includes a step-by-step analysis, from the determination of the various costs to the
assignment of the activity costs to the products using a cost driver related to the cause of
the cost.

Lastly, chapter seven recapitulates the most important findings and explains the
limitations of the paper. The chapter concludes with an overview of additional research
related to this thesis.

1.4 Literature Research Methodology

This thesis relies on a literature review of academic papers, books and websites. The
sources are either in English, in French or in German. By analysing managerial
accounting literature, the author creates the theoretical foundation of the topic.
Moreover, due to time constraints, it was impossible to do a systematic literature review
by analysing all contributions to important research papers and journals on ABC and
thus, the author adopted a more focused approach by searching for articles and passages
in books containing specific key phrases, such as type of costs, cost allocation models,
or activity-based costing.
Activity Based Costing 4

1.5 Research Limitation

The case study of the paper deals with the implementation of the ABC to Raiffeisen
Bank of Luxembourg. Yet, due to time limit and in order to conduct a predicative
analysis, the author decides to apply the selective sampling method for the analysis,
meaning that the author will select a sample of Raiffeisen Bank’s major selling points in
which the commercial activities are performed for the accomplishment of the case
study. Hence, the case study won’t correspond to the whole company of Raiffeisen
Bank but only to an important part of Raiffeisen Bank’s activities.

For all that, the study is still representative as it still takes into consideration of
Raiffeisen Bank’s primary agencies so that the case study only makes up a few
differences in comparison to the complete analysis of Raiffeisen Bank’s ABC.
Activity Based Costing 5

2 Theoretical foundations

Chapter Two provides the theoretical foundation for the thesis. Different literature
sources diverge on the specific meaning of various key concepts, and so there is a need
to immediately clarify their meaning. This chapter begins by defining the expression of
cost before illustrating some of the types of cost and completing with the definition of
cost allocation.

2.1 Definition of Costs

The Chartered Institute of Management Accountants (CIMA) of London defines cost as

the amount of expenditure (actual or notional) incurred on, or attributable to, a specified
thing or activity. 1 In other words, cost constitutes the resources scarified or forgone to
achieve a specific objective, such as the acquisition of a good or service. To a non-
economist, the cost represents the price that an individual has to pay for a good or a
service, whereas to an economist, cost is referred to as the forgone benefit that could
have been realised from the best forgone alternative use of a resource. 2 Hence, by using
a resource for a specific purpose, the person is forgoing his opportunity of utilising that
resource somewhere else and thus, for an economist the cost represents an opportunity
cost.

The term “cost” itself doesn’t have any significant meaning and therefore it is rarely
used without a preceding adjective to specify the type of cost being considered. With a
prefix, the term “cost” bears multiple meanings and different types of costs are applied
in different situations. 3 Thus, cost has to be studied in relation to the purpose, the
different conditions and the context in which it is used. In the recent years, a large
terminology has emerged in order to clearly indicate which cost meaning is being
conveyed such as variable cost, fixed cost, direct cost, indirect cost, opportunity cost,
labour cost, etc.

1
Cf. Rajasekaran V., Lalitha R. (2011), p.5
2
Cf. David R. Henderson (2008)
3
Cf. Drury Colin (2008), p.27
Activity Based Costing 6

The term “cost” and “expense” are often used interchangeably. However, these two
terms should be distinguished one from another as they bear different meanings. Cost is
the amount of resources given up in exchange for a good or a service, whereas an
expense represents an expired cost that incurred and that is totally used up in generation
of revenue. Moreover, expenses don’t necessarily need to be immediately paid in cash
because even a promise to pay could be made for the obtained benefits. 1

2.2 Types of Costs

Managerial accounting constitutes the art of planning, decision-making and controlling

in business. 2 In managerial accounting, costs are classified according to the decision-
making needs of management. Hence, there exist various types of costs.

A cost object is any activity or item for which separate measurement of costs is desired.
In other words, if a person wants to know the cost of something, this “something” is
called a cost object. Costs identified with cost objects can be divided into two
categories: direct costs and indirect costs. 3 The variable costs and the fixed costs are
traditionally used in managerial accounting for the description of the reactions of a cost
to the change of activity. Thus, in the following, the four types of costs, direct costs,
indirect costs, variable costs and fixed costs, will be discussed more in detail.

2.2.1 Direct vs. Indirect Costs

Direct costs represent costs that are easily and accurately traceable to an analytical
centre or a cost object, whereas indirect costs can neither be physically traced to a cost
object nor to an analytical centre but instead they are assigned to them by means of cost
allocation. 4 In other words, the indirect costs cover all the costs that are not direct costs.
For example, if a car represents the cost object, then all the accessory of the car such as
the audio player, the leather seats, the felloe and the GPS, etc. are part of the direct
costs. On the contrary, the research and development expenses used for the

1
Cf. Jawahar Lal (2007), pp. 22-23
2
Cf. Accounting In Focus, 2016
3
Cf. Drury Colin (2008), p.28
4
Cf. Kinney Michael R., Raiborn Cecily A. (2013), p.26
Activity Based Costing 7

manufacturing or improvement of the air conditioning of the car represent indirect costs
as they can’t be directly traced to an analytical centre.

The costs assigned to any cost object can be classified according to their relationship to
the cost object. The ability to assign costs directly to a cost object is called traceability.
The accuracy of the cost assignment is greater if the cost can be more easily traced to
the cost object. Depending on the cost object, it is possible to classify a cost as either a
direct cost or an indirect cost. 1

There are two kinds of direct costs: direct material costs and direct labour costs. Direct
material cost represents the cost of the raw materials that are used for the manufacturing
of the finished goods. 2 Thus, the raw materials become part of the finished goods like
for example wood that is used for the manufacturing of a chair. As for the direct labour
costs, these constitute the cost of wages paid to the workers who are directly involved in
the manufacturing process of the goods. 3 The direct labour costs include all wage and
non-wage labour 4 costs like insurance, holiday and vacation pay, pension, labour taxes
and other retirement benefits and these costs are directly traceable to the final product
cost. The non-wage labour costs are some sort of indirect costs, which however counts
to the direct labour costs.

Statec, the government statistics service provider of Luxembourg, conducted a labour

cost analysis in 2014 in which it analysed the direct labour costs of the various activity
sectors of Luxembourg between 2008 and 2012. According to this study, in 2012, the
proportion of wage labour cost (direct costs) and non-wage labour cost (indirect costs)
in Luxembourg was 86% (direct cost) to 14% (indirect cost). 5 By analysing the
individual activity sectors, it turns out that the percentage of the direct and indirect costs
of the financial sector was 85% to 15%. As for the education sector, the proportion was
87% to 13%. 6 In comparison to Germany, the proportion of direct and indirect cost in
2012 was 79% to 21%. Hence, this shows that in Luxembourg, the employers have to
pay a lower proportion of non-wage labour costs in comparison to Germany.

1
Cf. Hansen Don R., Mowen Maryanne M., Guan Liming (2009), p.25
2
Cf. Hart Jill, Fergus Chris and Wilson Clive (2012), p.10
3
Cf. Pandey I. M. (2009), p.195
4
Cf. OECD (2014), p.32
5
Cf. Europaforum (2014, November 11)
6
Cf. Le portail des statistiques, 2016a.; Le portail des statistiques, 2016b.
Activity Based Costing 8

Concerning the indirect costs, they are known as manufacturing overheads and they
include indirect material costs, indirect labour costs and other overhead costs. Indirect
material costs are cost of materials that can’t be identified with one particular product as
they are used for the benefit of all products instead of one specific product so that they
need to be treated accordingly. The indirect labour costs constitutes the salaries of all
the employees who don’t participate in the process of manufacturing of the finished
goods but who only assist in the manufacturing operation or service delivery process. 1
As for the other overhead costs, these comprise all the other indirect manufacturing
expenses besides of the indirect material and indirect labour costs. These costs include
expenses like supplies, rent, depreciation, electricity, taxes, etc. 2

2.2.2 Variable vs. Fixed Costs

Costs generally change in response to the change in a cost driver (a factor that causes a
change in the cost of an activity or volume). In decision-making, it is important to know
how costs behave in relation to the change in an activity measure. Activity measure
incorporates production, service and sales volume, number of purchase order processed,
hours of working time consumed, etc. 3 There are two kind of costs behaviour: variable
cost and fixed cost.

Figure 1: Variable Costs 4

The variable costs vary in direct proportion with the level of production output (volume
of output). This is shown on the left in Figure 1, where one can see that if there is no

1
Cf. Drury Colin (2008), p.29
2
Cf. Lianabel Olivier (2000), p.169
3
Cf. Drury Colin (2008), p.31
4
Cf. Hart Jill, Fergus Chris and Wilson Clive (2012), p.17
Activity Based Costing 9

output (0) then there are no variable costs and if the units of output increase then the
variable costs also increase and vice versa. However, in reality, in the view of an
economist, the costs don’t increase as straight as shown on the left graph of Figure 1 but
they will start at a steeper pace and afterwards they will stay steadily for a relevant
range of output before that they continue to rise as illustrated on the right of Figure 1.
The relevant range represents the area of feasible outcomes given the available
resources of a company. An example of the variable costs constitutes the commissions
that a bank perceives for selling the collaborating products to its customers, like for
example house-saving and loan products of BHW or BSH.

In contrast to the variable costs stand the fixed costs, which are costs that remain stable
over a wide range of activity for a specified time period. This is shown on the left graph
of Figure 2:

Figure 2: Fixed Costs 1

The right graphic of Figure 2 depicts the situation where production (output units) is
expanded beyond the relevant range of output. In this case, the costs will also increase
as additional investment is required in order to achieve a higher level of production. An
example of fixed costs would be the lease payment, which has to be monthly paid for
the building that an organisation leases, irrespective of the operational state of the
business.

In general, direct costs are variable, whereas the manufacturing overhead costs (indirect
costs) can either be variable or fixed. 2 An example would be the repairing costs and the
depreciation costs who both constitute manufacturing overhead costs but the repairing
costs are variable costs as they can vary depending on what needs to be repaired,

1
Cf. Hart Jill, Fergus Chris and Wilson Clive (2012), p.16
2
Cf. Ordelheide Dieter and KPMG (1995), p.1494
Activity Based Costing 10

whereas the depreciation costs are fixed costs as they recur in the same amount each
year throughout the useful life of an asset.

2.3 Definition of Cost Allocation

As stated above, direct costs can be easily traced to cost objects or analytical centres,
whereas overhead manufacturing costs are indirect costs that must be collected and
assigned to a cost object. The collection of indirect costs for allocation purpose is called
a cash pool. Hence, cost allocation constitutes the process of identifying and assigning
indirect costs to a specific cost object by means of an allocation base, known as the cost
driver. 1

It is to note that cost allocation represents an important process through which the
indirect costs are accumulated and assigned. This implies that if the indirect costs are
not accurately calculated then a company won’t be able to know which products and
areas of activity are profitable and which aren’t. Furthermore, if the overhead
manufacturing costs are misallocated, this could result in a waste of resources as the
resources are used on products that are mistakenly considered to be profitable and
consequently this could lead to the charging of the wrong prices to the customers.

1
Cf. Crosson Susan, Needles Belverd (2008), p.75
Activity Based Costing 11

3 Concept of Cost Allocation

This chapter begins by explaining the fundamentals cost allocation. Next, the author
defines the various methods of cost allocation and afterwards, the author will analyse
the advantages and disadvantages of each of these methods.

3.1 Fundamentals of Cost Allocation

Cost allocation is the process of assignment of an indirect cost to a cost object (products
or service) or an analytical centre (divisions inside the organisation to which activities
are related) of an organisation. The process requires the pooling of the indirect costs to a
cost pool and the selection of a cost driver (allocation base) whose activity base will
cause a change in the cost pool. There exist three methods of cost allocation, however,
before choosing the right method, it is necessary to define the purpose of cost allocation
as the purpose will determine the complexity and the level of precision required. There
are four essential purposes for allocating indirect costs: the economic-decision purpose,
the motivation purpose, the legal and management reporting purpose and the cost-
reimbursement purpose. 1

In the economic-decision purpose, cost allocation allows decision makers to make

trade-off decisions to use their resources more effectively as costs provide an estimated
measurement of the resources that the organization is using for the provision of a
product or service. For example, it allows managers of banks with many selling points
to decide if a selling point should be reorganised or whether processes analysis should
be undertaken in order to increase efficiency.

Cost allocation used for the motivation purpose is applied for encouraging or
discouraging specific behaviours of the various services within a company. Moreover,
this purpose emphasizes to decision makers how costs in the various functions are
related one another. 2 For example to discourage the behaviour of absenteeism at
training seminars, the human resources department could charge department managers a
certain amount of fees for unjustified absence. Yet, this purpose can lead to unintended

1
Cf. Lianabel Olivier (2000), pp.201-202
2
Cf. Bhimani Alnoor, Horngren Charles T., Foster George (2008), p.139
Activity Based Costing 12

consequences like signing for attendance at the beginning of the course but still not
participating in the training session. Thus, this purpose should be applied with caution.

The legal and management reporting purpose goes by the principle that cost allocation
is important for companies to meet financial (external regulatory and legal) reporting
obligations. For example banks need to yearly publish their financial reporting to the
shareholders of the bank.

Concerning, the cost-reimbursement purpose, cost allocation allows an organisation to

justify costs or calculate reimbursement. With cost allocation, an organization can
recover the direct costs of the products or services and a fair amount of the indirect
1
costs that are necessary for the management of the organisation. The cost-
reimbursement contract is used when there is uncertainty about the final cost or project
success and by applying these type of contracts, some risk of successful contract
performance is transferred from the contractor to the buyer. 2 For example small regional
banks could apply cost allocation in order to determine whether they should continue to
offer current operation services (money transfer or withdrawal) that large commercial
banks also offer.

After identifying the purposes of cost allocation it is also necessary to decide on the
criterion used for cost allocation. There are four criterion of cost allocation: cause-effect
relationship, benefits received, fairness or equity and ability to bear. 3 By allocating
costs by means of a cause-effect relationship, the variables that cause resources to be
consumed are identified. Costs may be allocated based on the services provided. This
relationship can easily be established when dealing with direct costs. The cause-effect
relationship constitutes the primary criterion used in the implementation of ABC as the
ABC system uses the concept of a cost hierarchy to identify the cost drivers that best
demonstrate the cause-effect relationship between each activity and the costs in the
related cost pool. Using the benefits received criterion, costs are assigned based on the
benefits received. The costs of the cost object are allocated among the beneficiaries in
proportion to the benefits each receives. The equity or fairness criterion is often applied
when cost allocation is the basis for establishing a mutual agreeable price between the

1
Cf. McWatters Cheryl S, Zimmerman Jerold L. (2016), p.324
2
Cf. Balakrishnan Ramji, Sivaramakrishnan Konduru, Sprinkle Geoffrey B. (2009), p.368
3
Cf. Horngren T. Charles, Datar Srikant M., Rajan Madhav. Rajan (2012), pp. 504-505; Shim Jae K.,
Siegel Joel G. (2009), pp. 80-81
Activity Based Costing 13

contractor and its supplier. Thus, costs are allocated in a reasonable way for justifying a
selling price in the minds of the contracting parties. Last but not least, the ability to bear
criterion advocates allocating costs in proportion to the cost object’s ability to bear the
costs that are allocated to it. 1

3.2 Cost allocation methods

For an organisation to run efficiently and cost effectively, it is required to own an

appropriate cost allocation method. Cost allocation affects the product cost, which is
used for decision-making like the determination of the product mix, the establishing of
the product price and the determination of discontinuance of a product line. For this
purpose, various methods have been developed to allocate costs appropriately within the
organisation. Cost allocation methods include: single plantwide rate, multiple
production department rate and activity based costing.

3.2.1 Single Plantwide Overhead Rate

The single plantwide overhead rate method constitutes the simplest approach to assign
all of a company’s overhead costs to cost objects (production outputs) using a single
overhead rate 2, which is calculated by using all estimated overhead costs for a company
divided by the estimated activity level across the entire company. 3 The distinction
between service departments and production departments is ignored and the entire plant
is treated as a single department. Companies using a single plantwide overhead rate
generally use a volume-based cost driver (direct labour hours, machine hours). 4 This
simple, one stage approach will only provide accurate product costs in cases where the
company produces a single product, or a few similar products that consume all services
and other indirect resources in the same proportions in every department. 5

1
Cf. Horngren T. Charles, Datar Srikant M., Rajan Madhav. Rajan (2012), pp. 504-505; Shim Jae K.,
Siegel Joel G. (2009), pp. 80-81
2
Cf. Warren Carl S., Reeve James M., Duchac Jonathan (2016), p.1201
3
Cf. Heitger Dan L., Mowen Maryanne M., Hansen Don R. (2008), p.152
4
Cf. Weil Roman L., Maher Michael W. (2005), p. 219
5
Cf. Martin James. R. (2016)
Activity Based Costing 14

3.2.2 Departmental Overhead Rate

The departmental overhead rate method is also referred to as the traditional two stage
allocation approach. This method recognises that within a company, there are service
departments and production departments. When production departments differ
significantly in their manufacturing processes, the company’s overhead costs are
normally incurred differently in each department. In such cases, it would be more
accurate to allocate a company’s overhead rate by means of departmental overhead
rates, which implies that different rates are used for each production department to
allocate the overhead costs to the cost object. 1

Figure 3: A Conceptual View of the Traditional Two Stage Allocation Approach 2

The costs are allocated after a waterfall principle because in the first stage, the overhead
costs (service department‘s costs) are allocated to the cost pools (production
departments) and afterwards the costs accumulated in the cost pools are allocated to the
different cost objects (products) using a small number of selected cost drivers, which
vary with the volume of products produced. 3 However, it is to note that within a
company, there are also some production departments such as the assembly departments
that are directly associated with the products or services that a company provides. In
this case, the production departments represent the intermediate cost objects and the
products and services constitute the final cost objects. 4

1
Cf. Warren Carl S., Reeve James M., Duchac Jonathan (2016), p.1203
2
Cf. Martin James. R. (2016)
3
Cf. Drury Colin (2008), pp.52-53
4
Cf. McWatters Cheryl S, Zimmerman Jerold L. (2016), p.334
Activity Based Costing 15

3.2.3 Activity based Costing

A third method is called the activity based costing method of cost allocation. The ABC
approach also allocates overhead costs to cost objects using the two stage allocation
process as the departmental overhead rate method. The ABC method focuses on the cost
of activities and then allocates these costs to products using a variety of activity bases.
In the ABC approach, a company’s overhead costs are initially accounted for in activity
cash pools, which are related to a given activity. 1 Thus, the ABC method measures the
actual performance of an organisation by taking into consideration every cost associated
with its activities instead of its departments. Furthermore, it assigns overhead costs to
products by the use of numerous different cost drivers. In the ABC system, cost drivers
are best chosen to capture the cause-effect relationship between the cost object and the
incurrence of overhead cost. 2

3.3 Advantages and disadvantages of the various cost allocation methods

The single plantwide overhead rate is a single overhead rate that a company applies to
allocate all of its manufacturing overhead costs to cost objects. This can be of advantage
if the company only has few departments with little variety in products. Moreover, this
approach is simple and inexpensive to implement as all the information is already
available and the method doesn’t take into account of every single department in a
company. The disadvantage is that this method is only valid for small companies that
manufacture one or few products because if a company has a large amount of overhead
costs to allocate or if the services provided by the various departments are highly
differentiated then this method would be inappropriate as a single rate would be
insufficient for allocating all the overhead costs to the costs objects.

Concerning the departmental overhead rate method, the advantage of this method is that
it constitutes a more accurate and equitable approach for allocating costs as a separate
overhead allocation rate is established for each department and each production
department constitutes a separate cost pool. This is important for companies with

1
Cf. Warren Carl S., Reeve James M., Duchac Jonathan (2016), pp. 1207-1209
2
Cf. Caplan Dennis (2005)
Activity Based Costing 16

1
multiple departments using significantly different types of work effort . The
disadvantage of the two stage overhead rate is that it is more time consuming than the
single plantwide overhead rate as more equations are required for the calculation of the
product. Another disadvantage that this approach entails is the fact that as a single
departmental overhead rate is established for each department, this could lead to the
distortion of the product costs as a single departmental overhead rate can only represent
one activity within a department. Hence, if a department has multiple activities then the
departmental overhead rates can only trace one of the activity to the cost object and
consequently, the cost object would be overcharged with the costs of the other
activities. 2

The activity based costing method represents the most accurate method among the three
approaches. The ABC system allocates costs to operations through the various activities
in place that can be measured by cost drivers. In other words, cost units are assigned to
individual activities. 3 With the ABC method, it is also possible to adjust and control the
process of service provision by analysing the individual activities. Unfortunately, this
method requires a lot of information and therefore, it is relatively complex and costly in
comparison to the two other approaches. Thus, it is inconvenient to keep the results up
to date according to the changing circumstances.
The benefits and limitations of the ABC system will be further analysed in the
following chapter.

1
Cf. Kinney Michael R., Raiborn Cecily A. (2013), p.72
2
Cf. Martin James. R. (2016)
3
Cf. Popesko Boris (2009), p.94
Activity Based Costing 17

4 Activity Based Costing

This chapter deals with the concept of activity based costing. The author will begin with
detailing the fundamentals and the procedure of ABC. Next, the section will analyse the
benefits and the limits of the ABC model. Moreover, a comparison of the ABC
approach with the traditional costing approach will be illustrated. The chapter ends by
pointing out the activity based management, which is derived from the ABC.

4.1. Fundamentals of ABC

The activity based costing model was developed by Robin Cooper and Robert Kaplan at
the end of the eighties. The two authors described ABC as a solution to problems
occurred with the traditional costing system that provided somewhat a distorted picture
of the true profits realised from the products sold and services rendered and thus,
leading to problems in decision-making. 1 Due to the competitive constraints that
exposed inaccurateness in cost accounting, the ABC system emerged as an efficient
profit analysis tool. With this tool, organisations are able to disclose the hidden sources
of profitability and the embedded costs and this model contributes to decision-making
that improved profitability. As for today, the ABC model constitutes the foundation of
performance management. 2

According to Consortium for Advanced Management – International (CAM-I), ABC

constitutes a methodology that measures the cost and performance of activities,
resources, and cost objects. Resources are assigned to activities, then activities are
assigned to cost objects based on their use. ABC recognises the causal relationships of
cost drivers to activities. 3 Thus, ABC is a two-step procedure for cost allocation. The
model, with embedded cause-effect logic, assigns the overhead costs via activities to
final cost objects. The rationale behind is that activities constitute the real consumer of
company resources so that overhead costs have to be distributed to activities first and
afterwards to specific products, services or customers.

1
Cf. Jeyaraj S.S. (2015), p.39
2
Cf. Turney Peter B.B., (2008), p.1
3
Cf. Pember Anthony, Lemon Mark (2012)
Activity Based Costing 18

Figure 4: CAM-I ABC/M Cross 1

The above-illustrated figure shows the ABC/M Cross, which was originally presented
by CAM-I in 1990. It presents the way how costs flow through an ABC model. The
vertical cost assignment view relates to ABC, whereas the horizontal process view
correlates to ABM. In this sense, the vertical axis explains “What things cost?” and the
horizontal axis provides answers on “Why things have cost?”.

The ABC method uses drivers to assign costs throughout the cost-consumption chain,
which implies that the resource drivers trace overheads to work activities and the
activity drivers trace activity costs to cost objects and thus accumulating all the resource
expenses to the final cost object. Hence, this approach provides a much more accurate
provision of product and customer costs than the traditional allocation method.

Concerning the process view of the ABC/M Cross, it sequences the work activities in
time and accumulates the build-up of activity costs from start to end of a business
process. 2 Business process can be defined as a network of activities with a common
purpose, where activity costs belong to the business processes. In this regard, the
ABC/M provides the cost elements for process costing that are not available from the
general ledger. 3

1
Cf. Cokins Gary (2001), p.15
2
Cf. Lawson Raef (2006), p.9
3
Cf. Cokins Gary (2001), p.17
Activity Based Costing 19

Figure 5: Cost Assignment Network 1

Figure 5 shows the typical ABC assignment diagram that provides traceability to
segment costs, where expenses are traced from resources to work activities and then to
specific products, services and customers, who ultimately constitute the origin for all
costs and expenses. The diversity and the variation in how cost objects uniquely
consume resource and activities are clearly reflected by this diagram. However, when
looking at the bottom left of the diagram, there is written “(1) Demands on work” and
“(2) Costs” with two arrows, one showing upwards and the other downwards. The
arrow showing downwards exhibits the cost allocation process, which has just been
explained. As for the first arrow, which is facing upwards, it reveals that all the
expenses originate from the demands of the customers and thus, the calculated costs
simply measure the effect of the demands. 2 Thus, this clearly shows the cause-effect
logic of ABC. Moreover, it is also to note that in order to avoid distortion of the results
regarding the profitability of the product costs (in an industrial point of view), some
parts of the activity’s costs like legal and administrative costs aren’t assigned to the
final cost objects as they are not related to the productions and customers.

1
Cf. Cokins Gary (2001), p.53
2
Cf. Cokins Gary (2001), p.53; Lawson Raef (2006), p.14
Activity Based Costing 20

In order to implement ABC, a five-step process needs to be operated:

STEP 1: Step 2: Step 5:

Step 3: Step 4:
Identification and Assignment of Allocate
Identification of Calculation of
classification of overhead costs to overhead costs to
cost drivers overhead rate(s)
activities activities products

Figure 6: ABC Implementation 1

The first step of the ABC system consists in analysing all the resource-consuming
activities performed in order to manufacture a product or to provide a service. 2 An
activity constitutes an action that is undertaken and performed by equipment or people
for other people. Identifying activities is usually accomplished by means of interviews
with managers or representatives of functional departments. In the interview, questions
are asked for the purpose of gathering the needed data for the ABC system. Moreover,
in order to avoid that the number of activities are getting unmanageably broad, activities
that require less than 5% of a worker’s time are ignored. 3

Activities are then classified according to a cost hierarchy that classifies activities based
on the level of costs incurrence. The cost hierarchy incorporates four different levels:
unit-level, batch-level, product-level and facility-level. The unit-level activities
represent primary activities performed on each unit of production and its costs tend to
increase in proportion to the number of units produced. On the contrary, the batch-level
activities refer to activities executed for each batch of products and the volume varies
directly with the number of batches instead of the number of units in a batch.
Concerning the product-level activities, they constitute activities that are carried out to
support a whole production line and they don’t need to be executed each time in
combination with the unit-level activities and the batch-level activities as they are
operated by the manufacture of a new product line and its maintenance. Lastly, the
facility-level activities are performed to support a facility’s general manufacturing
process. 4 The unit-level activities, as well as the batch-level and product-line activities
can easily be traced to products, while facility-level activities are difficult to trace and
hence, they are kept separately form the product costs. 5

1
Source: own representation
2
Cf. Weygandt Jerry J., Kimmel Paul D., Kieso Donald E. (2010), p.156
3
Cf. Mowen Maryanne M., Hansen Don R., Heitger Dan L. (2016), pp.291-292
4
Cf. Crosson Susan, Needles Belverd (2008), p.208; Sahaf M.A. (2013), p.430
5
Cf. CliffsNotes, 2016
Activity Based Costing 21

Next, the second step consists in assigning the overhead costs to activities, meaning to
determine the costs of the resources consumed by each activity, and thereby forming a
cost pool for each activity. 1 Labour, material, capital and energy are resources
consumed by activities. Resources cost must be assigned to activities by means of direct
tracing or driver tracing. For various resources, it is possible to apply a work
distribution matrix, which identifies the amount of resources consumed by each activity.
If an activity consumes 100% of the resources then the direct tracing method is applied
while driver tracing is used in case that several activities share a common resource.
These drivers are called resource drivers and they represent factors that measure the
consumption of overhead resources by activities. 2

The third stage comprises the identification of cost drivers. Cost drivers need to be
identified for each activity and they represent factors that measure the output of the
activity that causes costs to change. 3 They should be easily measured and they should
be linked to products. There are three types of cost drivers: transaction driver, duration
driver and intensity driver. The transaction driver measures the number of times an
activity is carried out, whereas duration driver measures the amount of time required for
performing an activity. As for the intensity driver, it directly charges for the resources
that are used each time an activity is carried out and it is applied in case that the
duration driver fails to provide accurate results. 4

After that the cost drivers have been identified, the next step consists in determining a
predetermined overhead rate for each activity (cost pool). 5 The predetermined overhead
rate, also referred to as the budgeted overhead rate, is obtained with the following
formula 6:
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑈𝑈𝑈𝑈𝑈𝑈 𝑜𝑜𝑜𝑜 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

For the computation of the predetermined overhead rate, the estimated/expected

numbers are applied instead of the actual ones in order to ensure timely information
because the actual figures retain unknown until the end of the accounting period and

1
Cf. Heisinger Kurt (2010), p.103
2
Cf. Hansen Don R., Mowen Maryanne M., Guan Liming (2009), pp. 99-100
3
Cf. Mowen Maryanne M., Hansen Don R., Heitger Dan L. (2016), p.68
4
Cf. Kaplan Robert S., Cooper Robin (1998), p.97
5
Cf. Jiambalvo James (2010), pp. 54-55
6
Cf. Weygandt Jerry J., Kimmel Paul D., Kieso Donald E. (2010), p.157
Activity Based Costing 22

therefore it is impossible to determine these numerals up to that time. 1 Thus, if a

company chose to wait till the end of the accounting period then the allocated overheads
would be accurate but not timely. And since an effective decision-making can only be
achieved through timely reporting, it is therefore required to use the estimated/expected
numbers for determining the overhead rates.

Finally, the ABC system provides the assignment of overhead costs to products based
on the level of activity required to manufacture the product or to provide the service. In
order to allocate the overhead costs to products, the predetermined overhead rate
(obtained in Step 4) is multiplied by the level of cost driver per activity used by the
product. 2

By successfully implementing the ABC system, management can get accurate cost
information for strategic decision-making and operational improvement. Moreover,
thanks to this system, it is also possible to detect the need of process improvement as
well as quality improvements of the employees of an organisation.

4.2 Benefits of ABC

Like every costing system, the ABC also comprises some advantages and
disadvantages. The ABC helps a company to make better decisions in terms of
monitoring of the ratio of cost/income and to implement its strategies and hence, it can
contribute to a company’s competitive abilities.

First of all, ABC can increase the accuracy of product costs as costs are directly
assigned by means of multiple cost drivers used to produce each product. In this sense,
ABC leads to more cost pools used for assigning overhead costs to products, which
constitute a more accurate way of assigning overhead costs than the single plantwide
overhead method. 3

Moreover, ABC provides accurate and informative product costs that allow
management to conduct accurate profitability analyses. By focusing on the activities of

1
Cf. Warren Carl S., Reeve James M., Duchac Jonathan (2016), pp. 798-799
2
Cf. Heisinger Kurt (2010), p.103
3
Cf. Weygandt Jerry J., Kimmel Paul D., Kieso Donald E. (2010), p.161
Activity Based Costing 23

an organisation and the demands those activities make on the organisation’s resources,
ABC provides a clear picture of how products, facilities, distribution channels or
customers generate revenues and consume resources. Managers can use this information
to conduct product profitability analysis of the various facilities or customers and
thereby, they can run managerial efforts to improve activities that have the biggest
impact on the bottom line. 1 Besides product profitability, ABC also provides valuable
insights for customer profitability analysis, which involves the identification of revenue
streams and service costs associated with specific customers or customer groups. 2 Due
to the fact that customers use different amounts of an organisation’s activities, but not
all of them, various customer profitability profiles are built up so that customers are
charged according to the cost used to serve them. 3

Another advantage of ABC system constitutes in its ability of process improvement and
cost management as it provides useful information for supervising the various activities
that generate costs. The ABC system provides management with a better view of the
detailed activities involved and the cost of each activity. 4 By carrying out the analysis,
organisations can focus on improving efficiency in the most costly activities and
thereby it allows them to reduce costs. 5

ABC also guides better management of decisions. By getting more accurate product
costing information, this can help setting selling prices that allow achievement of the
desired product profitability levels. 6 Depending on the obtained cost data, managers can
also decide whether to continue to produce a product or eliminate the product. Thus,
ABC allows manager to make accurate strategic decision and pricing decisions.

In addition, ABC allows improvement of internal performance of an organisation.

Performance measurement constitutes the process that quantifies how effective and
efficient the actions of an organisation are. 7 Performance measurement is important in
strategy execution because it is a process that ensures that an organisation is pursuing
strategies that lead to achievement of overall goals and objectives.

1
Cf. Cooper Robin, Kaplan Robert S. (1991)
2
Cf. Eaton Graham (2005), p.17
3
Cf. Wilks Colin, Burke Louise (2006), pp. 306-307
4
Cf. Heisinger Kurt (2010), p.110
5
Cf. Wilks Colin, Burke Louise (2006), p.304
6
Cf. Weygandt Jerry J., Kimmel Paul D., Kieso Donald E. (2010), p.161
7
Cf. Neely Andy, Gregory Mike, Platts Ken (1995), p. 1229
Activity Based Costing 24

Last but not least, the ABC system constitutes a tool in financial planning and
budgeting. ABC can lead to activity-based budgeting, which relates activities and cost
drivers to the underlying costs and as such supports continuous improvement and
process management. 1 Due to the ABC’s predictive ability, it is possible to utilise the
ABC model for the preparation of budgets that are consistent with the strategic goals
and the resource capacities of a company. Therefore, by knowing the activity-based cost
of the activities performed by an organisation, managers can include the appropriate
level of resources in the budget. 2

4.3 Limitations of ABC

Although ABC constitutes one of the most accurate methods to allocate costs, it still
comprises some limitations and disadvantages. One of the major disadvantages of ABC
is that although the ABC approach represents a scientific method, this method is still
complex, time consuming and expensive to implement. ABC is time consuming as it
requires teamwork across the organisation, meaning that managers and accountants
have to take their time out from their daily activities in order to assist in the ABC
process. 3 Moreover, ABC is costly to maintain as the process of data collection and data
entry requires substantial resources.

Even though with ABC, overhead costs are directly allocated to products through cost
drivers, there are still certain overhead costs that can’t be easily assigned to products or
customers. These costs are called “business-sustaining costs” and they represent activity
costs that aren’t caused by the manufacturing of products or the supply of services to
customers and they include unused capacity expenses 4. As there is no logical way to
trace business-sustaining costs to products, services, customers or channels on a
proportionate basis, these costs have to be equally distributed among the various costs
objects. 5

1
Cf. Mowen Maryanne M., Hansen Don R., Heitger Dan L. (2016), p.494
2
Cf. Davis Charles E., Davis Elizabeth (2012), p.381
3
Cf. Heisinger Kurt (2010), p.110
4
Cf. Northrup Lynn (2004), p.69
5
Cf. Lawson Raef (2006), p. 13
Activity Based Costing 25

In practice, the ABC system is applied to develop the full cost of products. However,
since full costs also include allocation of fixed costs (like the depreciation cost), which
constitute sunk costs, the cost per unit generated by the ABC system doesn’t incorporate
the measurement of additional costs required for the manufacturing of a product. 1 Since
sunk costs are costs that have already been incurred and that cannot be recovered 2, these
costs are therefore not appropriate for decision-making.

Lastly, another point to mention is that the ABC doesn’t conform to the generally
accepted accounting principles (like the IFRS) and hence, as a result, companies that
have implemented the ABC system still need to own another costing system, which is
used for the preparation of external reports. 3

4.4 Traditional Costing vs. ABC

There is a philosophical difference between the traditional and the ABC approaches.
Traditional Costing System Activity-Based Costing System
Concept Cost objects consume resources Cost objects consume activities and activities
consume resources
 Cause-effect relationship
Overheads Assigned to departments, then to cost Assigned to activities, then to cost objects
objects
Cost pools Limited number of cost pools Many cost pools
Cost drivers Restraint number of cost drivers Multiple cost drivers
Focus Managing costs of departments or cost Managing cost impact of cross-functional activities
centres
Table 1: Elements of Traditional Costing and ABC 4

The traditional view of cost accounting is that cost objects (products, services,
customers, etc.) consume resources while in an ABC system, every cost assignment to
an activity should be transparent and traceable, by means of cause-effect relationships,
to the demand for resources by the cost object. 5 In this sense, the logic of ABC is that
cost objects consume activities and activities consume resources, thus in other words,
costs are driven by activities. For both systems, the allocation of the overheads is
undertaken by means of a two stage allocation process.
1
Cf. Khan M. Y., Jain P. K. (2010), p.12-17
2
Cf. Investopedia, 2016
3
Cf. Garrison Ray H., Noreen Eric W., Brewer Peter C. (2009), p.338
4
Source: own representation
5
Cf. Kaplan Robert S., Cooper Robin (1998), p.100
Activity Based Costing 26

a) Traditional costing systems

Overhead cost accounts

(for each category of expenses e.g. property, taxes, depreciation, etc.)
First stage
allocations
Cost Cost Cost
centres centres centres
1 2 N
(normally (normally (normally
departments) departments) departments)

Second stage allocations

(direct labour or
machine hours)

Direct
Cost objects (products, services and customers)
costs

(b) Activity-based costing systems

Overhead cost accounts

(for each category of expenses e.g. property, taxes, depreciation, etc.)
First stage allocations
(resource cost drivers)

Activity Activity Activity

cost cost cost
pools pools pools
1 2 N

Second stage allocations

(activity cost drivers)

Direct
costs Cost objects (products, services and customers)

Figure 7: Two stage allocation process for traditional and ABC systems 1

The figure above illustrates the traditional and the ABC approach of cost allocation. In
the traditional approach, overheads are firstly allocated to product cost centres, which
generally represent production and service departments. Next, overheads are traced to
cost objects via small number of predetermined overhead allocation rates, typically

1
Source: own representation, adapted from Drury Colin (2008), p.224
Activity Based Costing 27

overheads per direct labour hour or machine hours, that vary directly with the volume
produced. 1 In other words, the traditional approach assumes that all overheads are
proportional to production volume. On the contrary, in the ABC system, the overhead
costs are apportioned into cost pools, with one cost pool for each cost-driving activity.
And afterwards, the overheads are allocated to the cost objects through activity cost
driver rates that attempt to show the extent to which each particular cost object is
believed to cause the particular part of the overheads (as shown on Figure 5). 2
It is to note that cost centres are similar to cost pools, except that each cost pool is
linked to a particular activity, rather than to general departments.

As stated above, in the traditional costing system, overhead costs are apportioned to few
cost pools as they are assigned to service or production departments, whereas in ABC,
many activity-based cost pools are created. Concerning the allocation of the overheads
to the cost object, which is processed by means of cost drivers, in the traditional costing
system only one or a few volume-related cost allocation bases are used. This is different
in the ABC system, which aims to establish a causal relationship between the costs and
activities in order to assign costs more objectively 3. ABC provides additional insights
into the factors that guide indirect costs by defining multiple cost drivers that constitute
either a linear or a non-linear relationship between the cost objects and their demand for
resources. 4

Another difference between the traditional and the ABC system consists in their focus.
In the traditional costing system, the obtained results allow a company to manage its
costs of departments or costs centres as it assigns the overheads to the cost objects via
costs centres. Hence, the traditional costing approach enables a company to trace all
expenses related to a certain department and thereupon to monitor the effectiveness of
all aspects within a company. Regarding the ABC approach, it allows to measure the
cost impact of the cross-functional activities of a company. ABC identifies the true
drivers of cost and the areas of extreme high overhead costs per unit for particular
products, services, or customers. By identifying activities without adding value, this
allows a company to focus their effort on reducing the cost drivers of these activities. At

1
Cf. Drury Colin (2008) pp. 223-224
2
Cf. Atrill Peter, McLaney Eddie (2009), p.140
3
Cf. Spitzer Dean R. (2007), p.241
4
Cf. Budding Tjerk, Grossi Giuseppe, Tagesson Torbjörn (2015), p.108
Activity Based Costing 28

the same time, ABC also helps to determine the costs associated with specific customers
or customer segments that turn out to be unprofitable. Therefore, ABC constitutes a
cross-functional measurement process, which facilitates decision making. 1

4.5 Activity Based Management

Activity-based management is defined by CAM-I as a discipline that focuses on the

management of activities as the route to improving the value received by the customer
and the profit achieved by providing this value. ABM includes cost driver analysis,
activity analysis, and performance measurement, drawing on ABC as its major source
of data. 2. The two terms ABC and ABM shouldn’t be used interchangeably. The ABC
approach identifies the costs of activities and the outputs produced by those activities,
which is however insufficient for continuous improvement of the company. On the
contrary, ABM represents a management tool that facilitates process improvement,
innovation and the realignment of resources 3 by means of the data obtained through
ABC in order to reduce or eliminate the unprofitable activities and thereby, improve the
overall process of a company.

The relationship between ABC and ABM is best illustrated in the CAM-I ABC/M Cross
(Figure 4) on page 18. The vertical cost view serves as an important input to the process
view. The process view illustrates the ABM approach, which decomposes a business
process model into activities and then to performance measure. In this sense, cost
drivers drive the cause for activities and the effort that is required to engage the
activities and performance measures drive the achieved results of activities, meaning the
efficiency, the required completion time and the quality of activities that were
performed. 4

ABM can be divided into two categories: the operational ABM and the strategic ABM.

1
Cf. Spitzer Dean R. (2007), p.241
2
Cf. Lawson Raef (2006), p.2
3
Cf. Cogent (2016)
4
Cf. SAS Institute (2007), p.6
Activity Based Costing 29

Activity-Based Management

Strategic ABM
Operational ABM • Doing the right things
• Doing things right • Product and customer
• Value added analysis profitability analysis

Figure 8: Operational and Strategic ABM 1

The operational ABM emphasizes on doing things right in order to execute activities
more efficiently. In the operational ABM, the ABC information helps to perform value
added analysis in which the focus is put on identifying value adding activities that need
to be improved and reducing or eliminating non-value adding activities for cost cutting. 2
The goal of the operational ABM is to improve efficiency, to enhance the use of asset
3
and to reduce costs. To achieve these objectives, the operational ABM utilises
management tools like activity analysis, process improvement, total quality
management and performance measurement. 4

The strategic ABM is about doing the right things for the purpose of performing
activities in a more effective way. The strategic ABM strives to increase the occurrence
of high-profitability activities and to decrease the occurrence of low-profitability ones. 5
The data obtained through the ABC approach provides information about the
profitability of individual products and customers and therefore, the strategic ABM can
be used to identify which products and customers are the most profitable and for which
sales volume should be developed. 6 Strategic ABM focuses on process design, value-
chain analysis and product and customer profitability analysis with the purpose of
supporting the decisions and increasing the overall profitability of the company. 7

1
Source: own representation
2
Cf. Gupta K. P. (2009), p.90
3
Cf. Kaplan Robert S., Cooper Robin (1998), p.137
4
Cf. Gill Suveera (2015), p.301
5
Cf. Proctor Ray (2009), p.260
6
Cf. Maher Michael W., Stickney Clyde P., Weil Roman L. (2012), p.76
7
Cf. Gill Suveera (2015), p.301
Activity Based Costing 30

5 Case Study: Implementation of ABC to Raiffeisen Bank of

Luxembourg

From this chapter on begins the practical part of the assignment. In this chapter, the
author will present the company in which the ABC will be implemented, namely the
Raiffeisen Bank of Luxembourg (RB). The chapter starts with a description of the
company profile and organisation, how the bank started and its evolution. Afterwards,
an industry analysis will be executed in order to understand the threats of RB in the
financial industry. The chapter will then end with a presentation of the various products
and services offered by RB.

5.1 Company Profile and Organization

The first cooperative banks were founded in the 19th century under the concept of
Friedrich Wilhelm Raiffeisen and Hermann Schulze-Delitzsch, the founders of the first
rural cooperative banks in Germany. The first credit union systems and cooperative
banks were founded in 1925 in Luxembourg. RB of Luxembourg was founded in 1926
and it constitutes the first independent cooperative bank in Luxembourg covering the
entire national territory. Moreover, Luxembourg’s RB doesn’t have any relation to the
other Raiffeisen Banks of abroad.

Number of Caisse Raiffeisen

160
138 134
140
122
120
100
75 78
80
60 44 46
35
40
20 13
5
0
1925 1930 1940 1950 1960 1970 1980 1990 2000 2014

Figure 9: Evolution of the number of Caisses Raiffeisen 1

1
Source: own representation, adapted from HRD (Human Resources Department) of RB
Activity Based Costing 31

In 1960, RB regrouped 138 Caisses Raiffeisen 1 (CR) across the country that reduced
over the years as illustrated on Figure 9. CR are independent legal entities that belong to
RB. Altogether, RB consists of 14 entities, 13 CR and the bank Raiffeisen, who are all
controlled by RB. As of May 2016, RB counts 42 sales points all over the country; 13
of them depending directly from the bank and the other 29 belonging to the 13 CR.
Moreover, beside the sales points, there are also 52 ATM’s distributed over the whole
region of Luxembourg.

The administration as well as the legal and extra-legal representation of the local Caisse
is provided by a board of directors and the supervision is entrusted to a board of
auditors. Under the control of the board of directors, the manager leads and develops the
activities of the Caisse within the context of legal and statutory provisions, the decisions
of the bodies of the Caisse as well as the regulations and requirements of RB. Moreover,
the General Assembly of the Caisse represents the universality of the associates of the
Caisse, which must at least meet up once a year in an ordinary general meeting.

All the CR, the Raiffeisen Members S.C. and several agricultural, viticultural and
horticultural organisations are associates of the RB. RB’s decision-making body is
composed of the General Assembly, the supervisory board and the board of
management.

Nowadays, RB has evolved from a rural union system to a universal financial institution
and it covers not only retail activities but it also has good expertise in private banking,
wealth management and small, medium enterprise segments.

On 31st May 2016, RB has more than 22.000 members 2 in all the entities combined.

Regarding the finances of Raiffeisen Bank, it is well placed. With an increase of the
total balance sheet by 8.5%, increasing deposits of non-banking customers and granted
loans in progression by 4.8%, the bank shows a net profit of 17.55 million euros in 2015
versus 17.96 million euros in 2014. 3

The organisation chart of RB is presented as follow:

1
Source: HRD of RB
2
Source: Commercial Support Department of RB, Status on 31.05.2016
3
Cf. Banque Raffeisen (2016) : Rapport annuel 2015
Activity Based Costing 32

Figure 10: Organisation chart of RB 1

The board of management is ensured by a president, a vice-president and three members

of the management board who each has their own responsibility over several metiers.

In the recent years, with the increase of the RB’s activities, the number of employees
has also increased steadily in order to support the sustained development of the Bank's
activities:

Evolution of the number of employees

700
591 609
600 530 550 580
482 511
500 424 430 433 450 471 474
384 408 413
400
300
200
100
0

Figure 11: Evolution of the number of employees 2000-2015 2

5.2 Industry Analysis

1
Source: own representation
2
Source: own representation, adapted from HRD of RB
Activity Based Costing 33

In Luxembourg financial industry, there are around 144 banks, subsidiaries or branches,
including RB, that come from 28 different countries like Germany, France, Belgium,
the United Kingdom and China. 1 The market in this branch is rather static as there
weren’t a lot of new entrants during the last five years 2.

The five forces that threaten the performance of RB are rivalry, buyers, substitutes, new
entry, and suppliers.

Substitutes constitute rather a strong threat, as almost all the retail banks offer the same
categories of products and services. Consumer will therefore have the possibility to
choose among a large range of products. Moreover, as RB constitutes a regional
cooperative bank, it doesn’t have diversification with any branches in other countries
and thus its products are pricier than some of its competitors like the BCEE who
operates under the influence of Luxembourg’s government.

New entrants pose a low to medium threat to the organisation of RB because as

mentioned above, there weren’t many financial institutions that entered the market in
the last five years. As for the industry’s rivalry, the rivals of RB consist of all the banks
that offer the same products and services like RB. RB main competitors are BCEE, BIL,
BGL BNP Paribas and ING. Moreover, with the development of technology, an
additional threat consists in the digital banking, in the sense that more initially non-
financial institutions offer financial services to their customers like for example the
technology company Apple Inc. who offers the Apple Pay service, which constitutes a
mobile payment and digital wallet service.

Suppliers in view of the collaboration partners pose a medium to high threat to RB. The
major cooperating corporations of RB are Foyer, Schwäbisch Hall, Vontobel and Post.
As RB’s profit primarily comes from the net interest margin (difference between the
interest paid out to customers for their deposits and the interest generated by loans
granted to the customers) and the commissions earned through its various
collaborations, this could be a menace to RB if one of its collaborating companies
decide to cease the collaboration with RB.

1
Cf. CSSF (2016, April 30)
2
Cf. CSSF (2012), p.52
Activity Based Costing 34

Buyers exert a somewhat strong force in the financial industry. In this case the buyers
are the customers who demand and consume the various products and services offered
by RB. The consumers have the option of choosing among a large range of products,
whether it is a saving account, a credit card, a credit loan, an insurance product, an
investment product, etc. Fortunately, the number of buyers is increasing because the
number of population and foreign employees are also rising in Luxembourg.

5.3 Company’s Products and Services

RB offers a large range of products and services. It goes from basic current accounts to
special investment products and each product is categorised as per age, purpose, use and
needs of the customers.

Figure 12: GC Flyers of RB 1

RB has a product line named Green Code (GC), which is designated for children of less
than 12 years (GC Kids) up to young adults (GC Study or GC Job). Green Code
products feature current accounts and saving accounts with special interest rates. The
GC Kids also allows parent to save money for their children as children can’t access
their accounts until their majority age. For children between 12 and 18 years, RB offers
the GC 12 -18 package. The GC 12-18 as well as the GC Study/ Job, which is destined
for young adults between 18 and 30, offers the customer the possibility to get a debit
card, respectively a credit card with different limitations. Moreover, GC debit card
holders receive special discounts at various places such as the cinema, the fast food

1
Source : Flyers of RB
Activity Based Costing 35

restaurant and the fitness or wellness centres. Furthermore, they also have the
possibility to use the e-banking service of RB named R-NET.

As for the retail customers, RB also offers a wide range of products. It provides not only
current operations services like transactions with the current account (transfers or
withdrawals) but also saving products, investment products, insurance and precaution
products and credit services. In addition, RB proposes customers to become member
either of the CR or of Raiffeisen Members S.C.. By becoming a member of RB, the
member participates in the OPERA program where he gets more privileges than an
ordinary customer and the member has the right to attend the general assembly that
takes place at least once a year.

In terms of the saving products, RB offers not only saving accounts, but also time
deposits and sight deposits. Moreover, it offers housing-saving and loan products
named BSH in collaboration with Schwäbisch Hall, a German home savings and loan
association situated in Baden-Württemberg. As for the insurance and precaution
products, RB provides some of these products in cooperation with Raiffeisen Vie, a
joint-venture of the insurance company Foyer. Moreover, RB provides investment
products in collaboration of Vontobel, a Swiss private bank. Last but not least, the new
partnership with POST gives POST customers the possibility to subscribe and use the
products and services rendered by RB like the execution of current operations services.

Concerning the credit services, the bank provides various types of loans such as
personal loans, housing loans, student loans, financial leasing and investment loans.

Figure 13: Tax Optimisation Products 1

1
Source: Flyers of RB
Activity Based Costing 36

RB also offers tax optimisation products such as R-Vie Protect, R-Junior, R-Pension or
housing saving and loan products. By subscribing to one of these products, customers
can enjoy interesting tax reductions and at the same time they can build a solid financial
reserve for their future. Moreover, depending on their personal situation (single or
married, with or without children), customers have the possibility to combine the
different deductible amounts.

Besides the retail products, RB also supplies products and services for small and
medium enterprises and freelance works like the Multiline, which constitutes a solution
of multi-bank e-banking service specifically designed for professionals, regardless of
the size of the company. This service provides a maximum of security as it establishes a
secure link between the enterprise’s computer and the one of the bank in order to
transmit the financial data in a structured, compressed and encrypted form.
Activity Based Costing 37

6 Process of Implementation of ABC in Raiffeisen Bank

This chapter studies the process of implementation of the ABC in Raiffeisen Bank. The
author will start with identifying the resources, the direct and indirect costs of RB,
following by a description of the activity and process mapping, which includes the
establishment of a dashboard and a matrix table. Next, the costs will be assigned to
activities by means of a waterfall model and cost drivers will be determined. Lastly, an
example of activity costs assignment to cost objects will be delineated in order to give a
complete view of the process of implementation of ABC in RB.

6.1 Determination of the Resources

In order to identify the various resources of RB, it is first required to determine the
different operational source systems of RB that provide financial and non-financial data.

Systems Description
T24 T24 (Temenos) : Activities of customers (current accounts, securities accounts, current
operations, credits, …), provisions of the Bank and accounting system
TriBank Costs of the bank (charges, rent, insurances, materials…) and amortisation
Apsal Salaries et advantages of the employees
MyGesper Organisation of the Bank
DSKNet (annual) leaves, absences, …
Excel file Other information

Table 2: Source systems of RB 1

The Temenos system, also called T24, represents an operational system that manages
the activities of the customers as well as the accounting of the various expenses
generated by the ordinary and exceptional activity of the bank. The system provides all
the financial movements, transactions and portfolios of the private and institutional
customers. Hence, exploiting the information of this system will be appropriate in the
case of a further cost-benefit analysis (comparison of costs/income, outstanding
customers, evolution, trend, etc.).

Tribank constitutes an invoicing tool, which covers all the expenses of the bank,
including the amortisation costs and the costs related to the development of new
projects. The extraction of the data from this tool is relevant in case where the

1
Source: own representation
Activity Based Costing 38

information obtained through T24 isn’t accurate enough for the determination of all the
expenses of the bank. Another system with which it is possible to retrieve the financial
data of RB is the Apsal system. This program contains all the information related to the
personnel costs of the bank like the salaries.

Concerning the MyGesper tool, it manages the organisation of RB by means of a

hierarchical view of the employees and the services within the entities of the Bank. In
addition, it also registers training sessions in which an employee is inscribed. As for the
DSKNet, this system provides information related to the employees of the bank like
their attendance, their leaves, absences due to sickness or absences due to training
sessions, etc. These data allow the allocation of the provisions for paid leaves by
comparing the taken leaves and the balance of the leaves.

It is to note that for information that aren’t contained in the source systems, a separate
data file (for ex. Excel file) will be established in which complementary information are
comprised. These represent data that are either not presented in the operational systems
or that require manual processing as it is impossible to directly rectify these data in the
source system.

After determining the source systems, it is now possible to identify the foundation of
the direct costs per analytical centre.

The Direct costs constitute the costs that are derived from the operational systems and
that are accurately attached to analytical centres (DCOAC (Direct Costs per Operating
Analytical Centre). However, as there are some costs that can’t be easily attached to an
analytical centre of the operational system, it would be appropriate to define a default
value for each dimension that corresponds to a centre, category or project. An example
would be the bill of the Blackberry phones that are placed at the disposal to the directors
and managers of the bank. And therefore, the parameterisation of allocation keys/bases
is required in order to isolate certain costs that need to be allocated.

The indirect costs arise from the reallocation of certain costs that can’t be directly
allocated to an analytical centre. The determination of the indirect costs constitutes the
primary stage of identification of the overhead expenses of the bank in order to
subsequently be able to allocate these costs to activities/centres.
Activity Based Costing 39

For costs that are assigned to a generic or insufficient specific level, it is possible, via
allocation bases, to reallocate these costs to other departments, categories, rubric,
segments, etc. The principle of definition and application of the allocation keys is based
on two areas: source perimeter (range of amounts to be reallocated) and target perimeter
(range of members receiving the new amount). The first scope is clearly defined in the
definition of the allocation bases, that is to say, the class, the centre and the period that
allow the recovering of the distributed amount is specified. The second perimeter isn’t
directly specified but it is defined through the applied allocation key.

Allocation key Description Source

Nb FTE Number of FTE MyGesper
Nb T24 Licences Number of T24 Licences T24
Nb Customers Number of customers T24
Nb Current Accounts Number of current accounts T24
Nb Total cards Total number of cards T24
Table 3: Example of allocation keys 1

The “FTE” key gives information about the number of employees working fulltime
(1 FTE) or halftime (0.5 FTE). Hence, all the cost centres involved in the FTE will
receive a proportion of the original amount. This also counts for other allocation keys
that involve the equipment rate of the customers. For example, the number of
customers, as well as the subscribed products of customers can be evenly assigned to
the employees of an agency via the FTE key. Moreover, the number of T24 licences can
also be equally distributed to the employees through the FTE’s within RB.

Take the maintenance expenses of T24. Suppose that the maintenance expenses for
three agencies is 25.500 € and each agency own the following number of T24 licences:

Allocation key Centre Value

Nb T24 Licences Agency Centre 5
Nb T24 Licences Agency Mamer 4
Nb T24 Licences Agency Wasserbillig 3

Table 4: Number of T24 Licences 2

In order to assess the maintenance expenses to each agency, the following formula will
be applied:

1
Source: own representation
2
Source: own representation
Activity Based Costing 40

𝐾𝐾𝐾𝐾𝐾𝐾 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑜𝑜𝑜𝑜 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑥𝑥 𝑥𝑥 % 𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎1
∑ 𝐾𝐾𝐾𝐾𝐾𝐾 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

Thus, the maintenance expenses of each agency will be:

Denomination Allocation key Centre Amount

Maintenance T24 Nb T24 Licences Agency Centre 25.500 x (5/12) = 10.625 €
Maintenance T24 Nb T24 Licences Agency Mamer 25.500 x (4/12) = 8.500 €
Maintenance T24 Nb T24 Licences Agency Wasserbillig 25.500 x (3/12) = 6.375 €

Table 5: Allocated amount of maintenance expenses 2

To get a complete overview of the direct and indirect costs of RB as well as the method
of allocation of these costs, a dashboard uniting all the information will be established.

Responsible
Category Sub-category Components Allocation Method Allocation base Source
Department
Personnel costs
Labour costs
Fixed labour costs Allocation Base & DCOAC Number of FTE Apsal HR
Variable labour costs Allocation Base & DCOAC Number of FTE Apsal &T24 HR
Mutual Insurance Scheme Refund (CCSS) Allocation Base & DCOAC Number of FTE Apsal HR
Social charges
Accident Insurance Contribution Allocation Base & DCOAC Number of FTE Apsal &T24 HR
Health Insurance Contribution Allocation Base & DCOAC Number of FTE Apsal &T24 HR
Mutual Insurance Scheme Contribution Allocation Base & DCOAC Number of FTE Apsal &T24 HR
Mutual Insurance Scheme Refund - Social charges Allocation Base & DCOAC Number of FTE Apsal &T24 HR
Informatic system
Production
T24 T24 Expenses Allocation base Number of users Trilog IT
Blackberry Blackberry Expenses Direct Cost Analytical Centre User of the Blackberry Trilog IT
DWH Datawarehouse Expenses Allocation base Number of reports Trilog IT
DMS Document Management System Expenses Direct Cost Analytical Centre TUP payments Trilog IT
Mosel Mosel Monitoring of ATM's Expenses Allocation base Agencies and Caisse RB Trilog IT
Internet Internet Expenses Allocation base Digital Banking Trilog IT
Advertising
"Molconcours" Raiffeisen Expenses Allocation Base & DCOAC Number of customers Trilog Marketing
Advertising Expenses Allocation Base & DCOAC Number of customers Trilog Marketing
Sponsoring Expenses Allocation Base & DCOAC Number of customers Trilog Marketing
Customer Events Expenses Allocation Base & DCOAC Number of customers Trilog Marketing
Audit
Internal Audit Expenses Direct Cost Analytical Centre Trilog Internal Audit
External Audit Expenses Allocation Base & DCOAC Trilog Management Board
Consulting Expenses Allocation Base & DCOAC Trilog Management Board
Training
External Training Session Expenses Direct Cost Analytical Centre Trilog HR
RB Training Session Expenses Allocation base All-Inclusive Price per FTE Excel HR
Training - Catering Expenses Direct Cost Analytical Centre All-Inclusive Price per FTE Excel HR
Card Payments
Property Expenses
ATM Exepenses Allocation base Number of cards Trilog& T24 Operation
Debit Card Expenses Allocation base Number of V-Pay cards Trilog& T24 Operation
Credit Card Expenses Allocation base Number of credit cards Trilog& T24 Operation
ATM Maintenance Fees Direct Cost Analytical Centre Trilog& T24 Operation

Table 6: Fraction of the dashboard of RB 3

The dashboard represents the reporting that retraces by analytical centre the revenues
and costs over which the manager of the department/service has a decisive, real and
direct impact on it. For example, the manager of the marketing department is

1
The percentage of allocation (% of allocation) allows the allocation of a portion of the selected costs
using the appropriate KPI.
2
Source: own representation
3
Source: own representation
 Activity Based Costing 41

responsible for the advertising expenses, which is related to the costs beard for an
advertisement campaign. Thus, the objective of the dashboard is to perceive the actual
cost of each activity and the result will serve as a basis for the cascade of the direct
costs to business units.

6.2 Activity and Process Mapping

As stated above, several sources system will be analysed in order to determine the
resources of RB. Unfortunately, these systems don’t necessarily have the same
framework, the same granularity or the same attributes and therefore, it is necessary to
provide a common reference system for all data in order to ensure the coherence and
standardisation of the received information. This reference system should allow the shift
of the data from one category to another one like for example the shift from the
financial accounting system to the managerial accounting system. The reference system,
called Mapping, is based on the criteria that vary according to the source application
providing the data. Thus, it is required to establish a mapping per application and for
each dimension that requires a mapping.

Consider the following encoding of the invoices in the TrikBank system:

Invoice Denomination Account Product Sub-Product Centre Amount

2016-0001 Car Leasing RB9999 61521 100 A32 USR00033 - 425,56 €
2016-0002 Fuel RB9999 61522 100 A20 USR00033 - 123,50 €
2016-0003 Internet Box – Employee 62217 200 A15 Agency Centre -75,00 €
2016-0004 Internet Box – Customers 62217 300 A23 Agency Centre - 30,00 €
2016-0005 Meal Vouchers 62059 200 B12 USR0099 - 36,00 €
2016-0006 Purchase Reimbursement 62059 300 B12 Agency Mamer - 45,25 €
2016-0007 T24 Maintenance 62228 400 C30 Bank - 25.500,00 €

Table 7: Bills encoded in TriBank 1

The table illustrated above contains a lot of information and the goal is to get a view by
category, without any details concerning the invoice or the product as these data will
only hinder and impair the analysis. The objective is to provide an exploitable
granularity per category by hiding an excessive level of detail. A possibility would be to
regroup the vehicle charges, which include the rent, insurance, maintenance and fuel, to
a category “Leasing Charges”. Moreover, it would also be appropriate to assort all the

1
Source: own representation, data obtained from Management Control Department
Activity Based Costing 42

charges related to the advantages of the employees such as the meal vouchers or the
purchase reimbursement.

Thus, the table will look like following:

Category Amount Remark

Leasing Charges - 549,06 € Invoice 2016-0001 & 2016-0002
Internet Employee - 75,00 € Invoice 2016-0003
Internet offered to the customers in the agency - 30,00 € Invoice 2016-0004
Other advantages of the employees - 81,25 € Invoice 2016-0005 & 2016-0006
Temenos T24 -25.500,00 € Invoice 2016-0007

Table 8: Pooling of categories 1

The Mapping framework can also be of use for the enumeration of the salaries of the
employees as it allows the encryption of the details of each employee, respectively of
the managers and executive assistants (attaché de direction) of the bank. The following
table shows an example of the encoded salaries of the managers/attachés in Apsal.

Account Denomination Centre Denomination Centre Amount

9514037 Salary Executive Assistant USR1216 Mr XXX -1.000,00 €
9527037 Bonus USR1216 Mr XXX -100,00 €
9514357 Salary Executive Assistant USR 2687 Mr YYY -1.000,00 €
9527357 Bonus USR 2687 Mr YYY -250,00 €
9514357 Salary Manager USR 7563 Mr ZZZ -1.500,00 €
9527357 Bonus USR 7563 Mr ZZZ -1.000,00 €

Table 9: Details of the salaries and bonuses perceived by each manager/attaché 2

Beside the mapping of the categories, it is also possible to proceed through the mapping
of the accounts:

Application Order Account (IN) Category (OUT)

Apsal 10 9514xxx Manager Expenses
Apsal 20 9527xxx Bonus Expenses

Table 10: Account Mapping 3

The first four digits of the account represent a group of an account, thus it is possible to
regroup the accounts with the same numbers and apply them on the bank level in order
to create a mapping with several categories.

1
Source: own representation
2
Source: own representation
3
Source: own representation
Activity Based Costing 43

Category Denomination Centre Amount

Manager Expenses Salary Bank -3.500,00 €
Bonus Expenses Bonus Bank -1.350,00 €

Table 11: Applied Categories 1

Next, these amounts can be distributed to the various departments of the bank via a FTE
manager key so that the confidentiality of the salaries and bonuses perceived by the
managers/attachés will be conserved.

The definition of the various rules for the Mapping framework constitutes the basis of
the cost allocation module. The establishment of the components for each dimension
allows the development of a base of raw data that facilitates the allocation of the costs
to the various departments.

Domain Example Description

Application Tribank / Apsal / NovaBank Application of a different mapping according to
the source file
Dimension Centre / Rubric / Entity … Dimension defined in the mapping
Criteria IN 1 621578 / USR042536 / LU0010000… Selection of 1st element (category, centre, …)
Criteria IN 2 Category / Product Selection of sub-element: Category
Criteria IN 3 Sub-category / Sub-Product Selection of sub-element: Sub-Category
Criteria IN 5 Original Entity Selection of sub-element: Entity
Criteria IN 6 Direction/Course Selection of sub-element: Direction
Criteria IN … … Selection of sub-element: …
Value OUT Salaries / USRxxx / Agency Kirchberg…
Direction OUT Direction/Course Possible to inverse the direction of the operation

Table 12: Example of Mapping 2

In order to establish a mapping, it is required to first determine the various domains that
are essential for the mapping like the source application, the various important
dimensions, the various criteria applied in the bank, etc. For the creation of the
mapping, it is possible to either create a separate file for each domain of analysis or
define a unique mapping for all the domains of analysis.

Moreover, it is important to eliminate the duplications of the data and to keep the initial
data. As there exists interactions between the various applied source systems, it is
possible that some of the same factors reside in these applications. For example the bills
of the bank are recorded in the TriBank system in its very details. These bills are
afterwards transmitted by the TriBank system to T24 system (with less details) in order

1
Source: own representation
2
Source: own representation
Activity Based Costing 44

to affect the profit and lost account of RB. This goes the same with the depreciation
expenses, which will be registered in the TriBank system and thereafter transferred to
the T24 system. Thus, in order to avoid duplication of the data, it is necessary to filter or
combine the diverse data of analysis.

The notion of budgetary responsibility also plays an important role in the determination
of the centre of attribution of the invoice expenses. There are two cases of budgetary
responsibility: the standard case and the particular case. The standard case takes the
various basic data (of the source system) and the information gathered via the mapping
tables (for the relevant dimensions, taking into account the input source application) and
discharges the invoice expenses on the indicated centres. As for the particular case, it
follows the same logic as the standard case, except for the category dimension, where it
is appropriate to define an attachment centre for the various invoice expenses as these
expenses are directly attached to the costs of the bank instead to the initiator centre of
the expenses. Thus, in order to manage this problem, the notion of budgetary
responsibility is required as it corresponds to an attachment centre that constitute the
default attachment centre of an invoice and that will be specific to each category.
In the previous example of table 7 (p.40), the maintenance expenses of T24 are attached
to the Bank Centre. However, by applying the budgetary responsibility, the maintenance
expenses of T24 are attributed to the IT service as T24 constitute an informatics tool.
And after this stage, it is now possible to distribute these expenses to the T24 users
within the bank by means of the allocation bases explained in the following section.

An additional point to mention is that it is important to define in the mapping not only a
category but also its sub-category as it is essential to be able to trace the sub-category to
the category. This also counts for the agencies and Caisses of RB, as the tracing of the
agencies to the Caisses is crucial for the problematic of cost distribution for the
managers/assistant managers of the CR. In the organisational structure of RB, the
managers and assistant managers are directly attached to the Caisse that they manage.
As a consequence, their costs will be systematically affiliated to the Caisse without
affecting the agencies that compose the Caisse. The objective is to better distribute the
charges on the entire structure that the manager manages in order to best reflect the
management task on the agency, the department and the team that he supervises. Hence,
 Activity Based Costing 45

it is important to identify the employees with this function and in this sense to know the
organisational structure of the bank (via the MyGesper system).

The MyGesper system defines various levels within the RB: function, activity, metier,
region, department, service and user ID. In order to find out if an employee manages
other departments, services or employees, it is required to proceed through an analysis
of the hierarchical structure of the employee. If the employee is directly attached to the
department, than he is considered as having a management position.

As an illustration, take the following example:

Function Activity Metier Region Department Service User ID

Business lines Commercial Bank Retail Centre-West CR Mamer CR Mamer USR001
Business lines Commercial Bank Retail Centre-West CR Mamer CR Mamer USR002
Business lines Commercial Bank Retail Centre-West CR Mamer Agency Mamer USR003
Business lines Commercial Bank Retail Centre-West CR Mamer Agency Bertrange USR004
Business lines Commercial Bank Retail Centre-West CR Mamer Agency Bertrange USR005
Business lines Commercial Bank Retail Centre-West CR Mamer Agency Steinfort USR006
Business lines Commercial Bank Retail Centre-West CR Mamer Agency Steinfort USR007

Table 13: Organisational structure of CR Mamer 1

The first and the second user IDs (USR001 and USR002) correspond to the ones of the
manager and the assistant manager. The hierarchical superior of the two users constitute
the Service CR Mamer, which itself is considered as a department within the bank that
concerns all the employees USR001up to USR007. Moreover, the department disposes
three different sub-departments (services): Agency Mamer, Agency Bertrange and
Agency Steinfort. Due to the fact that the two first users are directly attached to the
service, which is equal to the department, they are both considered as the employees
managing the three services and thus also the other five employees that are linked to
these services.

The organisational structure (analytical centres) of RB is defined as follow:

1
Source: own representation
Activity Based Costing 46

Function Department
Commercials Retail
Wealth Management
Enterprises
Treasury and Asset Liability Management
Back Office Back Office Securities
Back Office Payments
Back Office Clienteles
Back Office Credit
Structure Management
Finance & Control
Legal
Compliance
Risk Management
Internal Audit
Marketing
Support Facility Management
Human Resources
IT
Internal Control
Organisation

Table 14: Organisational Structure of RB 1

The organisational structure of bank is divided into four different functions/services:

commercials, back-office, structure and support. The commercial service incorporates
all the divisions of the bank that are in direct contact with the customers, whereas the
three other services generally don’t need to directly come in contact with the customers.
The various back-offices need to collaborate with the commercial services in order for
the business to function effectively, whereas the structure and support services
represents services that cover the legal, fiscal, operational, administrative and
managerial aspect of the bank.

6.3 Cost Allocation to the Activities

In order to allocate the various overhead costs to the activities of the bank, it is required
to establish a matrix that includes all the processes consumed by each department and
that reflects all the activities of the bank. Thus, it is important to retrieve the integral
existing processes within the Bank and the interactions (participation or consumption)
of the departments on these processes.

1
Source: own representation
Activity Based Costing 47

Macro-process Process Elementary process Proprietary Category Owner of Process

Customer relationship Accounts and customer deposits Customer Account - Opening Retail Realisation Retail
Customer relationship Accounts and customer deposits Customer Account - Monitoring Retail Realisation Retail
Customer relationship Creation and monitoring the business relationsCustomer Address - Modification Retail Realisation Retail
Accounts and customer depositAccounts and customer deposits Young Adults Account - funds liberation Legal Realisation Retail
Customer relationship Creation and monitoring the business relationsCurrent Account - Green Code - Processing at maturity Retail Realisation Retail
Current operations Till management Cash Tills - Processing of dysfunctions Retail Realisation Retail
Current operations Till management Cash management - Ordering of money by Agencies Operational Support Realisation Retail
Current operations Till management Cash management - Sending of money by Agencies Retail Realisation Retail
Current operations Till management Falsified money - Declaration Retail Realisation Retail
Distribution channels ATM ATM - Refilling Retail Realisation Retail
Distribution channels ATM ATM - Monitoring Retail Realisation Retail
Distribution channels ATM ATM - New installation Facility Management Realisation Retail
Distribution channels Retail Management Safe of the agency - Management Retail Realisation Retail
Customer relationship Customer complaints Management Complaints of customers - Processing Compliance Realisation Retail
Credit Student Loans Student Loans CEDIES - Request Credit Realisation Credit
Credit Student Loans Student Loans CEDIES - Implementation of repayment Credit Realisation Credit
Credit Student Loans Student Loans CEDIES - Modification Credit Realisation Credit
Credit Student Loans Student Loans CEDIES - Anticipated repayment Credit Realisation Credit
Credit Housing Loans Consumer Housing Loan - Request Credit Realisation Credit
Credit Housing Loans Consumer Housing Loan - Modification Credit Realisation Credit
Credit Housing Loans Consumer Housing Loan - Anticipated repayment Credit Realisation Credit
Credit Housing Loans Consumer Housing Loan - Closing at maturity Credit Realisation Credit
Credit Housing Loans Mortgages with state subsidies - Management Credit Realisation Credit
Risk and internal control Bank Insurance Management Insurance of the bank - Management of claims Risk Management Steering Risk Management
Risk and internal control Bank Insurance Management Insurance of the bank - Modification / Renewal of a conRisk Management Steering Risk Management
Risk and internal control Gestion des missions d'audit Audit - Progress of a mission Internal Audit Steering Internal Audit
Risk and internal control Gestion des missions d'audit Audit - Monitoring of recommendations Internal Audit Steering Internal Audit
Human Ressources Personnel Administration Personnel Management - Accident at work or on the rouHuman Ressources Support Human Ressources
Human Ressources Personnel Administration Personnel Management - Calculation of wages and salarHuman Ressources Support Human Ressources
Human Ressources Personnel Administration Personnel Management - Management of meal voucher Human Ressources Support Human Ressources
Human Ressources Training Personnel Management - Needs of trainings Human Ressources Support Human Ressources
General services Logistics Ordering of materials Facility Management Support Facility Management
General services Logistics Outgoing post Facility Management Support Facility Management
General services Logistics Relocation - Organisation Facility Management Support Facility Management
Information systems Administration of technical infrastructure Informatic Materials - Management Informatics Support Informatics
Information systems Maintenance of information systems Platform R-Net and Mobilebanking - Administration Informatics Support Informatics
Information systems Maintenance of information systems Platform T24 - Administration Informatics Support Informatics
Customer relationship Litigations and recoveries management Bankruptcy and liquidation - Processing Legal Support Legal
Customer relationship Litigations and recoveries management Recovery - Monitoring of litigation files Legal Support Legal

Table 15: List of Processes 1

Before establishing the matrix process, the resource drivers have to be identified by
means of a table listing all the processes within RB that needs to be assembled. This list
has been distributed to each service of the bank so that each service can allocate 100%
of its charges on all the processes within its scope of work.

By retrieving these data, it allows the identification of the cost of each process and
consequently the cost of each department. This approach necessitates the collaboration
of the various services of the bank in order to obtain information about the participation
of each service in the existing processes (Who is involved in which process?) and
information about the usage of the processes by the various services of the bank (In
favour of whom is the process rendered? Who uses the process?).

By getting information about the participants of the processes, it allows the

determination of the services (analytical centre) that intervene in the processes and to
what extent in relation to their total workload. In general, several departments can be
involved in one single process. If the establishment or the development of a product

1
Source: own representation
Activity Based Costing 48

requires the use of multiple processes, it is possible to get the total production cost of
the analysed product by summing up the participation of each service to each requisite
process. Moreover, by knowing the constitution of the direct costs of each service, it
enables the identification of the variable as well as the fixed components that influence
the price of the production of the product.

The calculation of the process matrix confronts each process with a ratio between the
participating centre and the consumer centre and it is also possible to calculate a cost
per process that is related to the cost of the various services involved in the
establishment of this process.

6.4 Determination of Cost Drivers

In the presentation of the process matrix, the structure of the bank is limited to six
services among which three of the services belong to the support activity of the bank:
HR, IT and Facility and Security (F&S). These six services participate in the
composition of the process so that for a service who is working at 100% on a specific
list of process, it is possible to directly allocate the service charges on these clearly
defined processes. And in other cases, the duration driver will be applied in order to
determine the amount of time employed for performing the process.

Consider that there are four isolated processes that are consumed by the six services:
HR, IT, F&S, B-O, Structure and Commercials.

Process HR IT Facility-Security Back-Office Structure Commercials Total costs

Costs 500 € Costs 1 000 € Costs 500 € Costs 1 000 € Costs 500 € Costs 2 500 €
Partici- Partici- Partici- Partici- Partici- Partici-
% Amount % Amount % Amount % Amount % Amount % Amount
pation pation pation pation pation pation
1 x 70% 350 € x 50% 500 € x 10% 50 € x 10% 100 € x 10% 50 € x 5% 125 € 1 175 €
2 x 20% 100 € x 30% 300 € x 60% 300 € x - - x - - x - - 700 €
3 x 5% 25 € x 10% 100 € x - - x 20% 200 € x 20% 100 € x 40% 1 000 € 1 425 €
4 x 5% 25 € x 10% 100 € x 30% 150 € x 70% 700 € x 70% 350 € x 55% 1 375 € 2 700 €
Total 100% 500 € 100% 1 000 € 100% 500 € 100% 1 000 € 100% 500 € 100% 2 500 € 6 000 €

Table 16: Participation in the processes 1

In the above illustrated table, the HR is involved in all the four processes with different
levels of contributions allowing the allocation of the total direct costs of 500€ to the
process 1 for 350€, process 2 for 100€, process 3 for 25€ and process 4 for 25€. In

1
Source: own representation
Activity Based Costing 49

addition, the chart also shows the total production cost of each process. For the first
process, the total production cost is worth 1.175€. This amount comes from the
contributions of all the six services. In order to get the contribution of the HR
component on the production cost of this process, it is required to take the labour costs
of each service (defined in the dashboard) and to apply the percentage relative to the
first process (in this case: 70% HR, 50% IT, 10% F&S, 10% B-O, 10% Structure and
5% Commercials). It is also to note that the total percentage of each service corresponds
to 100%, meaning that there is no loss of the charges for each service and hence, it is
possible to deduct a cost for each process.

In the following table, which describes the usage of the processes within the Bank, the
entire process is considered to be consumed within the Bank's services.

Process HR IT Facility-Security Back-Office Structure Commercials Total costs Control

Usage % Amount Usage % Amount Usage % Amount Usage % Amount Usage % Amount Usage % Amount
1 x 25% 294 € x 5% 59 € x 10% 118 € x 30% 352 € x 30% 352 € - - 1 175 € 100%
2 x 5% 35 € x 5% 35 € x 70% 490 € x 5% 35 € x 5% 35 € x 10% 70 € 700 € 100%
3 - - x 5% 71 € - - x 35% 499 € x 30% 428 € x 30% 428 € 1 425 € 100%
4 x 5% 135 € - - - - x 15% 405 € x 10% 270 € x 70% 1 890 € 2 700 € 100%

Table 17: Consumption of the processes 1

By combining the two tables, it allows to determine the participant of a service in the
establishment of a process that is consumed by another service (or by itself). The
formula used for the determination of the relation between the participant centre and the
consumer centre is as follow:

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑡𝑡ℎ𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑓𝑓𝑓𝑓𝑓𝑓 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐴𝐴

= 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 × % 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐴𝐴
× % 𝑜𝑜𝑓𝑓 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐴𝐴

By applying this formula on table 16 and 17, the following results will be obtained:
HR IT F&S Back-Office Structure Commercials
Proc\Part. HR IT F&S B-O STR COM HR IT F&S B-O STR COM HR IT F&S B-O STR COM HR IT F&S B-O STR COM HR IT F&S B-O STR COM HR IT F&S B-O STR COM
1 88 125 13 25 13 31 18 25 3 5 3 6 35 50 5 10 5 13 105 150 15 30 15 38 105 150 15 30 15 38 - - - - - -
2 5 15 15 - - - 5 15 15 - - - 70 210 210 - - - 5 15 15 - - - 5 15 15 - - - 10 30 30 - - -
3 - - - - - - 1 5 - 10 5 50 - - - - - - 9 35 - 70 35 350 8 30 - 60 30 300 8 30 - 60 30 300
4 1 5 8 35 18 69 - - - - - - - - - - - - 4 15 23 105 53 206 3 10 15 70 35 138 18 70 105 490 245 963
Total 94 145 35 60 30 100 24 45 17 15 8 56 105 260 215 10 5 13 122 215 53 205 102 594 120 205 45 160 80 475 35 130 135 550 275 1262
6000 464 165 608 1291 1085 2387

Table 18: Amount of the relation between the consumer and participant centre 2

The first line of table 18 constitutes the consumption services of RB and the second line
represents the various participation services of the bank.
1
Source: own representation
2
Source: own representation
Activity Based Costing 50

The cost of the second process charged on the HR service is equal to 35€. These costs
arise directly from the 5€ of the HR (= 500€ x 20% (participation of the HR for the
process 2) x 5% (consumed by the HR service)), 15€ of IT (1.000€ x 30% x 5%) and
15€ of facility (500€ x 60% x 5%).

Beside of the calculation of the amount, it is also possible to calculate the ratio of the
relation between the participant centre and the consumer centre via the same formula,
except that the amount of the cost of the participant centre will be excluded:

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑡𝑡ℎ𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑓𝑓𝑓𝑓𝑓𝑓 𝑃𝑃𝑃𝑃𝑃𝑃𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝐴𝐴

= %𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐴𝐴 × %𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐴𝐴

Hence, the following table will be established:

HR IT F&S Back-Office Structure Commercials

Proc\Part. HR IT F&S B-O STR COM HR IT F&S B-O STR COM HR IT F&S B-O STR COM HR IT F&S B-O STR COM HR IT F&S B-O STR COM HR IT F&S B-O STR COM
1 17,50 12,50 2,50 2,50 2,50 1,25 3,50 2,50 0,50 0,50 0,50 0,25 7,00 5,00 1,00 1,00 1,00 0,50 21,00 15,00 3,00 3,00 3,00 1,50 21,00 15,00 3,00 3,00 3,00 1,50 0,00 0,00 0,00 0,00 0,00 -
2 1,00 1,50 3,00 - - - 1,00 1,50 3,00 - - - 14,00 21,00 42,00 - - - 1,00 1,50 3,00 - - - 1,00 1,50 3,00 - - - 2,00 3,00 6,00 0,00 0,00 -
3 - - - - - - 0,25 0,50 - 1,00 1,00 2,00 - - - - - - 1,75 3,50 0,00 7,00 7,00 14,00 1,50 3,00 0,00 6,00 6,00 12,00 1,50 3,00 0,00 6,00 6,00 12,00
4 0,25 0,50 1,50 3,50 3,50 2,75 - - - - - - - - - - - - 0,75 1,50 4,50 10,50 10,50 8,25 0,50 1,00 3,00 7,00 7,00 5,50 3,50 7,00 21,00 49,00 49,00 38,50
Total 18,75 14,50 7,00 6,00 6,00 4,00 4,75 4,50 3,50 1,50 1,50 2,25 21,00 26,00 43,00 1,00 1,00 0,50 24,50 21,50 10,50 20,50 20,50 23,75 24,00 20,50 9,00 16,00 16,00 19,00 7,00 13,00 27,00 55,00 55,00 50,50

Table 19: Ratio of the relation between the consumer and participant centre 1

The results of the table states that the HR service works at 18,8% for themselves, 4,8%
for the IT, 21,0% for F&S, 24,6% for Back-Office, 24,0% for Structure and 7,0% for
the Commercials services.

This chart has the objective to identify the relation between the participant centre of the
costs and the consumer centre to which the costs are allocated. Thus, the consumer
centre will be retained and this method underlines the impacts of a particular centre to
another one.

Next comes the principle of the cascade, which consists to discharge the costs of several
functions of the bank to other functions by respecting a particular chronology and via
the provided allocation bases.

1
Source: own representation
 Activity Based Costing 51

6.5 Assignment of the Activity Costs to Cost Objects

Before starting with the assignment of the activity costs to cost object, the following
chart resumes the whole process of cost allocation by means of the ABC:

T24 Tribank Apsal MyGesper DSKNet …

Phase 1

Mapping and Integration

Mapping

Accounts Mapping
No allocation Accounting / Catégories,
Initial Data
Centres, …

Direct allocation DCOAC /

Budgetary Responsibility
Phase 2

Direct costs and/or Determination of Direct Costs

Allocation bases Allocation Bases
Determination of Allocation Bases Keys Framework (definitions,
values, usage)
Phase 4

Process

Phase 3
Allocation of costs
Process Framework
only to function Intra – Support Allocation (definitions,
of Support values, usage)

Support allocated to
Structure, Back Office Support reduced to zero Process
and Commercials Functions of Structure, B-O and Commercials are affected

Process
Phase 5

Back Office allocated Back-Office reduced to zero

to Commercials Function of Commercials is affected

Process
Structure allocated to Structure reduced to zero
Commercials Function of Commercials is affected

Process
Phase 6

Allocation of Detail per Process

Commercials (detail Function of Commercial is affected
per process)

Figure 14: Procedure of ABC of RB 1

The first three phases have already been dealt with in the previous sections so that now,
the fourth to the sixth phase will be examined. As stated above, the cascade principle

1
Source: own representation
Activity Based Costing 52

will be applied for the allocation of the activity costs of one department to the other
departments of the bank so that they will be reduced to zero one by one. The objective
consists in cascading the costs to the commercial department. To do this, it is advised to
follow a chronological order by starting with the allocation of the costs of the support
department to the structure department, the back-office department and the commercials
department. When all the costs of the support department have been distributed, it is
then the turn of the back-office department to allocate its costs to the commercials
department and lastly, the costs of the structure department will be allocated to the
commercials department, so that at the end, only the costs of the commercials
department remain. By doing this, it allows the identification of the total cost of the
commercial department’s activities.

As the support department is subdivided into three services, HR, IT and F&S, it is
necessary to start with the calculation of the costs of the services within the support
department (intra-support allocation).

By applying the following formula, it allows to calculate the benefits for the services
rendered to the different departments:

� 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑡𝑡ℎ𝑒𝑒 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 × 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑡𝑡ℎ𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶

In addition, if a cost represents a benefit for one department, this implies that the same
amount will constitute a cost for another department.

HR IT F&S
Direct Costs Cost 500 € Cost 1.000 € Cost 500 €
Service to HR -145,00 € Service to HR -35,00 €
Indirect costs (to
subtract) Service to IT -23,75 € Service to IT -17,50 €
Service to F&S -105,00 € Service to F&S -260,00 €
Charge from Charge from
HR 23,75 € HR 105,00 €
Charge from
Indirect costs (to add)
Charge from IT 145,00 € IT 260,00 €
Charge from Charge from
F&S 35,00 € F&S 17,50 €
Total 551,25 636,25 812,50

Table 20: Intra-Support Allocation 1

1
Source: own representation
Activity Based Costing 53

In the previous section, the ratio of the relation between the participant centre and the
user centre has been identified. In table 19, it is exhibited that IT renders at 14.5% of its
services to the HR. As the cost of IT constitutes 1.000 €, this implies that the expenses
of the service rendered from IT to HR represent 145€ (1.000€ x 14.5%). As 145€
constitutes a benefit for IT, this amount has to be abstracted from the IT’s costs and
charged to the HR’s costs. This goes the same for F&S, where the ratio IT/F&S
accounts for 26%, and thus the expense of 260€ (1000€ x 26%). In other words, this
means that F&S consumes for 260€ the services rendered by IT and hence, this cost has
to be abstracted from IT’s costs and contributed to F&S’s costs. This calculation works
the same for the other two services of the support department. By adding the additional
costs occurred from the other services and by subtracting the costs charged to other
services, it allows obtaining the actual cost of each service after the intra-support
allocation. This also shows that in the bank, one service has to work for another service
in order to facilitate their work or to provide suitable tools required for doing their
work. Thus, these expenses have to be borne by the service requesting for the support.

Now that the actual cost of each service of the support department has been identified, it
is possible to further proceed with the allocation of the support department’s costs to the
other three departments so that all the cost of the support department will be zeroed. To
calculate the distribution of the various costs to each process, which means the portion
of the participant centre affecting the consumer centre, the following formula will be
applied:

Cost of participant
ratio 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷/𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪
×
1 − ∑(𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷/𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 ( 𝑛𝑛𝑛𝑛𝑛𝑛 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑒𝑒𝑒𝑒 𝑑𝑑𝑑𝑑𝑑𝑑) − ∑ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷⁄𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 (𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑑𝑑𝑑𝑑𝑑𝑑)

The denominator of the formula implies that the ratio of the previous allocated
department has to be subtracted from the ratio of the departments that still have to be
allocated.

By applying this formula, it is possible to calculate the amount of the service consumed
by each department (B-O, Structure and Commercials) in the allocation of the support
department’s costs to the other departments. The following results will be obtained:
Activity Based Costing 54

HR IT F&S
Cost 551,25 € 636,25 € 812,50 €
Support to Back Office
Process 1 -208,58 € -173,52 € -52,42 €
Process 2 -9,93 € -17,35 € -52,42 €
Process 3 -17,38 € -40,49 € 0,00 €
Process 4 -7,45 € -17,35 € -78,63 €
Support to Structure
Process 1 -208,58 € -173,52 € -52,42 €
Process 2 -9,93 € -17,35 € -52,42 €
Process 3 -14,90 € -34,70 € 0,00 €
Process 4 -4,97 € -11,57 € -52,42 €
Support to Commercials
Process 1 0,00 € 0,00 € 0,00 €
Process 2 -19,86 € -34,70 € -104,84 €
Process 3 -14,90 € -34,70 € 0,00 €
Process 4 -34,76 € -80,98 € -366,94 €
Control Support zeroed 0,00 € 0,00 € 0,00€

Table 21: Allocation of Support to B-O, Structure and Commercials 1

The table is understood in the following way; for process 1, the B-O department
consumes for 208,58 € the services rendered by the HR support department. At the
same time, for the same process, the Structure department also uses for 208,58 € the
services provided by the HR support department and the commercials department
doesn’t participate in process 1. This amount of 208,58 € for the B-O department is
obtained via the above-mentioned formula:

Cost of participant
ratio 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷⁄𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪
×
1 − ∑(𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷/𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 ( 𝑛𝑛𝑛𝑛𝑛𝑛 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝐷𝐷𝐷𝐷) − ∑ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷⁄𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 (𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝐷𝐷𝐷𝐷)

Or in other words:
Cost of participant
% of Participation of HR in Back − Office
×
1 − ∑ 0 − ∑(𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐻𝐻𝐻𝐻 𝑖𝑖𝑖𝑖 𝐻𝐻𝐻𝐻 + 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐻𝐻𝐻𝐻 𝑖𝑖𝑖𝑖 𝐼𝐼𝐼𝐼 + 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐻𝐻𝐻𝐻 𝑖𝑖𝑖𝑖 𝐹𝐹&𝑆𝑆)

21 % 21 %
= 551.25 € × = − 551.25 € × = 208.58 €
1 − 0 − ∑(18.75% + 4.75% + 21%) 55.50%

The ratio Participant/Consumer (non allocated DP) is 0 because the support

department’s costs will be allocated to all the other departments (B-O, Structure and
Commercials). As for the ratio Participant/Consumer (allocated DP), this represents the
participation of each individual service in the support department as the allocation of the
support department’s costs has already been executed in the intra-support allocation
stage.

1
Source: own representation
Activity Based Costing 55

As 208,58 € consists a cost charged to the Back-Office, this cost should be subtracted
from the support department. This calculation is executed for each process and each
department, so that at the end the support department’s costs are zeroed. Therefore as a
summary, the total cost of each department is:

Additional Cost of Centres

Direct Cost Total
HR IT F&S
Back-Office 1.000 € 243,34 € 248,72 € 183,47 € 1.675,53 €
Structure 500 € 238,38 € 237,14 € 157,26 € 1.132,78 €
Commercials 2.500 € 69,53 € 150,38 € 471,78 € 3.191,69 €
Table 22: Total Costs of B-O, Structure and Commercials 1

This table clearly shows that the costs of the bank haven’t changed as the sum of the
total is still 6.000€.

The same allocation procedure will also be applied for the allocation of the Back-
Office’s costs to the commercials department and afterwards the allocation of the
Structure’s costs to the commercials department. Thus, the following results will be
obtained:

Back Office to Commercials Part HR Part IT Part F&S Part BO

Cost 243,34 € 248,72 € 183,47 € 1.000 €
Process 1 0,00 € 0,00 € 0,00 € 0,00 €
Process 2 0,00 € 0,00€ 0,00 € 0,00 €
Process 3 -26,55 € -27,13 € -20,01 € -109,09 €
Process 4 -216,80 € -221,59 € -163,45 € -890,91 €
Back Office zeroed 0,00 € 0,00 € 0,00 € 0,00 €
Table 23: Allocation of Back-Office to Commercials 2

Structure to Commercials Part HR Part IT Part F&S Part Struc

Cost 238,38 € 237,14 € 157,26 € 500 €
Process 1 0,00 € 0,00 € 0,00 € 0,00 €
Process 2 0,00 € 0,00€ 0,00 € 0,00 €
Process 3 -26,01 € -25,87 € -17,16 € -54,55 €
Process 4 -212,37 € -211,27 € -140,10 € -445,45 €
Structure zeroed 0,00 € 0,00 € 0,00 € 0,00 €
Table 24: Allocation of Structure to Commercials 3

In Table 23, the ratio Participant/Consumer (non allocated DP) isn’t equal to zero
because the department back-office is allocated to the commercials, so that the structure
department still hasn’t been allocated in this stage. In this sense, this ratio is equal to
zero in table 24 as the structure department consists the last stage that has to be
allocated to the commercials department.

1
Source: own representation
2
Source: own representation
3
Source: own representation
 Activity Based Costing 56

By combining all the tables of cost allocation of the three departments to the
commercials department, the following matrix is obtained:
Total Commercials Costs Part HR Part IT Part F&S Part BO Part Struc
Direct Cost 2.500,00 €
Additional cost of Support 69,53 € 150,38 € 471,78 €
Additional cost of Back Office 243,34 € 248,72 € 183,47 € 1.000,00 €
Additional cost of Structure 238,38 € 237,14 € 157,26 € 500,00 €
Table 25: Total Commercials Costs 1

At this stage, it is to note that the cost of the bank still hasn’t changed because by
summing up all the costs, the result is still 6.000 €. Now that the commercials costs
have been determined, a last stage consists in the allocation of the commercials costs on
each process it consumes in order to get a cost per process.

Commercials to Commercials Part Com

Cost 2.500 €
Process 1 0,00 €
Process 2 0,00 €
Process 3 -594,06 €
Process 4 -1.905,94 €
Commercials zeroed 0,00 €
Table 26: Allocation of Commercials to Commercials 2

Now that all the costs of each department have been allocated, it allows getting the cost
of each process and hence the production cost of each product.
Total Commercials Costs Part HR Part IT Part F&S Part BO Part Struc Part Com
Additional Cost of Support 69,53 € 150,38 € 471,78 €
Process 1
Process 2 19,86 € 34,70 € 104,84 €
Process 3 14,90 € 34,70 €
Process 4 34,76 € 80,98 € 366,94 €
Additional Cost of Back-Office 243,34 € 248,72 € 183,47 € 1.000 €
Process 1
Process 2
Process 3 26,55 € 27,13 € 20,01 € 109,09 €
Process 4 216,80 € 221,59 € 163,45 € 890,91 €
Additional Cost of Structure 238,38 € 237,14 € 157,26 € 500,00 €
Process 1
Process 2
Process 3 26,01 € 25,87 € 17,16 € 54,55 €
Process 4 212,37 € 211,27 € 140,10 € 445,45 €
Additional Cost of Commercials 2.500 €
Process 1
Process 2
Process 3 26,55 € 27,13 € 20,01 € 109,09 € 594,06 €
Process 4 216,80 € 221,59 € 163,45 € 890,91 € 1.905,94 €
Table 27: Details of process costs 3

1
Source: own representation
2
Source: own representation
3
Source : own representation
Activity Based Costing 57

Thus, by summing up the various costs of a process, the total cost of a process (activity)
will be obtained. Moreover, it is now also possible to determine the production cost of a
product because if a product/service is made up of several processes, it suffices to sum
up all the costs of the processes with the direct costs of the product and thereafter the
production cost will be obtained.

Exemplification

The personal loan for consumption is composed of the four following processes:
Macro-
process Process Elementary process Proprietary Category Owner
Credit Personal loan for consumption Personal loan - Demand Credit Realisation Credit
Credit Personal loan for consumption Personal loan - Modification Credit Realisation Credit
Personal loan - Early
Credit Personal loan for consumption Credit Realisation Credit
Repayment
Personal loan - Closing at
Credit Personal loan for consumption Credit Realisation Credit
maturity
1
Table 28: Processes of Personal loan for consumption

In the first process of personal loan inquiry, the participant of this process constitutes
the commercials department as they represent the direct contact person of the
customers, whereas for the other three remaining processes, the participants to these
processes are only the back-office (credit) department. As there is only one department
that participates in each process, the costs will be directly assigned on these clearly
defined departments. Let’s assume that the total cost for each process is as follow:

Total Commercials costs Part BO Part Commercials

Additional Cost B-O 250 €
Pers loan - Demand 250 €
Pers loan - Modification -
Pers loan - Early Repayment -
Pers loan - Closing at maturity -
Additional Cost Commercials 1.500 €
Pers loan - Demand -
Pers loan - Modification 650 €
Pers loan - Early Repayment 400 €
Pers loan - Closing at maturity 450 €
Table 29: Details of Personal loan for consumption costs 2

Moreover, the direct cost of the personal loan is 300 €. By summing up the costs of the
four processes that make up the personal loan for consumption product and its direct
cost, the production cost of the product will be obtained. Here, in our example, the total
production cost of the personal loan is 2.050€.
1
Source : own representation
2
Source : own representation
Activity Based Costing 58

7 Conclusion

This chapter will summarize the findings regarding the ABC model of RB. To begin,
the author will briefly enumerate the key findings of the paper before explaining the
limitations. The second section focuses on how this paper can act as a starting point for
further areas of research.

7.1 Findings and Limitations

The research analysis of ABC found that, although there exist different approaches of
cost allocation, the ABC is the most accurate allocation method as it allows the
identification of the cost and the performance of the activities, resources and cost
objects of a company. The only inconveniences of this model are that it is very
expensive, complex and time consuming because it requires a lot of resources,
calculations and updating, which is illustrated in the implementation process of RB. The
more processes and departments a company owns, the more complicated the
calculations will be. Thus, once the process has been established, in order to facilitate
the maintenance of this methodology, it is required to constantly (monthly) keep the
data up to date so that the whole process doesn’t need to be repeated every year.

The ABC methodology allows the determination of the cost of each activity. By
summing up the costs of the processes required for the establishment of a product and
by adding the direct cost related to the product, the final production cost of a product is
identified. This information provides the management the idea of cost-efficiency and
cost-effectiveness of a process and a product and thereby also the need for improvement
and adjustment.

Moreover, with the application of ABC, the controlling and reporting process could
attain some additional perspectives as one of the conceptual elements of the ABC
consists in its attempt to convert the usually fixed overhead costs into variable costs.
This provides a different perspective on RB’s cost structure and cost behaviour in case
of changing volume of sales and activities. Thus, the ABC doesn’t only represent a base
in the process of analysing the historical and actual cost but it also constitutes a base for
the budgeting process.
Activity Based Costing 59

The proposed process of implementation of the ABC in RB illustrates the procedure of

how the cost of each activity within the bank can be determined. However, at some
stages, it was also possible to take a different approach. For example, for the assignment
of the activity cost to the cost objects, each department’s costs have been individually
allocated to the same final destination, the commercials department. Yet, another
possibility of allocating the costs would be to proceed through a linear flow, meaning
that the cost of the first department will be allocated to the second and then the second
to the third and so on until that the costs arrive at the final department, which constitutes
the commercials department.

In addition, for the establishment of the process, only four major selling points of each
region have been taken into consideration due to time constraint. Yet to be accurate,
each individual selling point should be taken into consideration because in order to get
the right numbers, every element needs to be included.

7.2 Areas for Further Research

The objective of this thesis was not to create a complete tool with which companies can
measure the costs associated with their activities within their company, but to provide a
proof of concept of how this goal could be achieved. Consequently, several areas of this
study require further research.

During the establishment of the process of ABC, there were times when different
approaches could have been applied for the same purpose. Thus, one of the difficulties
was to determine the most effective approach and therefore some further analysis need
to be executed in order to find the most accurate approach.

The results of the ABC model of RB disclose the hidden sources of profitability and the
embedded costs and this model contributes to decision-making of the management
allowing improvement of the profitability. Unfortunately, the ABC model stops at the
identification of the cost of the activities and the products. A further step of analysis that
isn’t included in the ABC but that the ABC contributes to is the possibility to determine
the net profitability of each commercial entity, respectively of each selling point of RB,
in other words to identify if an agency is operating in a cost-effective way or not.
Activity Based Costing 60

Moreover, by going yet another step further, a research on the profitability of each
employee could be determined thanks to the ABC model.

In the end, the ABC provides a vast range of possible further researches that aren’t
included in the basic ABC model but that are profitable for an organisation when
executed. Hence, the ABC only constitutes the first step for further research.
Activity Based Costing 61

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David R. Henderson (2008): Opportunity Costs, URL:

http://www.econlib.org/library/Enc/OpportunityCost.html, Retrieved on May
27, 2016

Europaforum (2014, November 11): STATEC: Une étude sur le coût de la main
d’oeuvre au Luxembourg et dans toute en nuances, URL:
http://www.europaforum.public.lu/fr/actualites/2014/11/statec-cout-mo-lux-
ue/index.html, Retrieved on May 29, 2016
Activity Based Costing 66

Investopedia, 2016: Sunk Cost, URL:

http://www.investopedia.com/terms/s/sunkcost.asp, Retrieved on June 7, 2016

Le portail des statistiques, 2016a.: Niveau et structure du coût direct de la main-d'œuvre

2008 et 2012, URL:
http://www.statistiques.public.lu/stat/TableViewer/tableView.aspx?ReportId=12
489&sCS_ChosenLang=fr, Retrieved on May 29, 2016

Le portail des statistiques, 2016b.: Niveau et structure du coût indirect de la main-

d'œuvre 2008 et 2012, URL:
http://www.statistiques.public.lu/stat/TableViewer/tableView.aspx?ReportId=12
490&sCS_ChosenLang=fr, Retrieved on May 29, 2016

Martin James. R. (2016): Chapter 6: The Traditional Two Stage Cost Allocation
Approach, URL:
http://maaw.info/Chapter6.htm, Retrieved on June 1, 2016
Activity Based Costing 67

Annexe

Annexe 1: Distribution of Organisation of RB

EIKV‐Schriftenreihe zum Wissens‐ und Wertemanagement
Bereits erschienen

2015 Francesca Schmitt Intellectual Property and Investment Band 1

Funds
2016 Sebastian The electricity market reinvention by Band 2
Fontaine regional renewal
2016 Tim Karius Intellectual Property and Intangible Band 3
Assets ‐ Alternative valuation and
financing approaches for the knowledge
economy in Luxembourg
2016 Irena Hank Emotionale Intelligenz und optimales Band 4
Teaming – eine empirische Untersuchung

2016 Pascal Berg European Market Infrastructure Band 5

Regulation (EMIR)

2016 Dr. Sverre Klemp Die Angemessenheit der Vergütung nach Band 6
§ 32 UrhG für wissenschaftliche Werke im
STM‐Bereich

2016 Lars Heyne Immaterialgüterrechte und Objekt‐ Band 7

replikation: Juristische Risiken und
Lösungs‐möglichkeiten bei der
Vermarktung von
3D‐Druckvorlagen
2016 Torsten Hotop Äquivalenzinteresse im Erfinderrecht Band 8

2016 Christian Wolf Zur Eintragungsfähigkeit von Geruchs‐ Band 9

und Hörmarken

2016 Nadine Jneidi Risikofaktor Pflichtteil ‐ Grundlagen und Band 10

Grenzen der Regelungs‐ und Gestaltungs‐
möglichkeiten von Pflichtteilsansprüchen
bei der Nachfolge in
Personengesellschaften
2016 Meika Schuster Ursachen und Folgen von Ausbildungs‐ Band 11
abbrüchen

2016 Julie Wing Yan Activity Based Costing ‐ A case study of Band 12
Chow Raiffeisen Bank of Luxembourg
Band 1