Capacity-based Costing in Banking

There will always be institutions for which implementing a capacity-based costing methodology will not be appropriate. However, for many institutions, the business value created from such a methodology will far outweigh the additional expense of getting there. Financial institutions must balance their need to allocate costs for segment and management reporting with their need to understand the true cost of providing services to customers. Full-absorption costing has historically been utilized to support management and segment reporting, due to its ease of implementation. But this has come with consequences: inaccurate unit costs for pricing decisions that have been the source of endless internal debates over the charge of services. Capacity-based costing can provide a more accurate picture of the cost and profitability of bank products and services, support production capacity and resource management and in so doing, provide the foundation for integrating volume-based budgeting and KPI targets at an enterprise level. The combination of better product costs and improved planning capabilities should result in better decisions regarding product pricing and resource management, both of which will continually improve performance and financial operating results of the institution.