Term Paper on "Activity-Based Costing Approach to Measure Value"

Term Paper 22 pages (5960 words) Sources: 1+

[EXCERPT] . . . .

Activity-based costing approach to measure value of the Corporate Social Responsibility of financial institutions particularly Barclays

Bank.

Overall Research Aim, Questions and Objectives

Rationale in Support of the Study

Data Collection Tools and Sources

Using the Activity-Based Costing Approach to Measure Value of the Corporate Social Responsibility of Financial Institutions, Particularly Barclays Bank

Overall Research Aim, Questions and Objectives

In the wake of the widely publicized financial shenanigans of Enron et al. In recent years, corporate transparency has assumed a new level of importance today. Many companies have also attempted to improve their public image through various social initiatives in the communities, regions and countries in which they compete, and some of the larger ones have even implemented these social initiatives on a global level. While it would be hard to argue with the need for such socially responsible actions by the corporate sector, the various stakeholders involved will likely all have their own widely differing views of what is enough and why, so measuring the level of corporate socially responsible activities must be accomplished in some quantifiable way so that assessments of the effectiveness of these programs can be made and changes made when needed. Such quantifiable measures may also identify opportunities for improvement and expansion of existing initiatives.

To this end, this study proposes to use the activity-based costing data from financial institutions in general and Barclays Bank in particular to determine if these performance metrics provide insights into the level of corporate social responsibility. Likewise, this study will also seek to determine if these financial metrics can and have been misused by analysts and researchers in the past to misrepresent or overstate the degree of corporate social responsibility for such financial institutions. According to Blanden (2000), many financial institutions have also used some questionable tactics under the guise of socially responsible actions to mask target marketing initiatives such as beer and sports team sponsorships. To accomplish this overall research aim, the proposed study will be guided by the following research questions and others that may emerge as the research process progresses:

What financial performance metrics are associated with corporate responsibility?

Is there an inherent gap between the prevailing conception of financial performance and the ability to measure this performance using the activity-based costing approach?

Does this gap increase as companies become larger and lags between actions and their economic results lengthen?

Do some companies exploit the gap - if any -- between what should be measured and what can be measured, and how much does this affect the ability activity-based costing to discriminate good performance from bad?

Does the activity-based costing approach overcome any of these limitations?

Rationale in Support of the Study

Today, managers have a wide range of tools available to help them accomplish their organizational goals, but one fundamental issue quickly emerges from an analysis of various accounting systems used for these purposes: "Despite the ebb and flow of theory and reform, the bedrock question of what matters in budgeting remains: On what factors do budget outcomes depend?" (Hildreth, Miller & Rabin, 2001 p. 15). At first blush, various financial and accounting performance measures frequently appear to possess a degree of objectivity that is subsequently shown to be false. In this regard, Neely (2002) emphasizes that, "Even when a ratio has been defined in a conceptually appropriate way, there remain issues of measurement. Again, the non-accountant generally has a sense of the objectivity of an accounting measurement that is unsupported in practice" (p. 20). Furthermore, there is a very real risk that some financial services organizations will simply not recognize the need when it occurs because of complacency or a failure to recognize when change is needed. In this regard, Bamber and Hughes (2001) emphasize that, "Broken cars and computers simply stop running. In contrast, "broken" or outdated cost systems continue spewing out (potentially misleading) costs. Consequently, managers need to recognize clues that the cost system needs refinement" (p. 381). According to Neely (2002), the factors used in any accounting ratio can be defined in various ways, but there is no absolutely objectively correct or incorrect approach; instead, even the most savvy investor or analyst will be required to use this information in the manner most conducive to a given need, while keeping in mind that the marketplace is a dynamic environment where even the best laid plans often do not come to fruition.

Therefore, in order to provide companies with a more effective approach to financial analysis requires a more comprehensive method of examining a company's performance in the industry in which it competes. In this regard, Bamber and Hughes (2001) report that, "A major segment of the service sector - banks -- needs accurate cost information to make strategic decisions, and more refined accounting systems help fulfill this need" (p. 381). To this end, a number of proponents suggest that activity-based costing represents a valuable tool for measuring a wide range of performance metrics, including perhaps even a company's degree of social responsibility as defined and discussed further in Chapter 2 below.

Chapter 2

Review of the Related Literature

Activity-Based Costing and Financial Performance.

A fundamental shift that took place during the period from 1960s to the 1990s was the introduction of activity-based costing (ABC); ABC assumed new importance as more and more companies used these techniques to identify the actual costs of labor, equipment, and premises associated with each activity performed by the firm rather than relying on arbitrary formulas to allocate overhead (Meyer, 2002). According to Cortese-Danile and Latshaw (2002), "Activity-based costing (ABC) has become extremely popular in recent years. In fact, it is difficult to find an academic or practitioner journal that does not include at least one article on activity-based costing, activity-based management, or activity-based budgeting" (p. 30). Although activity-based costing was original used primarily for manufacturing settings (Meyer, 2002), the ABC system has an alternative approach that includes various nonmanufacturing costs, such as marketing and design and engineering costs, as products costs (Hussein & Tam, 2004). According to these authors, "Marketing and sales expenses include salaries and benefits of sales staff, and promotions and other marketing costs. General and administrative costs include top management, accounting, personnel, and legal counsel" (Hussein & Tam, 2004 p. 539). In fact, today, "It is difficult for any organization, whether it be a manufacturer, distributor, or service provider not to jump onto the activity-based bandwagon" (Cortese-Danile & Lawshaw, 2002 p. 30). One of the reasons for this interest in ABC appears to be technological innovations that have allowed companies to compare profit-and-loss statements on every customer and identify customers that cost the organization money rather than earning them a profit, a trend that appears to have affected banks in particular: "Banks are by far the biggest industry yet to marshal this data-crunching ability. Already, about half of big banks with more than $1 billion in deposits use profit data to make customer decisions, more than double the percentage just a year ago. For banks, a typical 'bad' customer makes frequent branch visits, keeps less than $1,000 in the bank and calls often to check on account balances" (Bamber & Hughes, 2001 p. 381). By sharp contrast, a bank's most profitable customers maintain several thousand dollars in their accounts, use a teller less than once a month and rarely use a bank's call center for assistance; furthermore, while such favored customers annually generate more than $1,000 in profits apiece, the bank's worst customers frequently cost the bank money to the tune of at least $500 a year (Bamber & Hughes, 2001). Moreover, the top 20% of average banking customers today produce as much as 150% of overall banking profits, while the bottom 20% of customers siphon off approximately half of the bank's revenues (Bamber & Hughes, 2001).

Not surprisingly, whatever financial performance metrics are selected for a given application, the more detailed the data that is used, the more reliable the results of the analysis: "Without adequate detail, it is hard to see how economic consequences arise from the choice of costing systems" (Platt & Towry, 2001 p. 99). According to Latshaw and Cortese-Danile (2001), "There are many variables that need to be considered when determining the type of costing system, such as ABC, that is best for an organization" (p. 30). In this regard, Maiga and Jacobs (2003), report that many companies are turning to ABC because it can help improve the accuracy of cost measures and proponents of ABC have cited a number of benefits associated with such systems and have identified several factors associated with ABC success that can be used as a best practices guide for similarly situated firms. According to these authors, "ABC focuses on costs associated with activities, but also evaluates whether those activities add value, thus providing a means of understanding how to most effectively reduce costs" (p. 283).

While ABC also provides a framework in which companies can monitor the ongoing performance of such initiatives, some constraints have been identified in the past… READ MORE

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