Costig in Bank

7/31/2019 Costig in Bank

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WHAT IS COSTING :

Definition of costing :

System of computing cost of production or of running a business, by aSystem of computing cost of production or of running a business, by allocating expenditure to various stages of production or to differentoperations of a firm.llocating expenditure to various stages of production or to different operations of a firm

Cost Accounting:

Term DefinitionCost accounting is the process of tracking, recording and analyzing costs associated with the products or

activities of an organization, where cost is defined as 'required time or resources'. Cost accounting is alsodefined as a type of management accounting, which translates the physical movement of products intofinancial value in order to support decision-making and improve costs and cash flows.

According to CIMA, The Chartered Institute of Management Accountants, Management Accounting isdefined as "The process of identification, measurement, accumulation, analysis, preparation, interpretationand communication of information used by management to plan, evaluate and control within an entity and toassure appropriate use of and accountability for its resources. Management accounting also comprises thepreparation of financial reports for non management groups such as shareholders, creditors, regulatoryagencies and tax authorities" (CIMA Official Terminology).

Standard Costing - costing by indirect and direct costs Activity-based Costing - costing by activitiesMarginal Costing - a methodology used for short-term decision-making.

The basic tenets are:Revenue (per product) - Variable Costs (per product) = Contribution (per product)Total Contribution - Total Fixed Costs = Total Profit / (Total Loss)

Throughput Accounting defined by Dr. Eliyahu M. Goldratt. Throughput Accounting is not costing and itdoes not allocate costs to products and services. It can be viewed as business intelligence for profitmaximization and rests on the following three definitions:Throughput: All of the money we make from selling our product. (Revenue minus Raw Material Cost.)Inventory: All of the money we have tied up in fixed assets to enable us to make the Throughput. (Theprimary difference here is that fixed assets and inventory are treated the same.)Operating Expense (OE): All of the money we spend to produce the Throughput.

Meaning Of Costing And Cost Accounting:

Costing is a technique and process of ascertaining costs. This technique consists of principles and ruleswhich govern the procedure of ascertaining the cost of products/services. The process of costing includesroutines of ascertaining costs by historical or conventional costing, standard costing or marginal costing.

Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determinationof the costs of products/services, and for the presentation of suitably arranged data for purposes of controland guidance of management. It includes the ascertainment of the cost of every order, job, contract,process, service or unit as may be appropriate. It deals with the cost of production, selling and distribution.It is thus the provision of such analysis and classification of expenditure as will enable the total cost of any


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particular unit of production or service to be ascertained with reasonable degree of accuracy and at thesame time to disclose exactly how such total cost is constituted (i.e. the value of material used, the amountof labour and other expenses incurred) so as to control and reduce its cost. According to Wheldon, Cost

Accounting is the application of accounting and costing principles, methods and techniques in theascertainment of costs and the analysis of saving/or excess cost incurred as compared with previousexperience or with standards. Thus, cost accounting relates to the collection, classification, ascertainmentof cost and its accounting and control relating to the various elements of cost. It establishes budgets andstandard costs and actual cost of operations, processes, departments or products and the analysis of variances, profitability and society use of funds.

Cost Accountancy is the application of costing and cost accounting principles, methods and techniques tothe science, art and practice of cost control and the ascertainment of profitability. It includes thepresentation of information derived there from for purposes of managerial decision making. Thus, costaccountancy is the science, art and practice of a cost accountant. It is science because it is a body of systematic knowledge having certain principles which a cost accountant should possess for proper discharge of his responsibilities. It is an art as it requires the ability and skill with which a cost accountant isable to apply the principles of cost accountancy to various managerial problems. Practice includes thecontinuous efforts of a cost accountant in the field of cost accountancy. Such efforts also include thepresentation of information for the purpose of managerial decision making and keeping statistical records

OBJECTIVES OF COSTING IN BANK:

The main objectives of Cost Accounting are as follows : (i) Ascertainment of cost, (ii) Determination of selling price, (iii) Cost control and cost reduction, (iv) Ascertaining the profit of each activity, (v) Assistingmanagement in decision-making.

1) Ascertainment of Cost :

There are two methods of ascertaining costs, viz., Post Costing and Continuous Costing.

Post Costing means, analysis of actual information as recorded in financial books. It is accurate and isuseful in the case of "Cost plus Contracts" where price is to be determined finally on the basis of actualcost.

Continuous Costing, aims at collecting information about cost as and when the activity takes place so thatas soon as a job is completed the cost of completion would be known. This involves careful estimates beingprepared of overheads. In order to be of any use, costing must be a continuous process.

Cost ascertained by the above two methods may be compared with the standard costs which are the targetfigures already compiled on the basis of experience and experiments.

2)Determination of selling price :

Though the selling price of a product is influenced by market conditions, which are beyond the control of any business, it is still possible to determine the selling price within the market constraints. For this purpose,it is necessary to rely upon cost data supplied by Cost Accountants.

3)Cost control and cost reduction :

"The guidance and regulation, by executive action of the cost of operating an undertaking". The word"guidance" indicates a goal or target to be guided; 'regulation' indicates taking action where there is adeviation from what is laid down; executive action denotes action to "regulate" must be initiated byexecutives i.e. persons responsible for carrying out the job or the operation; and all this is to be exercisedthrough modern methods of costing in respect of expenses incurred in operating an undertaking. Toexercise cost control, broadly speaking the following steps should be observed:


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(i) Determine clearly the objective, i.e., pre-determine the desired results;

(ii) Measure the actual performance;

(iii) Investigate into the causes of failure to perform according to plan; and

(iv) Institute corrective action.

The target cost and/or targets of performance should be laid down in respect of each department or operation and these targets should be related to individuals who, by their action, control the actual and bringthem into line with the targets. Actual cost of performance should be measured in the same manner inwhich the targets are set up, i.e. if the targets are set up operation-wise, then the actual costs should alsobe collected operation-wise and not cost centre or department- wise as this would make comparisondifficult. Cost Reduction, may be defined "as the achievement of real and permanent reduction in the unitcost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product."

Cost reduction should not be confused with Cost control. Cost saving could be a temporary affair and maybe at the cost of quality. Cost reduction implies the retention of the essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the cost of manufacture,administration, distribution and selling, brought about by elimination of wasteful and inessential elementsfrom the design of the product and from the techniques carried out in connection therewith. In other words,the essential characteristics and quality of the products are retained through improved methods andtechniques and thereby a permanent reduction in unit cost is achieved. The definition of cost reduction doesnot, however, include reduction in expenditure arising from reduction in taxation or similar Governmentaction or the effect of price agreements.

The three-fold assumptions involved in the definition of cost reduction may be summarized as under:

(a) There is a saving in unit cost.

(b) Such saving is of permanent nature.

(c) The utility and quality of the goods and services remain unaffected, if not improved.

4)Ascertaining the profit of each activity :

The profit of any activity can be ascertained by matching cost with the revenue of that activity. The purposeunder this step is to determine costing profit or loss of any activity on an objective basis.

Assisting management in decision making

Decision making is defined as a process of selecting a course of action out of two or more alternativecourses. For making a choice between different courses of action, it is necessary to make a comparison of the outcomes, which may be arrived under different alternatives. Such a comparison has only been madepossible with the help of Cost Accounting information.

BANKING DICTIONARY SAYS:

Accounting system allocating direct and indirect costs of bank services to various departmental units.Internal cost accounting considers various factors in pricing bank services, and typically includes thefollowing: overhead, including building rent, utilities, administrative support, and executive salaries; sellingcosts, which include advertising, promotional expenses, and salaries of account executives and branchemployees; and interest cost, or the cost of acquiring funds for lending or investing. Some bank expenseshave fixed costs that remain more or less constant, such as employee salaries and rent; others havevariable costs and are volume sensitive.


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The Marginal Cost of Funds measures the cost of expanding deposits at the margin, that is the cost of oneadditional dollar unit of deposit or loan volume. Fully absorbed costing takes into consideration both interestexpense and noninterest expenses, such as rent, insurance, and taxes, and frequently it is the basis of pricing banking services. A bank carries out a cost analysis of the product or service being considered anddetermines the yield required to meet its required return. Fully absorbed costing, also called cost pluspricing, often disadvantageously ignores customer demands and competitive pricing by other financialinstitutions.

SCOPE OF COSTING:

The scope of cost accounting is very wide and includes:

1. Cost Ascertainment :

In this region of cost accounting, cost accounting collects product's material, labor and overhead cost andtry to calculate total and per unit cost of product. This total cost calculation will be based on historical or standard or estimated basis. After this, cost accountant will use any method of costing like specific order costing, operation costing, and direct costing technique. These techniques and methods may be used for calculating different nature products in same organization.

2. Cost Records :

In this part of cost accounting, cost accountant maintains cost books, vouchers, ledgers, reports and other cost related documents for future comparison and reference. It will also be under the scope of costaccounting.

3. Cost Control :

This is the end boundary of cost accounting scope. In this division, cost accountant used differenttechniques and methods for controlling the cost. Save One Rupees in the cost of product means we haveearned one rupees in the production of goods. So, Cost accountant uses budgetary control, standard

costing, break even point analysis and many other techniques for controlling the cost.

Principle of Cost Account :

Generally Accepted Accounting Principles (GAAP) consist of the rules, procedures, and conventions thatdefine accepted practices at a given time. GAAP includes broad guidelines as well as detailed procedures.Much of GAAP is issued in codified form by the Government Accounting Standards Board (GASB).

The Government Accounting Standards Board, in its GAAP, endorses the use of accrual accountingpractices like FCA. Many cities and counties are required to conform to GAAP. Unfortunately, accrualaccounting is not fully implemented or used in day-to-day solid waste management. Most local governmentaccounting, even under GAAP, still focuses on the use of financial resources. FCA is a better measure of

the costs of Municipal Solid Waste (MSW) management because it recognizes the full costs of all resourcesused or committed in support of operations.Five FCA Principles

FCA embodies several key concepts that distinguish it from standard accounting techniques. The followinglist highlights the five basic tenets of FCA.

Accounting for costs rather than outlays Accounting for hidden costs Accounting for overhead and indirect costs Accounting for past and future outlays


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SLR (Statutory Liquidity Ratio)

Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain aminimum percentage of deposits with them at the end of every business day, in the form of gold, cash,government bonds or other approved securities. This minimum percentage is called Statutory Liquidity

Ratio.

Example:

If you deposit Rs. 100/- in bank, CRR being 6% and SLR being 8%, then bank can use 100-6-8= Rs. 84/-86/- for giving loan or for investment purpose.How it effects us

Having understood the meaning of these banking terms, let us now see how we are affected byincrease/decrease of these rates.

The central bank uses these rates to control inflation.

All About InflationInflation and Types of Inflation

Banks earn profit by borrowing at a lower rate of interest from the central bank, and lending the sameamount at a higher rate to the customers. If the repo rate or the bank rate is increased, bank has to paymore interest to the central bank. So in order to make profit, banks in turn increase their interest rate atwhich they take deposit from the customer and lend money to the customer. So the demand for loandecreases, and people start putting more and more money in bank accounts to earn higher rate of interest.This helps in controlling inflation.

An increase in Reverse repo rate causes the banks to transfer more funds to the central bank, becausebanks earn attractive interest rates and also their money is in safe hands. This results in the money beingdrawn out of the banking system, thus banks are left with lesser funds.

Thus, by lowering repo rate, central bank injects liquidity in the banking system and by increasing reverserepo rate it absorbs liquidity from the banking system.

Increase in SLR and CRR rate means that banks will have less power to give loans (see our exampleabove), which again controls amount of money floating in the market; thereby controlling inflation. It alsomakes banks safer to keep money because banks will have a higher liquidity to meet the demand of customers. As we learnt from the recession, giving loans expose banks to great risks. So if banks havelesser funds to give as loan, they become relatively safer.

RBI keeps CRR unchanged at 4.75%. no cut in repo rate

Classification Of cost:

DIRECT COST :

Definition: A price that can be completely attributed to the production of specific goods or services. Direct costs refer tomaterials, labor and expenses related to the production of a product. Other costs, such as depreciation or administrative expenses, are more difficult to assign to a specific product, and therefore are consideredindirect co


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For example, the cost of meat in a hamburger can be attributed directly to the cost of manufacturing thatproduct, as could the cost of packaging materials and preservatives. These are considered variable coststhat are inconsistent and change amounts often. An indirect cost, such as the hamburger manufacturer'slegal fees and staffing, is anything that is not a direct cost.sts

INDIRECT COST:

Definition:

An expense (such as for advertising, computing, maintenance, security, supervision) incurred in joint usageand, therefore, difficult to assign to or identify with a specific cost object or cost center (department,function, program). Indirect costs are usually constant for a wide range of output, and are grouped under fixed costs.

An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost.

After direct costs have been determined and charged directly to the contract or other work, indirect costsare those remaining to be allocated to the several cost objectives. An indirect cost shall not be allocated toa final cost objective if other costs incurred for the same purpose in like circumstances have been includedas a direct cost of that or any other final cost objective.

In simpler terms, indirect costs are those costs not readily identified with a specific project or organizationalactivity but incurred for the joint benefit of both projects and other activities. Indirect costs are usuallygrouped into common pools and charged to benefiting objectives through an allocation process/indirect costrate.

Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent andutilities) and general and administrative expenses (for example, officers' salaries, accounting departmentcosts and personnel department costs).

Commercial (for-profit) organizations usually treat "fringe benefits" as indirect costs. These fringe benefitsare applied to direct salaries charged to projects either through a fringe benefit rate or as part of anoverhead/indirect cost rate. Therefore, fringe benefits treated as indirect costs should not be included as adirect cost in the "Personnel" category of the budget form of the grant application or on a contract proposal.

The indirect cost base or bases (that is, the denominator(s) of the fraction producing a rate) should beselected so as to permit an equitable distribution of indirect costs to the benefiting cost objectives.

Advantages Of Cost Accounting:

Following are the most important advantages of a good cost accounting system:

1) Classification and Subdivision of Costs:2)

In the contrast to a single profit or loss figure supplied by general accounting, the cost accounting classifiescosts and income by every conceivable subdivision of the business enterprise. In a good costing systemdata regarding costs by departments, processes, functions, products, orders, jobs, contracts and servicescan easily computed. This detailed cost information for managerial control is one of the most importantcontributions of cost accounting.

3) Adequacy or Inadequacy of Selling Prices:

Unit cost of production, administration and safe made possible by cost accounting aids management in


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deciding the adequacy or inadequacy of selling prices i.e. neither too high detracting business, nor too lowresulting in losses to the concern.

In period of depressions, slumps, or in case of competition management forced to lower prices even belowcost of production and sale. In such circumstances, cost accounting will help management in deciding theproper reduction.

4) Disclosure of profitable Products:

Cost Accounting will disclose activities, departments, products and territories, which bring profit and thosethat result in losses. Management to determine what products because of profit margin the salesdepartment because of their greater profit margin should emphasize will use this information. What productsarte unprofitable or less profitable and might be eliminated or lesser sales pressure be given to them. Whatactivities or territories are not producing sufficient profit and should be either further improved or eliminatedand what methods of production and distribution are most profitable for the firm. This will increase theoverall profit of the concern.

5) Control of Material and Supplies:

In a good costing system materials and supplies must be accounted for in terms of departments, jobs, unitsof production or service. This will eliminate altogether or reduce to the minimum misappropriations,embezzlements, deterioration, obsolescence, and losses from defective, spoiled, scrap and out of datematerials and supplies.

6) Maintenance of Proper Investment in Inventories:

A costing system will help in the maintenance of various inventory items of materials and supplies in linewith production and sale requirements. If these quantities are too small, production may stop or sales maybe lost. On the other hand, if quantities of such materials and supplies are in excess of the production andsales requirements, too much working capital may unnecessarily tie up in inventories. The detailed quantityinformation furnished by the cost accountant at all times will go a long way in reducing or eliminating thispossibility.

7) Correct Valuation of Inventories:

Cost Accounting plays a basic role in the correct valuation of inventories of finished goods, work in process,materials and supplies. The book inventory method (as opposed to physical inventory method) madepossible by cost accounting system will involve the operation of the various inventory control accounts insuch a manner that the balances of these accounts well be inventory valuations required for periodicfinancial statements. This enables the preparation of monthly financial statements without the trouble andexpense of taking monthly physical inventories.

Further, the value of inventories shown by the book inventory will be more accurate than inventory valuesshown by the physical inventory method. If no cost system is in use and inventory values computed byphysical inventory method, then the value of these inventories must either bean estimate of cost or bedetermined at market values. But in a cost accounting system accurate procedures and techniques areavailable by which inventory values can be computed in a relatively more exact fashion. The requirementsof management, stockholders, creditors, employees and other groups interested in the financial statementsof the firm naturally attach more emphasis on this objective of cost accounting. In most cases, this objectiveof cost accounting dominates the formal cost records and routines.

8) Whether to Manufacture or Purchase from Outsiders:

Cost records furnish information regarding the cost of manufacturing of different finished parts, which assist


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management in making a decision whether to purchase these parts from outside manufacturers or manufacture them in the factory.

9) Control of Labour Cost:

Orders, jobs, contracts, departments, processes, or services record cost of labour. In many manufacturing

enterprises, daily time reports are prepared showing the number of hours and minutes spent and the wagerate for each worker per job or operation. This enables management to compare the current cost of labour per job or operation with some previously incurred or determined cost thus measuring the efficiency or inefficiency of the labour force and assigning the work to employees best suited for it.

10)Use of Company-wide Wage Incentive Plans:

When labour cost is accounted for by jobs and operations, it is possible to use effectively wage incentiveplans or bonus schemes for the remuneration of labour force. Carefully planned and administered incentiveschemes are an effective means of enforcing superior performance and cost reduction. Workers are moreco-operative, responsive and productive when some form of incentive offered to them for surpassingstipulated standards of perfection and performance. Cost of accounting has developed incentive plans,which are applicable not only to factory workers but also to clerks, salespersons, and other executives for

above standard performance.

11)Controllable and Uncontrollable Cost:

Cost accounting exhibits at each stage of production and sale the controllable and uncontrollable items inthe manufacturing, selling and administrative cost thus enabling management to concentrate attention onthose costs, which can reduced of, eliminated. There is very little the management can do to reduce suchuncontrollable items as idle time of machines and labour, wastage in the use of materials, supplies andpower can controlled much more effectively.

12)Use of Standards for Measuring Efficiency:

A complete cost accounting system, generally, has a well-developed plan of standards to measure theefficiency of the organization in the use of materials, incurrence of labour and other manufacturing cost.Cora does this appraisal paring the work of factory workers, office and sales personnel and other executivewith what should have done in manufacturing and selling a given quantity of units in a given period.

13)Reduction of Losses Due to Seasonal Conditions:

Cost accounting provides data for making a complete analysis of losses due to idle plant and equipment or due to the use of plant and equipment beyond normal capacity, irregular employment of labour, wastes inthe use of materials. It indicates cost variations between active and inactive periods and seasonalconditions in the business or industry. Seasonal fluctuations in business activity affect profoundly theearnings of the concern. In many industries, seasonal variations are responsible for higher costs and lower profits.

14)Budgeting:

In a good cost accounting system, preparation of various budgets periods in advance of actual productionand sale of goods is necessary. These budgets include budgeted statement of profits, budgeted cost of plant improvements, budgeted cost of production, budgeted cash receipts and payments, and so forth.These budgets show the plans of the management for future periods and they reflect the expected resultsof these plans. They are of great help in getting the sales manager, the works manager, and the treasurer into agreement as to a plan that can sold, manufactured and financed. In fact, the use of budgets has madecosting a preventive device for the rectification of inefficiencies before they creep into the business


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operations or as they occur from day to day. In other words, budgeting, inculcates the habit of thinking andcalculations before taking decisions.

15)Reliable Check on General Accounting:

Finally, an efficient and proper system of cost accounting is a most reliable and independent check on the

accuracy of the financial accounts. This check made effective through reconciliation of the balance of profitor loss shown by the costing profit and loss account and the balance of profit of profit or loss revealed bythe general accounting profit and loss account.

methods of costing:

Various Mehtods of Costing:

Different industries follow different methods for ascertaining cost of their products. The method to beadopted by business organisation will depend on the nature of the production and the type of out put.

The following are the important methods of costing:

Job Costing:Job costing is concerned with the finding of the cost of each job or work order. This method is followed by

these concerns when work is carried on by the customers request, such as printer general engineering workshop etc. under this system a job cost sheet is required to be prepared find out profit or losses for each jobor work order.

Contract Costing:Contract costing is applied for contract work like construction of dam building civil engineering contract etc.

each contract or job is treated as separate cost unit for the cost ascertainment and control.Batch Costing: A batch is a group of identical products. Under batch costing a batch of similar products istreated as a separate unit for the purpose of ascertaining cost. The total costs of a batch is divided by thetotal number of units in a batch to arrive at the costs per unit. This type of costing is generally used in

industries like bakery, toy manufacturing etc.

Process Costing:This method is used in industries where production is carried on through different stages or processes

before becoming a finished product. Costs are determined separately for each process. The main feature of process costing is that output of one process becomes the raw materials of another process until finalproduct is obtained. This type of costing is generally used in industries like textile, chemical paper, oilrefining etc.

Service (Operating) Costing: This method is used in those industries which rendered services instead of producing goods.Under this method cost of providing a service is also determined. It is also called service costing.The organisation like water supply department, electricity department etc. are the examples of using operating costing.

Operation Costing:This is suitable for industries where production is continuous and units are exactly identical to each

other. This method is applied in industries like mines or drilling, cement works etc. Under thissystem cost sheet is prepared to find out cost per unit and profits or loss on production.

Multiple Costing: It means combination of two or more of the above methods of costing. Where a productcomprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different component.


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ABC SYSTEM

Paul A. Sharman

Activity-based costing (ABC) offers a way to analyze costs that is different from traditional methods. Peopleoften say that ABC is a better way to do product costing. But, in fact, it is a huge mistake to think that ABCis either better or worse than traditional costing. Traditional costing is premised on accounting conceptsthat were designed to satisfy the needs of external and regulatory financial reporting, based on an ancientset of assumptions. By contrast, ABC is a practical method designed to provide management withmeaningful information with which to make better decisions. This article will describe the difference betweenthe two approaches and benefits of ABC to banking organizations.Different Perspectives

Four years ago, a research consortium of banks produced a report that clearly described how managementaccounting information in banking needed to be reevaluated. [1]The most substantial finding was thatcustomers who maintain low balances consume more of the banks resources and cost than they createrevenue for the bank. The consortium noted that most retail banks have a very high proportion of customers who maintain low balances and generate minimal fee income. It discovered that the inverse isalso true; a relatively small proportion of customers maintain high balances and pay large amounts of fees.These findings are consistent with our own experiences in completing studies to determine profitability bycustomer or segment. The outcome is that high balance/fee customers in essence subsidize those with lowbalances/fees. Often the gap can be significant, for example, high balance/fee customers produce earningscontribution that is three to five times final total bank profits. These profits are then diluted by losses madeon low balance/fee customers. In one recent study in which I participated, 10% of a banks clients produced90% of the revenue and 60% of the banks resources were tied up in serving the other 70% of the clients(10% of the revenue).

The report legitimized a view that was, and remains, highly contentious among bankers. Various individualbanks had performed ABC before the release of the report; however, many banking personnel are used tothe traditional profitability information. Furthermore any suggestion that low-revenue customers are a badbusiness proposition for banks challenges a prevailing view in banking that low-value customers are intraining to become future profit generators. People in many banks become alarmed that the identification of low-profit or loss-producing clients might lead to them being abandoned, which to many is unacceptable.The whole idea of profitability by customer or segment struck many managers I spoke to over the years asunnecessary, impractical, and possibly threatening. Recently, it seems that more bank personnel arecoming around to a more modern view of customer/segment profitability.Manufacturing View Is Contradictory for Banking

Traditionally, bank profitability information has been developed using cost allocation logic from generallyaccepted accounting principals (GAAP), that is, fair allocation of overhead to products. For most people,because accounting logic was indeed generally accepted it was also assumed to be correct and useful for decision-making purposes. Most people, however, are not aware that cost allocation for financial reportingpurposes under GAAP was developed in order to match cost with revenue in some reasonable way. Thereasonable way was to assume that expenses are all incurred to produce products that customers will

value and be willing to pay for. Accountants employed by banks are obliged to follow GAAP in order toproduce financial statements and calculate earnings. Most accountants would agree that earnings numbersso calculated are premised on a variety of opinions. Few accountants would suggest that numbersproduced for financial reporting are appropriate to support detailed operational decisions. It is not thatfinancial results are wrong; rather, it is that they may be misunderstood and the numbers can bemisapplied.

Under traditional cost accounting methods, accountants identify a denominator to allocate all of theoperating expenses of each cost center to an object that represents products of the business. Thedenominator most commonly used is something that could be perceived to contribute to the preparation of


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the products. The usual denominator used for cost allocation is one that varies with revenue level andusually is a measurement that is only applicable to one activity. For example, it is interesting to note that inmany branches, where cost is allocated on the basis of number of transactions processed, that the actualproportion of resources consumed in processing transactions is often in the order 40% of the total resourcesconsumed by the branch. Therefore, 60% of the resources of the branch are allocated based on adenominator to which they are unrelated and the data produced is not representative of the facts. In allprobability, accountants know that the cost distribution occurs in this manner, but most believe that their objective is to create some fair distribution of cost. In the accounting model, it actually doesnt matter thatthere is this misrepresentation of cost, because it is assumed that these other costs are required to facilitatethe processing of transactions, and that is good enoudifferent methods of costing may be used. It is also known as composite costing. This type of costing isapplicable to industries producing motor vehicle, aeroplane radio, T.V. etc.

Essential Of Good Cost Accounting System

Cost accounting system should possess are as follows :(i) Cost accounting system should be tailor made , practical , simple and capable of meeting therequirement of a business concern .(ii) The data to be used by the cost accounting system should be accurate , otherwise it may distort theoutput of the system .(iii) Necessary cooperation and participation of executive from various departments of the concern isessential for developing a good system of cost accounting .(iv) The cost of installing and operating the system should justify the result(v) The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details.(vi) A carefully phased programme should be prepared by using network analysis for the introduction of thesystem .(vii) Management should have a faith in the costing system and should also provide a helping hand for itsdevelopment and success .

The method of costing adopted, i.e. Job or process costing, should be suitable to the industry and serve theobjectives of installing the system. A ready made costing system cannot be suitable for every business. Thecost accounting system should be tailor made according to the requirement of a business. If a costingsystem is to be successful, it may be fully supported by executives of various departments and everyoneshould participate in it. The cot of installing and operating the system should be justified by the resultsproduced. In order to derive maximum benefits from a costing system, well-defined cost centers andresponsibility centers should be built within the organization. Controllable and non-controllable costs of each responsibility center should be separately shown. There should be cooperation and coordinationbetween cost accounting and financial accounting departments. In order to avoid duplication of accounts,cost and financial accounts may be integrated. Well-trained and educated staff should be employed tooperate the system. In order to educate the costing staff written manuals and meetings etc should bearranged on a continuous basis.

A good costing system consists of the techniques, forms,and accounting records used to develop timelyinformation about the cost of manufacturing specific products and of performing specific functions.Becausecost accounting sysytems are most widely used in the manufacturing companies.but the cost accountingsystem is applicable to a wide range of business situations.For example,banks,accounting firms,andgovernmental agencies etc.These techniques should be able to determine the cost of performing various service functions. For

example Cost Accounting system in a manufacturing Company should serve two important managerialobjectives in order to meet the characteristics of a good Cost Accounting system.


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Costing the Banking Services:

Sony Corporation designs, develops, manufactures, and sells electronic equipment, instruments,and devices for consumer, professional, and industrial markets worldwide. The company offersconsumer products and devices, including televisions, video cameras, compact digital cameras anddigital single-lens reflex cameras, Blu-ray Disc players/recorders, DVD-video players/recorders,home theaters and audio systems, and portable audio and car audio products. It also providescharged coupled devices, complementary metal-oxide semiconductor image sensors, system LSIs,small- and medium-sized TFT LCD panels, and other semiconductors; and components, such as

batteries, optical disk drives, chemical products, audio/video/data recording media, storage media,and optical pickups. In addition, the company develops, produces, markets, and distributes games,such as PlayStation3, PlayStation Portable, and PlayStation 2 hardware and related software; andPCs and flash memory digital audio players, as well as manufactures broadcast- and professional-use products, Blu-ray Discs, DVDs, and CD discs. Further, it produces and distributes motion

pictures and television programs, and home entertainment; creates and distributes digital content;operates a channel network and studio facilities; and develops entertainment products, services,and technologies. Additionally, the company engages in the music publishing business, as well as

provision of various financial services, including insurance, savings products, loans, leasing, andcredit financing services; and a network service business and an advertising agency business. Italso involves in research, development, design, production, marketing, sales, distribution, andservicing mobile phones, accessories, services, and applications.

Why HSBC Internet banking is costing you money :

It is my assertaion that HSBC internet banking is not cost effective and is a badly delivered"me to" service. In fact I have publicly proven that it is not run well or by people with agood understanding of delivering web services.

HSBC: Internet Banking EPIC Fail! Documented that the HSBC Internet banking teamfailed to realise that people might try to access the site both with and without the www. atthe start of the domain name and that one must configure the web server to respond to bothof these as www.hsbc.co.uk is a sub domain of hsbc.co.uk. This mistake is acceptable for

beginners but for a group with the resources of the HSBC such a mistake should never havehappened.

Additionally no organisation the size and importance of HSBC should allow employees tolie in public and be rude to customers as did the user "Mr T" who came from IP193.108.73.47 (owner by the HSBC) and insulted me on my own blog. Specifically theycorrect the error and then tried to pretend that the problem had never existed.

When organisations the size of the HSBC feel that it is fine to try and cover up mistakesand then, at the same time, expect us to trust them with our money something has gonevery wrong in the thinking that lead to this.

But let us look at the HSBC Internet Banking website itself.
http://lordmatt.co.uk/item/1412http://lordmatt.co.uk/item/1270/http://lordmatt.co.uk/item/1270/http://lordmatt.co.uk/item/1412


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While they no longer try to force me to work within a popup for fake "security" and whilethey no longer engage in lame and easily defeated actions like diabling the right mouseclick via javascript (honestly) they still have no idea what they are doing.

HSBC are, trying to get to grips with Web 1.0 in a world for which web 2.0 is old hat and3.0 is on the cusp of reality. These might not be popular phrases this year but frankly theydo demonstrate just how many generations of design and thought the HSBC InternetBanking team are behind by.

While they have wisely stepped beyond the security risks of username and password theyhave done so in a clumsy and ill thought out way. Customers are required to memorise (or write down) a 12 digit number which can be obtained from any branch with minimal effort

Then just the "secret" of the person's date of birth is needed. What good does this doanyone? If I were an identity theif this would be a key item of dta and I would have it.

Knowing the users Date of Birth, HSBC does nothing to enhance security but doesintroduce 6 more characters (that brings us to 18 now) that must be typed without error from easily obtainable information.

18 opportunities for an HSBC customer to make a mistake and get fustrated one time toomany and move to another bank. 18 opportunities that add no actual security. In other words we have a very long and conveluted username when the sort code and accountnumber would have done the trick just as well.

Then the only thing they have done anywhere near right is set up a 6 or more digit pinnumber and require 3 digits from it. In principle this is fine but assuming that the user doesnot select a date of birth or their own phone number or something else easy to guess then atleast randomising the digits asked for would be a good idea right?

Wrong.

In a six digit number any three digits would if entered incorrectly rule out a thousandcombinations. That means that the most guesses a smart hacker needs to get access to anygiven HSBC customer's account is 1,000 for a six digit number. At the very slow rate of three tries a second it would take just under 6 minutes to access the HSBC customer account.

Even if the HSBC limit the number of tries a customer can make to say 10 a day thenwithin 29 weeks a hacker could have access to the account without setting off any alarms.

Remember that to be lucky the attacker only needs to guess a number at a 999 to 1 odds of being correct and each time they are wrong they illimiate arround a thousand guesses thatare no good.

Worse yet it need not take all that long at all. Using a probability stack the attacker could


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semi-randomly select their answer from all the possible remaining right answers based onthe simple effort of picking numbers present in the most non illimitated combinations. Inthis way they could easily half the time it takes to find a number combination that wouldgrant them access.

That first access does not even tell the attacker what the true number is just that it is one of 1000 combinations (or less). Nevertheless they are still in. Of the 999,999 possiblecombinations 1,000 would grant the attacker access on any given try.

All that criminal needs is time, some programming skills and enough patientice. Then theycould target and access any HSBC customer's internet bank account and send that moneyelsewhere with ease. All they need to know is who you are.

But let's pretend that somehow the HSBC are not only able to cover the cost of all theselosses but happy to. You can bet that they don't publish the full extent of the account break ins and while they are more than able to pay the cost every HSBC customer pays the price.

What rate of interest would HSBC customers get if their Internet banking had valid securityon it? You can bet it is a lot more. You can also bet that people that borrow fromt he HSBC

pay more to do so because the HSBC Internet Banking Security is laughable.

But this is not the only area where the HSBC is flushing money down the pan. They alsofail to get the very reason why Internet banking and paperless billing is so attractive.

The HSBC needs to recognise the need for digital data to be, well, digital?

Right now if you log onto you HSBC Internet Banking page you can access thetransactions on your account on a per statement basis. Despite the fact that you have a webfront end accessing the HSBC servers directly there is no way of producing an on screenstatement of the year to view.

Worse yet there is no way to download your data in a way that makes it useful to you. Youcan print the page but why bother when you have the staement come via the post?

How much more useful would your account data be if you could save it as an Excel SpreadSheet or manipulate it in Open Office?

The minimum effort required would be to make the data available as CSV (CommaSeperated Values) - a simple text file that any data system worth it's salt can play with.

That would mean that a HSBC customer with the inclination to do so would be able to fireup a spread sheet and work out how much of their wages they actually spend on bills andshopping and what their spending is like. Your average joe could create householdexpenditure projections, estimate the cost of poor spending and calculate his (or her)monthly available budget.


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It would be possible to create realisist debt managment plans that would empower andenable people to make more savings.

As an internet user I expect to be able to access my information in more than just HTML.Writing a screen scraper to help me manage my spending should not be needed. For

example I would expect (as a minimum best practice) to have access to my data as CSVand PDF. Otherwise why would I want to go "paperless" in the first place?

The current HSBC Internet Banking offering is far too inflexible for the twenty firstcentury. It assumes that to be a valid web offering the bank needs to offer a HTML versionof the paper based way they have always offered customers information. This is not true.

But this is not the only area where HSBC have failed to build a reasonable InternetBanking service. Quite aside from giving money to criminals and failing to understandconsumer needs the HSBC have failed to understand how to create a simple and effectiveweb interface.

Input validation with the HSBC Internet Banking is not suitable for a modern bankingorganisation. So much so that had I written it I would be too ashamed to say so. Mind youif I had written it then it would do the job it is supposed to do.

For example if when setting up some transaction you can not type 1.04 and send a poundand four pence. You have to enter a 1 int he pound box and a 04 in the pence box. Justentering a 4 will produce an error message. Indeed if you enter the ammount "0" into the

pence box the message you will get will be that the ammount you have entered is invalid.Change it to "00" and the system accepts your input.

Now forgive me if I am wrong but no mater how many 0s I put in a row it still has thenumeric value of zero. 0 is the same as 00. Any systemt hat can not cope with a single digitversion of nothing but needs to digits to equal nothing was written by someone with a Ph.Din stupid.

This is just an affront to good design. Let us comapire to ebay who must make their moneyonly via their web interface. Ebay recognise that when a customer puts 1.0 they mean one

pound. If they type 1.2 then that is one pound twenty. This is because 1.20 and 1.2 arenumerically identical values. We use a decimal currency so forcing users to write 00 in the

pence box every time they want to carry out a transaction is forcing the user to do a lotmore work for no good reason.

All in all I'd hate to think of the billions that the HSBC is giving to criminals every year and the similar fortune they paid their IT staff to come up with a way of both pissing off customers and givng money to crime.


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What do banking crises cost?

One thing I didn't have space to mention in my comment piece today is that the IMF has producedan excellent primer on recent banking crises, which can be found here .

The paper includes a checklist of likely outcomes following a crisis, which is well worth goingthrough.

1. Banking crises usually cause the nationalisation of one or more financial institutions. (check)

2. They often cause a run by depositors on a bank. (check)

3. For all the talk about moral hazard, about resisting bail-outs whenever possible, banking crisesinvariably end up with the taxpayer having to support a major chunk of the financialsystem.Usually this involves recapitalising the banking system. On average this ends up costingtaxpayers 6pc of gross domestic product. (check, particularly if the Paulson plan is passed)

4. It also shows that 55pc of banking crises also cause a currency crisis (though bear in mind manyof the examples examined are from developing nations with more vulnerable capital accounts).(still waiting for this one though the dollar and the pound have both tanked in recent weeks)

5. Interest rates are left more or less unchanged if governments start splurging.

When governments are forced to step in, they rarely ever make a profit for taxpayers. However,they do usually prevent the broader economy from suffering a major slump.

The paper shows how disingenuous it is for Alistair Darling or Hank Paulson, or Ben Bernanke to claim that their rescue plans could eventually end up making a profit for the taxpayer. What theyavert, in terms of economic trauma, is far more important.

Bank Fraud Still Costing Plenty:
http://www.telegraph.co.uk/finance/comment/edmundconway/3090601/Financial-Crisis-The-next-decade-could-be-our-very-own-Great-Depression.htmlhttp://www.telegraph.co.uk/finance/comment/edmundconway/3090601/Financial-Crisis-The-next-decade-could-be-our-very-own-Great-Depression.htmlhttp://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdfhttp://www.telegraph.co.uk/finance/comment/edmundconway/3090601/Financial-Crisis-The-next-decade-could-be-our-very-own-Great-Depression.htmlhttp://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf


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Since U.S. laws put the onus on banks to assume liability, consumers and some businesses tend tothink their exposure amounts to little more than a temporary inconvenience while they await newdebit cards. But that isnt really the case.

As diligent as banks try to be, they cant catch everything and so they must depend on bank customers to report fraud, too. Sometimes those reports dont come, however, because too manyconsumers are either unaware of the problem or depend too heavily on banks to solve it.

But there are those that argue that increased public awareness does not and will not lead to adecrease in cyber crime against banks. RSA CEO Art Coviello testified to as much before theHouse Select Committee on Intelligence earlier this year. "Theres too much awareness withoutanything being done," he said. "Theres no amount of consumer education to make them smartenough to resist attacks. Theyre just too sophisticated."

Coviello was not advocating public ignorance. Instead he appeared to be underscoring that lossesfrom fraudulent activity include decreased public confidence. The public, he said, is left with asense of helplessness in the face of a deluge of information upon which they cannot act. Coviello

thinks the responsibility to solve the problem rests solely on government and businesses.

"It is clear that security and fraud monitoring is a top concern for bankers," said Ed Gainer, senior vice president of North American Cash Management at Fundtech, a provider of financial supplychain applications, in a statement. "Seventy-four percent of our clients think that their businessclients would be willing to change financial institutions for better security. Account security is nowa key competitive issue as well as a legal concern."

It is likely that Coviello shares much of the frustration consumers feel as RSA, the securitydivision of EMC and a respected security leader, was breached in March by infiltrators believed to

have used spear phishing email to gain access. The criminals targeted RSAs much lauded SecurIDtwo-factor authentication system. The attack left the network security world stunned. Ironically, itis currently being debated as to whether more employee awareness within RSAs ranks might have

prevented the spear phishing tactic from succeeding. But no one really knows the answer to that.

According to David Nelson, a specialist in the FDICs Cyber Fraud and Financial Crime Section,overall cyber fraud has declined steadily since its peak in 2006. However, online wire transfer andAutomated Clearing House (ACH) Network fraud are still climbing -- racking up $87.5 million in
http://blogs.govinfosecurity.com/posts.php?postID=1077http://www.esecurityplanet.com/features/article.php/3928621/RSA-Hacked.htmhttp://www.esecurityplanet.com/features/article.php/3928621/RSA-Hacked.htmhttp://www.csoonline.com/article/603461/ach-fraud-why-criminals-love-this-conhttp://blogs.govinfosecurity.com/posts.php?postID=1077http://www.esecurityplanet.com/features/article.php/3928621/RSA-Hacked.htmhttp://www.csoonline.com/article/603461/ach-fraud-why-criminals-love-this-con


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losses in 2010.

But this problem is not exclusive to bank account infiltration.

According to a recent white paper by Fundtech, Fraud: A 360 View , this type of fraud is

increasingly occurring across a variety of channels: from bank account infiltration (24%), via callcenter and fax communication (26%), as well as in-branch (15%). Further, the survey revealed thatthe majority (66%) of bankers believe that cyber crime will never get under control.

"Institutions can do a lot to smooth the recovery process once an incident takes place," saidZachary Miller, acting deputy assistant director in the FBIs Cyber Division, in the Fundtech white

paper.

He advises companies to have an incident response plan in place outlining the firms policies and procedures for dealing with an incident. Firms should also develop a relationship with lawenforcement so they know whom to call when an incident occurs. One way to do this is to join anorganization, "such as InfraGard or the National Cyber-Forensics & Training Alliance , devoted tosharing information about threats."

Miller encourages individuals to take greater responsibility for the safety of the information ontheir personal computers. "People have to take a proactive effort," he said. Criminals are out totarget the weakest link. "I hate to tell you, but we are all the weakest link."

A NICE-Actimize small business study found that only 18% of small businesses understood theyare lible for cyber losses, for example. That leaves 82% of small businesses vulnerable to fraud andignorant of their real or potential losses. Avivah Litan, a Gartner analyst, warned that small

businesses do not have the same protections as consumers and are not necessarily able to recover money stolen from their accounts.

While the country waits for regulation to catch up with advances in cyber crime, professionals likeLitan are hoping that knowledge in the hands of consumers, particularly small businesses, willtranslate to the power to thwart criminals.
http://www.fundtech.com/news/147/fraud-360-view-white-paper-reveals-widespread-bank/http://www.fundtech.com/news/147/fraud-360-view-white-paper-reveals-widespread-bank/http://www.infragard.net/http://www.ncfta.net/http://www.actimize.com/index.aspx?page=news274http://blogs.gartner.com/avivah-litan/2011/06/07/judicial-decision-favors-bank-over-defrauded-business-regulatory-blunder/http://www.fundtech.com/news/147/fraud-360-view-white-paper-reveals-widespread-bank/http://www.infragard.net/http://www.ncfta.net/http://www.actimize.com/index.aspx?page=news274http://blogs.gartner.com/avivah-litan/2011/06/07/judicial-decision-favors-bank-over-defrauded-business-regulatory-blunder/


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PROBLEM OF COSTING IN BANKS

As Indians openness to further speed up the financial industry furtherintensified competition in Indias commercial banks. Long term evolvingemphasis on the internal management of the credit indicator light and heavyincrease in the number of light quality, growth, cost of indifference andneglect of the concept of cost-effectiveness of the appropriate distributionnegative than the long standing malpractice and other increasingly stand out,and restrict the improvement of the

Competitiveness of bank and various businesses , repaid and healthy. In thecontext, as a new cost management-activity-Based Costing (Activity BasedCosting. referred to as ABC) are increasingly being Indias commercial banksector, concerns and respected. This article on the current Indias commercial

bank in difficulty in the implementation of ABC focus and breakthrough toexpress their point of three superficial view.

A) Technology base and the low quality of personnel

After 20 years of reform and opening up, Indias commercial bank the levelof equipment has been greatly improved. Howeverd, not yet formed a fund-raising, investment, cost management, logistic management, integratedmanagement of the systematic; software development. Low level, basicallyto stay in raising accounting efficiency and labor intensity, the poorinteroperability between different system. Therefore , the lack of activity-baced costing the corresponding technical support. At the same time ,from the quality point of view , despite years of efforts, Indias commercialbanking business the quality of staff have been greatly improved , butcommercial banks in developed countries is still larger than accountingpersonnel gaps in both knowledge in accounting expertise, but alsounderstand the appropriate management of knowledge and applicationtechnology of composite aircraft telents are extremely scarce. Combinedwith a long time , commercial bank , accounting personnel the accountingsystem used in accordance with the relevant provisions of the model to

fixed accounting treatment , the lack of professional judgment. Theactivity-based costing is a more complex cost calculation method , whichrequires not only the means of technical support , but also require high-quality accounting personnel , otherwise , it is difficult to ensure theireffective implementation and the desired results, or evencounterproductive.


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B) Implementing a costly

Necessarily requires the implementation of ABC systems in the originalcost of the appropriate improvements . Indias commercial bank in order topresent a comprehensive business system and related business management

system for the construction of the framework , with the requirement of ABC ,compared with a considerable difference. Therefore, very large commercialbank in the current system , the cost of reconstruction, such as design cost,consulting cost, will be very huge, combined with equipment costs, testingfees, maintenance fees and related cost for the airborne activity-based costingof human, material expenses accounting for the cost of transforming a costaccounting system is no easy matter, which have to bear the financial burdencan be imagined.

C) The definition of work motivation and job choice more difficult

The commercial bank to use ABC, aimed at a more comprehensive andrational consumption of the commercial bank the resources allocated tooperation on the consumption on this resources. Commercial bankoperations are diverse, especially with the relaxation of financial control,mixed trend intensified its operation will be even more numerous species.

Thus Indian commercial bank, the definition of the operating division of thereasonableness of choice of cost divers, affecting the proper use of ABC tobe the key.However, due to the experience and technical problems, butalso because of agent problem, Indias commercial bank in the operationdivision of the choice of cost driver inevitably subjective, and thus easilylead to the cost of false.

D) Improper positioning of the implementation of ABC

Some cases from the existing look of understanding and positioning of theABC is unknown, are also seriously effects its application effect. First, theABC only as a cost method of calculating of the accounting and finance

department that can be independently completed; second is an ABCintroduced in the pursuit of perfection on the over the neglect of Indiascommercial bank in which the application environment. Both views andpractices are biased against ABC in the implementation of Indiascommercial bank caused great harm.

E) System of the constraints


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Judging from the current Indias current financial reporting system andaccounting standard point of view, commercial bank will cost during theoperation and management expenses for processing, generally does notrequire the assessment to the product, customer and department such asthe cost of the object, allowing commercial bank, when in reality theimplementation of ABC in the accounting system and businessmanagement subjective support.

The implementation of ABC is systematic project, involving all aspect of commercial bank, require co ordination arrangement and focused.According to ABC system, the calculation principles and the basic approach,I believed that a good grasp of basic work to establish a framework, isIndias commercial bank at this stage, the focus of the implementation of ABC.

A) The establishment of the institutional framework for activity-basedcosting

Although the ABC in Indias commercial bank does not have a practice of success stories, but in the area has made considerable progress. Toeffectively guide the ABC of practice, must be prepared to introduce ABCSintroduction, system design, training, etc., in order to establish ABC as soonas possible the institutional framework for their effective implementation

and provide a theoretical foundation and an institutional guarantee

B) ABC information system

The assumption that commercial banks, regulatory authorities andaccountants have basically mastered the ABC on the basis of the calculation,ABC establishment and improvement of information system for Indiascommercial banks, but also a major charge .development and theestablishment of ABC information system will not only affect all sectors withinthe scope of the study and staff , but also a variety of operation questioned.Present Indias commercial bank of, level, ABC information system is the keyto the success of effective planning and implementation.


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HISTORY OF COSTING IN BANKS:

Ijiri (1975) presents three reasons why historical cost is relevant for decision-making. Historical cost affects theevaluation and selection of decision rules.

To determine which decision rules to use,managers need information about the qual-ity of their past decisions. Historical cost isdirectly related to past decisions. Also, inthe decision-making process, a forecast of future prices must be made, and past prices(historical cost) serve as the basis for sucha forecast. Historical cost provides input tothe satisficing notion. Some decision mak-ers do not seek to optimise but to satisfice.The question for them is how much has al-

ready been earned rather than how muchmore they can earn. Thus, historical cost isan important input for such cases. Histori-cal cost is used because it is imposed onthe decision maker by his environment. Thefact that historical cost is employed in manydifferent contexts, such as taxable incomeand cost-plus contracts, cannot be denied.Historical cost is less subject to manipu-lation:

Historical cost is based on actual,not merely possible, transactions. It is theacquisition price of the assets. The man-agers only have to record all the assets andliabilities at their acquisition price. Hencethey are measured and reported objec-tively. Historical cost is therefore basicallyverifiable. Thus, this minimises the risk of

manipulation of figures by the managers.Historical cost is useful for control pur-poses:

In conventional accounting, the ob-jective of accounting is seen as involving

mainly the stewardship function of man-agement. Managers are to give accountsto the equity holders. Income is the essen-tial measure of that function. The incomestatement provides the evidence for deter-


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mining how effective management has metits responsibilities. Records of past trans-actions are necessary for accountability.

Historical Cost Versus Current Cost Accounting

tion reflects the results of asset management decisions and the impactof the environment on the firm not reflected in transactions. Propo-nents of current cost accounting believe that a failure to recognise thisdichotomy of profit may result in an inadvertent capital erosion(Godfrey et. al., 1997). In addition, it is suggested that the separatereporting of holding gains will enable users of financial statements tomake a more accurate assessment of managers operating performance.Despite the advantages of using current cost accounting, it hasalso received some criticism from academicians as well as practi-tioners. The disadvantages and problems of implementing cur-rent cost accounting are:

Current cost accounting is open to subjectivity: Current costaccounting is claimed to be very subjective (Edward et. al., 1981;Leo & Rodford, 1999). This conclusion is perhaps derived fromthe fact that in most instances, the current cost to be used is notbased on actual transactions. It is difficult to determine the exactcurrent value, for example if a second-hand market does not existand it cannot be replaced with an identical asset. The determina-tion of current cost then is up to the discretion of managers. For assets where no market prices are available, appraisals, calcula-

tions of reproduction costs and use of index numbers will be nec-essary. However these methods require a great deal of judgement.Thus, for current cost to be objective and verifiable, a

standardisation of the method used as well as the availability andaccessibility of market price are needed.Current cost accounting is relevant only for short-term decisions:Peasnell et. al. (1987) in their study found that investors use cur-rent cost information in their short-term portfolio decisions. Thestudy also concluded that current cost information does not seemto be the driving force behind long-term returns. Share returnsin the long run are more closely associated with historical datathan with current cost financial data. Thompson & Watson (1989)found that historical cost profits generally provide the best expla-nation for the change in dividends. Further, there was no con-vincing evidence that individual current cost adjustments play a

significant part in the dividend decision


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PROBLEM OF COSTING IN BANKS

As Indians openness to further speed up the financial industryfurther intensified competition in Indias commercial banks. Long

term evolving emphasis on the internal management of the creditindicator light and heavy increase in the number of light quality,growth, cost of indifference and neglect of the concept of cost-effectiveness of the appropriate distribution negative than thelong standing malpractice and other increasingly stand out, andrestrict the improvement of the

Competitiveness of bank and various businesses , repaid andhealthy. In the context, as a new cost management-activity-BasedCosting (Activity Based Costing. referred to as ABC) areincreasingly being Indias commercial bank sector, concerns andrespected. This article on the current Indias commercial bank indifficulty in the implementation of ABC focus and breakthrough toexpress their point of three superficial view.

F) Technology base and the low quality of personnel

After 20 years of reform and opening up, Indias commercialbank the level of equipment has been greatly improved.Howeverd, not yet formed a fund-raising, investment, costmanagement, logistic management, integrated management of the systematic; software development. Low level, basically tostay in raising accounting efficiency and labor intensity, thepoor interoperability between different system. Therefore , thelack of activity-baced costing the corresponding technicalsupport. At the same time , from the quality point of view ,

despite years of efforts, Indias commercial banking businessthe quality of staff have been greatly improved , butcommercial banks in developed countries is still larger thanaccounting personnel gaps in both knowledge in accountingexpertise, but also understand the appropriate management of knowledge and application technology of composite aircraft


27/30

telents are extremely scarce. Combined with a long time ,commercial bank , accounting personnel the accounting systemused in accordance with the relevant provisions of the model tofixed accounting treatment , the lack of professional judgment.

The activity-based costing is a more complex cost calculationmethod , which requires not only the means of technicalsupport , but also require high-quality accounting personnel ,otherwise , it is difficult to ensure their effectiveimplementation and the desired results, or evencounterproductive.

G) Implementing a costly

Necessarily requires the implementation of ABC systems inthe original cost of the appropriate improvements . Indiascommercial bank in order to present a comprehensive businesssystem and related business management system for theconstruction of the framework , with the requirement of ABC ,compared with a considerable difference. Therefore, very largecommercial bank in the current system , the cost of reconstruction, such as design cost, consulting cost, will be very

huge, combined with equipment costs, testing fees, maintenancefees and related cost for the airborne activity-based costing of human, material expenses accounting for the cost of transforminga cost accounting system is no easy matter, which have to bearthe financial burden can be imagined.

H) The definition of work motivation and job choice moredifficult

The commercial bank to use ABC, aimed at a morecomprehensive and rational consumption of the commercialbank the resources allocated to operation on the consumptionon this resources. Commercial bank operations are diverse,especially with the relaxation of financial control, mixed trendintensified its operation will be even more numerous species.


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Thus Indian commercial bank, the definition of the operatingdivision of the reasonableness of choice of cost divers,affecting the proper use of ABC to be the key.However, due tothe experience and technical problems, but also because of

agent problem, Indias commercial bank in the operationdivision of the choice of cost driver inevitably subjective, andthus easily lead to the cost of false.

I) Improper positioning of the implementation of ABC

Some cases from the existing look of understanding andpositioning of the ABC is unknown, are also seriously effects itsapplication effect. First, the ABC only as a cost method of calculating of the accounting and finance department that canbe independently completed; second is an ABC introduced inthe pursuit of perfection on the over the neglect of Indiascommercial bank in which the application environment. Bothviews and practices are biased against ABC in theimplementation of Indias commercial bank caused great harm.

J) System of the constraints Judging from the current Indias current financial reportingsystem and accounting standard point of view, commercialbank will cost during the operation and management expensesfor processing, generally does not require the assessment tothe product, customer and department such as the cost of theobject, allowing commercial bank, when in reality theimplementation of ABC in the accounting system and businessmanagement subjective support.

The implementation of ABC is systematic project, involvingall aspect of commercial bank, require co ordinationarrangement and focused. According to ABC system, thecalculation principles and the basic approach, I believed that a


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good grasp of basic work to establish a framework, is Indiascommercial bank at this stage, the focus of the implementationof ABC.

C) The establishment of the institutional framework for activity-based costing

Although the ABC in Indias commercial bank does not have apractice of success stories, but in the area has madeconsiderable progress. To effectively guide the ABC of practice,must be prepared to introduce ABCS introduction, systemdesign, training, etc., in order to establish ABC as soon aspossible the institutional framework for their effectiveimplementation and provide a theoretical foundation and aninstitutional guarantee

D) ABC information system

The assumption that commercial banks, regulatory

authorities and accountants have basically mastered the ABC onthe basis of the calculation, ABC establishment and improvementof information system for Indias commercial banks, but also amajor charge .development and the establishment of ABCinformation system will not only affect all sectors within the scopeof the study and staff , but also a variety of operation questioned.Present Indias commercial bank of, level, ABC information systemis the key to the success of effective planning and

implementation.


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Documents

Costig in Bank