Usin^ Activity-Based Costing (ABC) to

Measure Profitability on a Commercial

Loan Portfolio

Mehmet C. Kocakulah, Ph.D.

Professor of Accounting, University of Southern Indiana
mkocakul @ usi. edu

Abstract
The competitive environment in the banking industry has made it
very difficult to increase revenues and market share that is sufficient
in growth and maximizing shareholder's wealth. The minimal growth
in the area plus the over saturation of banks, financial institutions and
other sectors competing for the traditional banking products has forced
banks to look at ways to control their costs to reach the profitability
levels that are necessary to appease their stakeholders. The only way
to control expenses is to have a better understanding of how certain
products and how they are setup to contribute to the overall expenses in
day to day operation of a bank. Activity-based costing will give bank
managers a greater understanding of the true cost and profitability of
all transactions in daily processes in the bank.
Our research study shows the profitability of the same loans under
ABC and Traditional Costing systems. Management can easily use
this information and make more accurate inform decision to cut cost
and increase profitability for the financial institution.

Introduction

The competitive environment in the banking/financial institution

industry has made it very difficult to increase revenues and market share
that is sufficient in growth and maximizing shareholder's wealth. The
minimal growth in the area plus the over saturation of banks, financial
institutions and other sectors (mortgage companies, insurance

P~"" USING ACTIVITY-BASED COSTING (ABC) TO MEASURE PROFITABILITY "^T"]

! ON.A COMMERCIAL_LOAN PORTFOLIO IN A SMALL COMMUNITY BANK i
 ifficult to increase revenues and market share that is sufficient in
growth and maximizing shareholder's wealth. The minimal growth
in the area plus the over saturation of banks, financial institutions and
other sectors competing for the traditional banking products has forced
banks to look at ways to control their costs to reach the profitability
levels that are necessary to appease their stakeholders. The only way
to control expenses is to have a better understanding of how certain
products and how they are setup to contribute to the overall expenses in
day to day operation of a bank. Activity-based costing will give bank
managers a greater understanding of the true cost and profitability of
all transactions in daily processes in the bank.
Our research study shows the profitability of the same loans under
ABC and Traditional Costing systems. Management can easily use
this information and make more accurate inform decision to cut cost
and increase profitability for the financial institution.

Introduction

The competitive environment in the banking/financial institution

industry has made it very difficult to increase revenues and market
share that is sufficient in growth and maximizing shareholder's wealth.
The minimal growth in the area plus the over saturation of banks,
financial institutions and other sectors (mortgage companies, insurance
agencies, internet companies, etc.) competing for the traditional
banking products has forced banks to look at ways to control their
costs to reach the profitability levels that are necessary to appease
their shareholders.^
The only way to control expenses is to have a better understanding
of how certain products and how they are setup to contribute to the
overall expenses in day to day operation of a bank. The traditional
costing system in banking does not effectively assign actual costs to
the actual transaction. This is where activity-based costing will give
bank managers a greater understanding of the true cost and profitability
of all transactions in daily processes in the bank.
Activity-based costing can be used in all areas of banking, and in
some banks it is used in analyzing checking accounts for businesses.

1 30 JOURNAL OF PERFORMANCE MANAGEMENT i

However for this study, we will be looking at how activity-based costing
can be used to determine the true profitability of all commercial loans
transitions in the small community bank.
Commercial loans represent 81.26% of the bank's total loan portfolio
as of December 31, 2006 so it is a major contributor to the overall
revenue of the bank.^ However, commercial lending also represents
a major expense of the bank. In general, the commercial lender and
the Chief Credit Officer, manage the commercial lending portfolio.
Aside from the Chief Executive Officer, these two officers have the
two highest salaries in the bank. Also, commercial loans have to be
managed a lot more closely with the review offinancialsand monitoring
of collateral that is not required with other loans. This adds expense
due to the lender's time, but the loan assistant has to take time to collect
the needed data and performed other tasks that will be mentioned later
in the study.

The Bank

The institution is a small-community bank entering its 7"' year of

existence. As a relatively new, small-community bank, there are many
advantages that can be levered towards better customer service. These
advantages come from the ability to make approvals and decisions fast
and locally, which eliminate a lot of red tape from the larger corporate-
ran banks. Also, decisions can be based on a case-by-case basis instead
of whether the customer is a Tier 1 or Tier 4 determining what level of
service the customer would receive.
However, there are some disadvantages in the cost area. First, the bank
is more dependent on Certificate of Deposits (brokered and local).
Federal Home Loan Bank lines of credit, and Federal Funds Purchased.
These funding sources are typically much more costly than demand
deposits, savings, and money markets. Typically, the small-community
bank cannot and does not have the resources to market and obtain these
"cheaper" deposits. Also, the limited amount of locations sometimes
limits the amount of checking and savings accounts the bank can open
for the customers. This bank has 63.43% of its total deposits tied up in
Certificate of Deposits.'' To make a comparison; other bigger banks

E0Bimy^^
in the same market (Old National Bank) has 41.13% of its total deposits
in CDs."
The other main disadvantage is the eeonomies of seale that the large
eorporate bank has over the small-eommunity bank. These savings are
found in eentralization, and more direetly in salary savings in certain
tasks. This bank has Chief Credit's offieers' salary or the eommereial
lender's salary eost when doing the analysis to underwrite the eredit
or perform the annual analysis after the eredit is booked. The large
eorporate bank has analyst making approximately half the salary taking
eare of the same work. This, also, allows its higher paid lenders to
spend its time loeating new business in the market plaee.

Traditional Costing in Banking

Traditionally, when community bank attempts to determine the

profitability of a eredit, most of the eosts are simply allocated to the
eredit based on its percentage of the total overall portfolio. These
costs are salaries, cost of funds, and provision of loan losses. This
methodology would be appropriate if all credit were created equal.
However in reality, no two credits are alike. Some credits take a lot
of management, while some credits go on the books and require little
additional work.
Without a true understanding of the cost ofa credit, it makes it difficult
for bank management to decide what business are the best eredits to
use its resources to pursue. To obtain a better understanding on more
accurate actual cost, a bank should consider implementing an activity-
based costing.

Activity-Based Costing

The Activity-Based Costing (ABC) process attempts to give a better

understanding and accurate assessment of the costs associated with
producing a product or service and delivering it to its end-users. It looks
at the activities associated with producing the product and service and
the amount of resources that are required for these activities.'
ABC is fiirther defined as:

32 JOURNAL OF PERFORMANCE MANAGEMENT

ABC is further defined as:
1. A more accurate cost management methodology
2. Mostly focuses on indirect costs (overhead)
3. Traces rather than allocates each expense category to
the particular cost object
4. Makes "indirect" expenses "direct"^
One of the reasons to use ABC system is when there is a lot of
competition.^ As stated earlier in this study, the over saturation of
banks, financial institutions and other sectors competing for tradition
banking business provides a competitive environment that requires the
need for a better understanding of costs, which makes the use of ABC
imperative to obtain the levels of profitability required by the company
and shareholders.
The five steps of the ABC process are: Identify Activities, Determine
Cost of each Activity, Determine Cost Drivers, Collect Activity Data,
and Calculate Product Cost.^

Identify Activities

The following have been determined as the necessary activities when

making a loan at the bank.
Underwriting — This is the process where the loan officer reviews
the financials of the borrower to determine if the bank should extend
credit. Depending on the total committed liability to the borrower,
there are more steps required to complete underwriting. Also, the
higher the committed liability, the loan officer may have to present the
credit to the CCO, CEO, Board Loan Committee, or the entire Board
of Directors.
Documentation Preparation and Set-up on System - The more
complex the credit, the more time it takes for the loan assistant to
produce the needed documentation and set-up of the loan on the bank
system.
Review of Documents and Closing of Loan - The loan officer must
review the documents for accuracy, and then must perform the loan
closing.

USING ACTIVITY-BASED COSTING (ABC) TO MEASURE PROFITABIUTY 33

ON A COMMERCIAL LOAN PORTFOLIO IN A SMALL C O M M U N I T Y ' B A N K
Cost of Funds - Loans are funded through deposits in the bank or
from borrowings from the Federal Home Loan Bank and/or Federal
Funds Purchased.
Provision for Loan Loss - Each loan requires a portion of the income
set aside as a provision for loan loss. This information goes to the
Allowance to Loan Loss, which is an asset account set aside to cover
losses when bad loans are charged off.
Payment - Payments can be made either manually or electronically.
Manual payments require the loan assistant to produce tickets to apply
the payments to the system. On Revolving Lines of Credits, there may
be extra payments made as principal reductions.
Loan Advances - In a line of credit, all the money is not taken out
at closing so later onfiandsmust be advanced to the borrower. If the
customer has a checking account, the funds can be directly deposited
in their account. If not, a cheek must be written and sent or picked up
by the customer.
Maintenance - Sometimes payments or advances are misposted so
this requires the loan assistant to make corrections on the system.
Insurance Follow-up - The loan assistant must follow up with
insurance agencies to make sure that loans with collateral have
insurance still in place during the life of the loan.
Collection of Financials - At certain levels of borrowings, the bank
requires yearly financial information to do annual reviews. The loan
assistant sends letters to request financial information and updates the
credit files. In most instances, the processor has to make copies of the
financials.
Annual Reviews - The loan officer annually reviews the financial
information collected on each borrower to review the company's
performance. The review is used to determine that a credit is properly
risk rated (the rating determines how much should be reserved in the
loan loss for the potential loss) and to determine if there is any action
plan needed by the bank.

I 34 JOURNAL OF PERFORMANCE MAJ^AGEMENT . . ,; 1

Determine Cost Drivers

The loan officer performs Underwriting, Review of Documents and

Closing of Loan, and Annual Reviews. The salary plus benefits of the
loan officer is $35.82 per hour. This will be thefigureused to determine
the total cost of each activity.
The loan assistant performs documentation Preparation and Set-up on
System, Payment, Loan Advances, Maintenance, Insurance Follow-up,
and Collection of Financials. The cost per hour is $13.75.
Cost of Funds is the most important cost activity to consider in this
case. Cost of Funds will be set at 3.22%, which was the overall end
of month deposit cost for the bank.^ However, this number is moving
upward rapidly. As a small-community bank, one must monitor this
activities closely making sure that bank can maintain a reasonable
margin between the interest income and the interest expense. With
the bank size, small shifts in the deposit portfolio play a major role on
the bank's profitability. As have CDs maturing or the need for new
deposits because of substantial loan growth, these new deposits are
being booked at a 5.25% rate.
The final cost, the provision of loan loss, is determined by the risk
rating of the credit. The provision cost is set-aside in the Allowance
for Loan Losses. This allowance is used to cover losses from bad
loans. The amount of allowance is determined by the risk of the
bank's credit portfolio. Using this method, the bank has a surplus in
the reserve because of its credit quality. However do to growth of the
loan portfolio; the allowance is now less than 1% of total loans. The
bank has determined that even though risk rating shows a surplus, bank
management would like to raise the allowance to get it close to 1%.
The bank has decided to look at a small provision each month of $5000.
This represents about 3.11% of the bank's net interest margin.
The bank has approximately 3.33% of its portfolio in risk rated 4,
and only .79% in risk rated 6 categories. The rest of the credits are in
the 1 - 3 categories, with the vast majority in the 3-risk rating. The
following table shows what percentage of net interest margin will be
reserved for each category.

USING ACTIVITY-BASED COSTING"(ABC) TO MEASURE PROFITABILllV; 35

ON A COMMERCIAL LOAN PORTFOLIO IN A.SMALL COMMUNITY B A N C
 Risk Rating Classification Percentage of NIM reserved

Minimal Risk - 1 0.00%

Average Risk - 2 2.75%

Acceptable Risk - 3 3.11%

Marginal Risk/Watch - 4 7.5%

Special Mention - 5 10.00%

Substandard - 6 15.00%

Doubtful - 7 N/A

Loss - 8 N/A

As one can see, the risk rating 1 has a 0% reserved due to this category
being loans secured by the bank's CDs. Since the enormous majority of
the portfolio is 3-rated, we have made this percentage equal the average
percentage mentioned above. The last two ratings are not applicable
because these loans are going to be charged off.
There are some other costs that are not mentioned because of one factor
or another. The major one is computers and data processing. At the
bank's size, it is at all of the minimum levels. More or less computer
transactions do not cause cost to go in any direction greatly. Once
the bank has grown to a certain level, this will be another category to
consider.

Collect Activity Data

Cost offiandsand the provision are a one-time activity, even, though

they can fluctuate due to rising or lower deposit costs or change in risk
rating. However, the other costs are determined by the activities.
The first category is underwriting. There are four different categories:
<$50,000, >$50,000, BLC, or BOD. The <$50,000 requires minimal
underwriting and paperwork. This would only require on average 2 hours
of work. The next category >$50,000 includes all loans approved

36 JOURNAL OF PERFORMANCE MANAGEMENT

by the loan officer greater than $50,000, but does not have to go to the
BLC (Board Loan Committee). The extra time is due to some extra
underwriting paperwork and other requirements. The third level is BLC.
The underwriting for this level increases plus there is a presentation
that has to be prepared for the BLC (total time 4 hours). The last level
is the BOD (Board of Directors). These credits are usually the most
complex and require extra attention due to their size. Approximately
6 hours will be spent on these credits.

Category Underwriting Hours

<$50,000 2 hours

>$50,000 3 hours

BLC 4 hours

BOD 6 hours

The next category is Documentation Preparation and Set-up on the

System. There are three major categories: Unsecured, Mortgage,
and Secured (UCC filing, deposit secured, or titled). On an unsecured
loan, there is very little to do when preparing the documents. This will
take the loan proeessor approximately 45 minutes to doeument and 45
minutes to be put the loan on the system. On a mortgage, the processor
has to take the time to order an appraisal, title work, andfioodsearches.
Processor must also take documents to be recorded. Documentation
preparation is on average 3 hours with 1.5 hours for Set-up on the
system. The last category is Secured. It is basically between the other
two categories. There are extra documents to prepare, and there are
documents that have to be filed. On average, document prep time is
1.5 hours with set-up at 1 hour and 15 minutes.

USING'ACTfVffY-BASED CdStiNG (ABC)TO MEASURE PROFITABILITY",,

SMAi?Q|!ME8aALJiMNPQRTFQUCLIM SM.ALL COMMUNITY BANK
 Category Doc Prep Time Set-up Time

Unsecured .75 hour .75 hour

Mortgage 3 hours 1.5 hours

Secured 1.5 hours 1.25 hours

The next cost activity is for the loan officer. It is the time spent reviewing
documents and closing the loan. These categories are the same as the
previous. Mortgages and secured loans have more documents to review
before the closing, and obviously more document to review at closing.
The following table shows the anticipated times.

Category Doc Review/Closing Time

Unsecured .5 hour

Mortgage 1 hour

Secured .75 hour

The next activity is Payments. Payments can be made manually or

electronically. Manual payments take about 5 minutes for the loan
processor to write-up tickets and run them through the teller line each
time. Electronic payments take about 15 minutes to set-up on the
system, but this is a one-time event.
Advances are made on lines of credits. If the borrower has a checking
account with the bank, it takes 5 minutes for the processor to complete.
If the customer does not have a checking account with the bank, then
the processor must write a check and mail it to the customer in most
cases. This makes the activity approximately 15 minutes (1/4 hour).

JOURNAL OF PERFORMANCE MANAGEMENT

If there is an error on the system, the processor must perform
maintenance to fix the problem. This may include some research or a
phone call to the customer. Overall, this has been determined that it
takes roughly 20 minutes (1/3 hour).
The last two costs for the processor is Insurance Follow-up and
Collection of Financial information. If a loan is secured by anything
except accounts receivable or land, the bank requires insurance to be
kept during the life of the loan. This requires the processor to follow-up
on cancellations or other noticesfi'omthe insurance agencies. This takes
approximately YA hour. On the Collection of Financial information, this
requires the processor to notify the borrowers that financials are due,
and in almost every case to make copies of the financial information
for the bank. This on average takes % hour.
The final activity is a required Annual Review by the loan officer. The
loan officer should be familiar with the company and should only have
to look at the last year's financial information. However, since it has
to be reviewed, it is a sizeable credit. This will take about 1 hour.
Exhibit 1 on the next page shows the data collected on each loan, and
how each loan is structured.

Calculate Product Cost

Since the activities have been identified, costs of each activity

determined, the cost drivers determined, and data collected, one can now
calculate the cost of each loan and determine the remaining profitability
after subtracting the costsfi-omthe interest income plus loan fees.
Exhibit 2 takes the collected data and converts it to an actual cost
figure. These cost figures are now subtracted from interest income
and loan fees. The exhibit shows the profitability of eaeh credit under
ABC system.

Traditional Costing Numerically

As mentioned earlier, banks usually use traditional costing to determine

the profitability of a loan. For this bank. Interest Income, Loan Fee, and
Cost of Funds are determined by the same method as it is in ABC.

USING ACTIVITY-BASED COSTING (ABC) TO MEASURE I

ON A COMMERCIAL LOAN PORTFOLIO IN A SMALL COMMUNITY BANK
The difference comes in the Provision, Loan Processor Cost, and Loan
Officer Cost.
For the provision, the total cost is divided by the total loan portfolio,
and then multiplied by the balance of the loan to determine the loan's
portion of the provision. On the Loan Processor Cost, processor is
responsible for the entire commercial loan portfolio. So processor's
salary is divided by the entire commercial loan portfolio, and then
multiplied by the balance of each loan to determine processor's
allocated cost for each loan. The loan officer's salary is divided by
the portfolio, and then multiplied by the balance of each loan. This
amount is then allocated to each loan.
Exhibit 3 shows the same loans, but in this case the costs are allocated
under the Traditional Costing method.

Conelusion

Traditional costing is much easier to calculate than ABC. So the

question is, why would one choose to use ABC? ABC gives a true cost
for a loan compared to traditional costing, which allocates most of the
expenses more accurately. Banking has become very competitive, and
it has become imperative that banks like any other businesses allocate
their resources to the most profitable areas.
What did our research study show on a commercial loan portfolio at
a small-community bank? First let's look at Exhibit 4, which shows
the profitability of the same loans under ABC and Traditional Costing
systems.
In all loans, except for 3 (#3, 5, and 6), ABC system shows greater
profit than Traditional system. Why is this and what can be concluded
from this result?
First, when we look at the three loans that differ fi-om the majority.
Loans #5 & 6 were the only two loans that were in the under $50,000
in underwriting. This shows that if expenses are not allocated. These
loans are not as profitable for the bank because there is not a whole lot
of relief on costs because a similar amount of work is required. The
only really break is in the cost of fijnds and provision. Loan #3 is

40 JOURNAL OF PERFORMANCE MANAGEMENT

 similar to the other two in the fact that it is small in size. However,
since it is a part of a larger relationship, it had to be taken to the BOD
for approval so a lot more underwriting work was required.
What ABC system shows us here is that the bank needs to look at a
junior lender at a smaller salary to handle these smaller loans. This
may also shows us that the loan officer has a lot of smaller relationships
that are taking to much time and takes away from securing larger
relationships that do not cost as much as the smaller loans when
looked at cost as a percentage of loan balance. The regular lenders
compensation needs to be concentrated in the larger loans. Finding
accurate cost is one of the best ways to increase profitability of the
bank to maximize shareholder's wealth. The final conclusion is that
there are some work hours that are not accounted for in ABC system.
This is reflected in profitability being higher in almost all loans in ABC
system when compared to Traditional system. However, most of these
hours can be attributed to prospecting for business and attending civic
events. With these so-called non-production hours or non-value added
activities, it is imperative that the production hours are maximized and
productivity increased to help company's overall profitability.

USING AQflVitY-iASE'D'COSTING (APC)TO MEASURE PROFITABILITY ..

 I ill
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42 .1 ... JOURNAL OF PERFORMANCE MANAGEMENT .

 Exhibit 2
Profit under ABC

Balance Interest Loan Fee Cost of Risk Loan Loan Profit

Income Funds Rating Processor Officer
Cost Time Cost Time Cost

Loan #1 $248,718 $20,174 $ 250 $ 8,009 $ 378 $ 59 $ 197 $ 11,780

Loan #2 $114,768 $ 9,600 $ 250 $ 3,696 $ 184 $ 107 $ 215 $ 5,649
Loan #3 $ 33,261 $ 2,361 $ 150 $ 1,071 $ 40 $ 65 $ 278 $ 1,057
Loan #4 $ 151,200 $13,797 $ 250 $ 4,869 $ 278 $ 103 $ 287 $ 8,511
Loan #5 $ 15,809 $ 1,122 $ 100 $ 509 $ 19 $ 55 $ 99 $ 540
Loan #6 $ 21,070 $ 1,709 $ $ 678 $ 155 $ 56 $ 99 $ 721
Loan #7 $ 59,519 $ 3,319 $ - $ 1,917 $ 105 $ 89 $ 215 $ 993
Loan #8 $ 144,287 $ 8,046 $ - $ 4,646 $ 255 $ 89 $ 215 $ 2,841
Loan #9 $ 394,541 $ 24,067 $ - $ 12,704 1 $ 353 $ 88 $ 215 $ 10,706
Loan#10 $ 62,752 $ 4,056 $ 150 $ 2,021 $ 63 $ 89 $ 179 $ 1,854
Loan#11 $ 68,745 $ 4,182 $ 150 $ 2,214 $ 61 $ 89 $ 179 $ 1,789
Loan#12 $ 41,579 $ 3,162 $ 150 $ 1,339 $ 57 $ .89 $ 179 $ 1,648
Loan#13 $ 91,476 $ 6,956 $ 250 $ 2,946 $ 125 $ 107 $ 179 $ 3,850
Loan#14 $251,092 $ 18,457 $ $ 8,085 $ 285 $ 79 $ 287 $ 9,721
Loan #15 $ 300,000 $ 19,260 $ 250 $ 9,660 $ 264 $ 39 $ 269 $ 9,278
Loan #16 $ 307,282 $ 18,693 $ 150 $ 9,894 $ 274 $ 108 $ 287 $ 8,281
Loan #17 $157,414 $ 9,576 $ 150 $ 5,069 $ 140 $ 103 $ 287 $ 4,128
Loan#18 $ 100,000 $ 6,587 $ 250 $ 3,220 $ 105 $ 33 $ 269 $ 3,210
Loan#19 $110,532 $ 6,724 $ 300 $ 3,559 $ 98 $ 89 $ 215 $ 3,062
Loan #20 $ 175,928 $ 12,486 $ 300 $ 5,665 $ 212 $ 89 $ 215 $ 6,605

USING ACTiVITY-BASEDTCOSTING (ABC)Td MEASURE PROFITABILITY

 Exhibit 3
Profit under Traditional

Balance Interest Loan Fee Cost of % Risk % Loan % Loan Profit

Income Funds Rating Processor Officer
Cost Time Cost Time Cost

Loan #1 $248,718 $20,174 $ 250 $ 8,009 $ 639 $ 349 $ 1,162 $ 10,266

Loan #2 $ 114,768 $ 9,600 $ 250 $ 3,696 $ 295 $ 161 $ 536 $ 5,163
Loan #3 $ 33,261 $ 2,361 $ 1bO $ 1,071 $ 85 $ 47 $ 155 $ 1,152
Loan #4 $ 151,200 $ 13,797 $ 260 $ 4,869 $ 388 $ 212 $ 706 $ 7,872
Loan #5 15,809 r$ 1,122 $ 100 $ 509 $ 41 $ 22 $ 74 $ 576
Loan #6 r$" 21,070 r$ 1,709 $ - $ 678 $ 54 $ 30 $ 98 $ 848
Loan #7 $ 59,519 $ 3,319 $ - $ 1,917 $ 153 $ 84 $ 278 $ 888
Loan #8 $144,287 $ 8,046 $ - $ 4,646 $ 370 $ 202 $ 674 $ 2,153
Loan #9 $
$ 394,541 $ 24,067 $ - $ 12,704 $ 1,013 $ 554 $ 1,843 $ 7,954
Loan#10 $ 62,752 $ 4,056 $ 150 $ 2,021 $ 161 $ 88 $ 293 $ 1,643
Loan #11 $ 68,745 $ 4,182 $ 150 $ 2,214 $ 177 $ 96 $ 321 $ 1,524
Loan#12 $ 41,579 $ 3,162 $ 150 $ 1,339 $ 107 $ 58 $ 194 $ 1,614
Loan#13 $ 91,476 $ 6,956 $ 25U $ 2,946 $ 235 $ 128 $ 427 $ 3,470
Loan #14 $251,092 $ 18,457 $ - $ 8,085 $ 645 $ 352 $ 1,173 $ 8,202
Loan #15 $ 300,000 $19,260 $ 250 $ 9,660 $ 770 $ 421 $ 1,401 $ 7,258
Loan #16 $ 307,282 $ 18,693 $ 150 $ 9,894 $ 789 $ 431 $ 1,435 $ 6,293
Loan #17 $ 157,414 $ 9,576 $ 150 $ 5,069 $ 404 $ 221 $ 735 $ 3,297
Loan#18 $ 100,000 $ 6,587 $ 250 $ 3,220 $ 257 $ 140 $ 467 $ 2,753
Loan#19 $ 110,532 $ 6,724 $ 300 $ 3,559 $ 284 $ 155 $ 516 $ 2,510
Loan #20 $ 175,928 $ 12,486 $ 300 $ 5,665 $ 452 $ 247 $ 822 $ 5,601

INCE MANAGEMENT
 Exhibit 4
ABC vs Traditional

ABC Profit Traditional Profit Difference

Loan #1 $ 1 1,780 $ 10,266 $ 1,514

Loan #2 $ 5,649 $ 5,163 $ 487
Loan #3 $ 1,057 $ 1,152 $ (96)
Loan #4 $ 8,511 $ 7,872 $ 639
Loan #5 $ 540 $ 576 $ (36)
Loan #6 $ 721 $ 848 $ (127)
Loan #7 $ 993 $ 888 $ 105
Loan #8 $ 2,841 $ 2,153 $ 688
Loan #9 $10,706 $ 7,954 $ 2,753
Loan #10 $ 1,854 $ 1,643 $ 211
Loan #11 $ 1,789 $ 1,524 $ 264
Loan #12 $ 1,648 $ 1,614 $ 34
Loan #13 $ 3,850 $ 3,470 $ 380
Loan #14 $ 9,721 $ 8,202 $ 1,519
Loan #15 $ 9,278 $ 7,258 $ 2,021
Loan #16 $ 8,281 $ 6,293 $ 1,988
Loan #17 $ 4,128 $ 3,297 $ 830
Loan #18 $ 3,210 $ 2,753 $ 458
Loan #19 $ 3,062 $ 2,510 $ 552
Loan #20 $ 6,605 $ 5,601 $ 1,004

USTNG AefiyiTY-BASED COSTING (ABC)TO MEASyRl PRdFrtABJLITY

JJNACQMMiBCiALLQlNJlORTFPLIOJNASMALL^^^^
 References

1. Anthony, Robert N., David F. Hawkins, and Kenneth A. Merchant.

Accounting Text & Cases, McGraw-Hill Irvin, 12th e, pgs 557 - 565.

2. The National Bank internal financial statements.

3. McGuire, Brian L., Mehmet C. Kocakulah, and Leonard G. Wagers.

"Implementing Activity-Based Management in the Banking Industry,"
The Journal of Bank Cost & Management Accounting, http://findarticles.
com/p/articles/mi_qa3682/is_ 199801/ai_n8759740.

4. Uniform Bank Performance Report for the National Bank, http://

www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.asp.

5. University of Pittsburgh lecture slides, http://www.pitt.edu/~roztockiy

abc/abctutor/sldOO 1 .htm.

; 46 JOURNAL OF PERFORMANCE JUANAGEMENt

\ ^ , ^.___/ .,* ^