Journal of Money, Investment and Banking ISSN 1450-288X Issue 6 (2008) EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.

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Costing the Banking Services: A Management Accounting Approach

Jordi Carenys Professor at the Management Control Department. EADA Business School EADA, c/o Arag 204, 08011 Barcelona, Spain E-mail: [email protected] Tel: 934 520 844; Fax: 933 237 317 Web: www.eada.edu Xavier Sales Professor at the Management Control Department. EADA Business School E-mail: [email protected] Abstract The present study aims to outline the characteristics of the cost systems used in banking institutions. It does so by describing the partial costs and full cost systems in banking institutions. It then looks at the limitations of these approaches to the current competitive conditions and goes on to consider the applicability of the activity based costing system in the allocation of indirect transformation costs to branches, products and customers. Finally, we will look at the findings of a questionnaire to Spanish savings banks in order to evaluate how widespread these systems are and how they are used in savings banks. We found that direct costs systems predominate in customer and products entries whereas full costs systems are much more widespread in the case of branches. Furthermore, we also found that the use of activity based costs systems is very limited.

Keywords: Saving banks Cost structure Management accounting Cost systems Activity based costing. JEL Classification Codes: M41 Accounting G21 - Banks; Other Depository Institutions.

1. Introduction
Historically, management accounting in banking institutions was introduced considerably later in comparison with companies in other sectors. There are a number of reasons for this limited development. This was due, on the one hand, to external causes. For example, it was not until the 80's that competitive conditions in the banking sector fostered the development of accounting management planning and control systems. On the other hand, there were also internal conditions that had to do with the nature of the banking business and the operations that these companies carry out, which differ significantly to those of other sectors. This hindered the transfer of models that had basically been developed for industrial companies to the financial sector. As regards internal factors, the accounting regulations set down by regulating bodies of the banking system have traditionally been the starting point from which banking institutions have drawn up their accounting information. The purpose of he latter was clearly to address the needs of central

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banks that used this accounting information in order to supervise and control the solvency of the financial system and to control the relevant variables of monetary policy (Ta and Larriba, 1986, p.37; Cates, 1997, p.51-56; Kimball, 1997, p.24). Furthermore, the environment in which these companies had traditionally operated had been sufficiently stable in order for them not to see the need to improve their management accounting systems (AECA, 1994a, p.12-13). On an internal level, Waden-Berghe (1990, p.569) Rouach and Naulleau (1992, p. 101-102) and Carmona (1994, p.210) point out that the characteristic features of the products and the production process of banks hinder the application of management accounting techniques: the intermediation function they carry out, the permanence on the balance sheet of the main sources of income and expenses, the problematic definition of outputs and input, given that there is no difference between the nature of the raw material obtained via financial markets or deposit taking and the final product (loans), the fixed cost and marginal revenue syndrome, the difficulty in allocating indirect costs to cost objects or the diffuse figure of the customer-supplier. However, the deep transformation of the banking system, and, more specifically, deregulation, disintermediation and innovation processes, have ushered in changes to the competitive behaviour and the information needs of banking institutions. We can therefore assume that the accounting systems of these companies have most probably also evolved and established new conceptual frameworks 1. As a consequence of growing competition in the banking sector and the reduction of financial margins, banking institutions have had to give increasingly greater importance to the planning and control of their non financial costs, which has opened up the debate around the adequacy of the costs systems currently in use in these companies (Scias, 1985, p. 48; Kimball, 1993, p. 5-20; Bos, Bruggink et al., 1994, p.12; Carmona, 1994, p. 213). This essay aims to analyse the characteristics of the costs systems of Spanish savings banks which operate in the universal retail banking segment. In the first place, we will look at the different theoretical models that will enable us to analyse the financial intermediation activity from a microeconomic viewpoint. Secondly, we will go on to describe the characteristics of non financial costs in banking institutions, given that they influence the application of management accounting in these companies. Thirdly, we will put forward a costs classification in savings banks that facilitates the allocation of their non financial costs to different cost objects (centre of responsibility, products, customers and activities). Based on the above, we can then go on to assess the use of different costing systems, looking at both traditional costing systems (partial and full) as well as activity based costing. The study finishes by presenting the results of a questionnaire given to the heads of management control of Spanish savings banks with the aim of finding out which costing systems are currently in use and how they are likely to evolve in the future.

2. The Production Process in Banking Institutions

This section aims to present an overview of the different theoretical approaches that interpret the productive process of banking institutions. According to Bergs and Soria (1993, p. 17-23) the models that explain the productive process of banking institutions can be grouped into three groups: partial decision models, portfolio theory and services production. Let's look at these in more detail. 2.1. Partial Decision Models Partial models focus either on the assets and investment decisions (loans versus the treasury) or on the composition of the liability structure (capital versus deposits), considering the other part of the balance sheet as an external or exogenous variable. In these models, the banking institution's balance sheet is
1

We can identify various evolution stages in bank accounting and management; for example, Chisholm and Duncan (1985, p.27-33) have divided its historical evolution into three stages, Faletti (1986, p.88-95) refers to four stages, Rezaee (1991, p.26-28) and Roosevelt and Johnson (1986, p.30-31) have established five stages, and Ernst & Young (1995, p.25-31) outline up to 11 phases. Having said this, the different number of stages by different authors reflect differences in nuances but not in fundamental aspects because the evolution of information drawn up by management accounting in banking institutions may be seen as a continuous process rooted in financial accounting that is evolving towards objectives that are more and more related with tactical and strategic decision making.

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viewed as the key element, because each of its components is modelled individually (Santomero, 2000, p.4). When loans are regarded as outputs of the banking institution, it is assumed that, given a certain level of exogenously determined deposits, which are not subject to optimization, the company's management decision is focused on determining what proportion of deposited funds will be allocated to the provision of loans and what proportion will be kept in the treasury. This is due to the fact that the banking institution needs to maintain a certain level of liquid reserves in order to address possible withdrawals of deposits. Obviously, maintenance of this treasury will generate an opportunity cost, so banking institutions will have to minimise this opportunity cost by maintaining the treasury at a minimum level. However, if the treasury that is kept is insufficient, the company exposes itself to a high liquidity risk (Baltensperger, 1980, p.3; and Swank, 1996, p.176). When deposits are regarded as outputs, the problem focuses on determining the optimum balance between deposits and equity (Swank, 1996, p.177). According to this approach, a situation of insolvency could be brought on not only by the mass withdrawal of customer deposits, but also if the value of assets drops below that of liabilities. This scenario is less and less likely the fewer the deposits. It can therefore be minimised by increasing the volume of equity (Baltensperger, 1980, p.1011; Swank, 1996, p.177). However, given that the opportunity cost of equity is greater than the financial cost generated by deposits, in order to maximise profitability the bank need to minimise the bank's own funds, which increases the possibility of an insolvency scenario and of meeting the ensuing costs associated with it (Baltensperger, 1980, p.13). 2.2. Portfolio Theory Based Models The previous models seek to address the structure of assets or liability management whilst considering the other part of the balance sheet as exogenous. A comprehensive theory of the productive process of banking institutions needs to simultaneously account for the structure of assets and liabilities. The efficient portfolios selection model for banking institutions put forward by Markowitz (1959) and developed by Pyle (1971, p.737-747) concomitantly looks at decisions concerning assets as well as liabilities and gives us a more comprehensive view of the interrelations between assets and liabilities. Having said this, it must be acknowledged that although portfolio theory overcomes the limitations of partial models by determining optimum treasury, loans and deposits levels together, it still has its drawbacks. The most relevant to this study has to do with the fact that both partial models and portfolio selection theory regard non-financial costs as irrelevant when it comes to estimating the output level and composition of banking institutions (Swank, 1996, p. 194). 2.3. Models Based on the Production of Services and Real Resources The provision of financial services entails transformation costs which are not contemplated in the abovementioned models. The services production model advocates that the production processes of banking institutions cannot be properly analysed by simply looking at the management of its optimal assets and liabilities structure, but that we also need to take into account the fact that both financial intermediation and the provision of other banking services generate transformation costs, which entail the use of real resources both human and technological (Baltensperger, 1980, p. 27-29). The models developed by Pesek, (1970, p. 357-385); Saving (1977, p. 289-303) and Sealey and Lindley (1977, p.1251-1266) are approaches based on production and cost functions, and enable us to study the banking institution's behaviour from the point of view of profit maximisation. According to the above models, the activity of banking institutions consists of providing a range of different financial services (both intermediation and other kinds of services), the production of which can be expressed in accordance with a production function. The inputs of this production function are a combination of different types of factors consisting of real resources whereas the outputs are different possible combinations of assets, liabilities and services. Hence the production function, along with the balancing of the accounts between assets, liquidity and liabilities, interest rates that are externally set by the market and legally established coefficients, make up the restrictions under which banking

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institutions must operate and try to maximise their profits. These profits will ultimately depend on the difference between revenue generated from the sale of their services on the one hand and the total costs of their inputs both financial and non financial on the other (Sealey and Lindley, 1977, p. 1255; Santomero, 2000, p.3). The following sections will discuss the problematic of the costing structure of real resources in banking institutions and look at how these are classified for management accounting purposes. This will be followed by an overview of the different costing systems identified in the literature, partial costs, full costs and activity based costing. And finally, we will present the findings of an empirical research study concerning the costing systems used by Spanish savings banks.

3. The Cost Structure of Banking Institutions

Before we proceed to assess the different existing cost systems and their application to banking, we would like to highlight some of the characteristic features of the banking business which influence the cost structure of its costing systems. These characteristic features can be summed up as follows (Sloane, 1991, p.76-79; Sapp, Rebischke et al., 1991, p.56-57): Variable work load: the volume of operations fluctuates enormously from one moment to the next, which obviates the problem of capacity management, given that at certain times there are "peaks" whilst at other times there are "valleys" which means that these resources are underused. High fixed costs: resources are usually allocated to covering "peaks" of activity. However, the cost of these resources does not vary with the volume of transactions, because they have a large fixed component. Predictability of the activity: although the demand for services tends to be highly variable, it is relatively easy to predict, because it follows a cyclic behaviour pattern, which offers the possibility of turning part of fixed costs into variable ones by means of outsourcing. Mass services production activities: a comparison can be drawn between the high volume of repetitive operations in banking institutions and traditional industrial mass commodity manufacturing, which facilitates the use of methodologies that originated in industry and the setting up of a standard costing system. Joint production and an undefined product: the banking product is physically indefinable which makes it more complex to identify. For example, when a banking institution issues a loan to a customer, the latter must open up a current account to meet the loan payments. If on top of this the customer orders a cheque book on his current account and takes out a life insurance policy, we have four interrelated products. Low cost traceability: given that we are dealing with joint production activities with elevated fixed and indirect costs there are many resources that are shared by activities, customers, products and centres of responsibility. As far as we see it, the most significant factors that influence the applicability of different cost systems in banking institutions are on the one hand, the significant weight of indirect costs in relation to cost objects, which makes it difficult to trace them in relation to cost objects. Similarly, given that a large part of the operations carried out by banking institutions are of a repetitive nature and susceptible to standardisation, this makes it feasible to consider calculating the costs of these operations and allocating them to cost objects, and to introduce the use of standard costs as a planning and control instrument.

4. Costs Classification in Banking Institutions

The classification of the non financial costs of banking institutions may prove useful in studying the applicability of different cost systems to banking institutions. Although we can make different classifications of these costs, the most relevant for our purposes is the difference between

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transformation and overhead costs (AECA, 1994a, p.61-62): "transformation costs are costs that are generated in profit centres and in operational cost or general services centres. In general, the costs of these centres are directly or indirectly related to the consumption of products and services on the part of customers". At the same time, transformation costs can be divided into direct and indirect costs, depending on their relation to cost objects (AECA, 1994a, p.61): Direct costs, are those costs that can be unequivocally and directly allocated to cost objects, in other words their allocation is controlled economically in an individualised fashion. Indirect costs, are costs that cannot be directly allocated to cost objects because there is no exact allocation of funds that enables us to estimate the consumption of these costs by cost bearers, It should be noted that a significant number of transformation costs of banking institutions are dual in nature when viewed from the previous classification criterion, to the extent that certain transformation costs can be direct with respect to the branches network but indirect in relation to products and customers (De la Cuesta, 1996, p.85-87). In banking institutions, transformation costs basically correspond to personnel costs, depreciations and other general costs, which although they are difficult to allocate to customers and products, are generally easier to allocate to responsibility centres (Cole, 1995, p.152). The second costs category corresponds to overhead costs, which are generated in the bank's organisational centres. These costs are generated by the various functions related to management, administration, organisation and control. In general, these are indirect in relation to all the cost objects. These costs are treated as costs assigned to support all the company's functions, and as such they are independent of production volume, the existing product lines and of the markets they serve (AECA, 1994b, p.58).

5. Traditional Cost Systems in Savings Banks

The process of allocating non financial costs to different cost objects begins with deciding on which costs must be transferred to cost objects. This enables us to identify two types of approaches, the partial costs system, which allocates only a part of the company's costs and the full cost systems, which allocates all the costs (Amat and Soldevila, 1997, p.46). In any of these alternative systems, "the cost allocation process is usually a sequential process that consists of two stages. In the first stage, the different cost categories are added to the different intermediate cost objects (cost centres or sections) and in the second stage, costs are allocated to the final cost objects" (AECA, 1994b, p.72). Thus, coming back to the classification of transformation costs of banking institutions which differentiated between direct and indirect costs, it is worth considering the use of partial or full cost systems in banking institutions (AECA, 1994a, p.87-89). 5.1. Partial Cost Systems This system only takes into account the direct transformation costs of a cost object and does not assign indirect transformation and overhead costs, which are simply allocated to cost centres or sections (AECA, 1994b, p.87). According to Anthony and Dearden (1976, p.554), the application of the partial costs system in banking is basically a consequence of the existence of the considerable volume of common and joint costs in relation to the different objects, which complicates their allocation to cost objects. But at the same time, given that the direct costs are usually quite insignificant, that variable costs may be practically non-existent and that their outputs are difficult to measure, assessing efficacy and efficiency by means of a partial costs system seems an excessively limited approach. This cost structure also helps to explain why banking institutions were slower to adopt full cost accounting systems than were companies of other sectors (Sloane, 1985, p.75; Kimball,1993, p.7). Authors such as Mecimore and Cornick (1982, p.13-18), when faced with the peculiarities of the cost structure of banking institutions, consider that the profitability analysis of the different costs objects should be based more on contribution margins than on net margins. Their argument is that it is

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preferable for decisions to be based more on the philosophy of contribution than on that of absorbing costs. Similarly, Gardner and Lammers (1988, p.36), after carrying out a survey of United States banks, found that banks gave very little importance to obtaining full costs and attributed greater importance to cost management and direct costs. However, as the mass of indirect costs gradually increases, the direct costs system or contribution system becomes less and less important for planning and control purposes, although it is still applicable to certain special types of decision making (De la Cuesta, 1996, p.88). It is therefore of limited use in the case of multi-product companies with a high level of indirect costs. Consequently, considering the cost structure of banking institutions (the predominance of fixed indirect costs), the margin obtained for cost objects by this method may end up being of little significance. 5.2. Full Cost Systems In addition to direct costs, the full cost system also allocates all or part of their indirect transformation costs to cost objects (Leguay 1984, p.19). Rezzae (1991, p.29) points out that the traditional full cost methods applied to banking have been based on establishing cost centres, generally related to the organisational structure, which then transfer their costs to the different organizational units, products, customers or distribution channels. Marigot's work (1988, p.178-181) also follows along these lines. He in fact proposes a sequential allocation of non financial costs to the different responsibility centres, as can be seen in Figure 1.
Figure 1: Full costs system (I).

Source: Adapted from Marigot (1988, p.178-180).

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Rouach and Naulleau (1994, p.124-132) and Rouach (1998, p.21-23) also follow the same lines. They put forward a full cost model by sections that involves the allocation of indirect transformation costs to cost objects in five stages, which are summed up in Figure 2:
Figure 2: The full costs system (II).
Organisatio nal centres Unallocated costs for the term General services Financial accounting Costs of Accounting analysis Operational cost centres Profit centres Profit centres Profit centres centres Operational cost centres Unallocated costs for the term Cost of operation A Cost of PROFIT CENTRES operation B Cost of operation C Unallocated costs for the term

Source: Rouach and Naulleau (1994, p.125).

Determining which costs will be incorporated in the accounting analysis. Proceeding to locate costs in responsibility centres. Proceeding to allocate the costs of general services centres into operational and profit centres. Calculating the cost of service provision operations in the operational service centres, which can then be allocated to the cost objects that consume them 2, calculating the repercussions that the costs of operations have on cost objects. The costs that are allocated to each cost object are equal to the number of operations carried out multiplied by the unit cost of each type of operation.

6. The Limitations of Traditional Cost Systems in Savings Banks

Given the above, we can conclude that the application of any of the traditional costing systems leads to a paradoxical situation. On the one hand, if we opt in favour of a partial cost system and only attribute direct costs to their final cost objects, then a situation arises whereby only a small fraction of costs can be allocated to cost objects whereas the rest, which are indirect, are not accounted for under centres of responsibility, products or customers. On the other hand, if we opt for a full costs model, we will be faced with a number of limitations. Ernst and Young (1995, p.123), Sapp et al. (1990, p.54), Raihall and Hrechak (1994, p.44), Kimball (1997, p.31) and Helmi and Hindi (1996, p.8) argue that the traditional costing systems applied in banking assume that indirect costs are generated by production volume whilst ignoring the effects that the diversity and complexity of operations have on indirect costs. On the other hand, as banking institutions develop initiatives in order to meet new competitive requirements, the weight of indirect costs on their structure increases because the costs of market research, marketing, the introduction of new products, automatisation of transactions, new technologies, etc are clearly on the rise. Furthermore, Raihall and Hrechak (1994, p.45) point out that the number of cost drivers that
2

The unit per operation is perfectly applicable and easily identifiable when it comes to calculating the unit cost of the provision of services in these types of centres. For example, the number of cheques handled, the number of discounted charges, number of transfers, stock purchase and sale orders, coupons, etc. By simply adding up these operations the bank can get a precise idea of the magnitude of their evolution.

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have been used to attribute indirect costs to cost objects is very small, which makes it difficult to discern the differences between the company's diverse service production processes as regards their use of resources. Hence it is practically impossible to trace costs and this makes it difficult to develop initiatives to improve their management (Mrindol and Obadia, 1998, p.28). Hence, a full costs system that allocates indirect costs under a few headings based on business volume may be acceptable in industries that have a relatively small proportion of indirect costs and where output is reasonably homogeneous. This is not advisable however in multi-product industries with heterogeneous outputs which are difficult to measure and with a high percentage of indirect costs (Carmona, 1994, p.213; Raihall and Hrechak, 1994, p.44-45; Kimball, 1997, p.31, Druker, 1995, p.8; Lacan, 1986, p.152; Merlo, 1995, p.40; De la Cuesta, 1996, p.88).

7. The ABC System in Banking Companies

During the nineties traditional costing systems came under minute scrutiny: loss of relevance, lack of reliability, inability to provide valid information for decision making as well as obsolete methods or systems that were unadapted to the realities of companies are some of the criticisms that were directed at traditional cost accounting systems. Johnson and Kaplan (1987) and Mevellec (1988, 1991), after demonstrating that traditional methods were unable to address the needs of companies, went on to argue in favour of their comprehensive overhaul and proceeded to reinvent management accounting. Deregulation, that has been the general standard in financial sector companies, has facilitated the entry of new competitors and has given companies a greater degree of freedom with regard to pricing and the product mix they offer. Companies in this sector have witnessed the disappearance of the protectionist environment of regulated prices and the advent of new competitors and at the same time are faced with significant threats and opportunities, the management of which demands a comprehensive knowledge of markets, customers, products and the search for new competitive advantages. As a consequence, in the late eighties, a series of new concepts were introduced into cost accounting. One of the chief innovations in this respect was the activity based accounting system. The academic world has shown a considerable amount of interest in the application of the activity based costing system in banking institutions. In recent years a number of authors have published studies that assess the applicability of ABC and ABM methodologies to banking institutions, some of the most important of which are the studies by Kerebel (1997, p.60-62), Helmi and Hindi (1996, p.5-19), Blake (1996, p.5-43), Ernst and Young (1995, p.123-140), Weiner (1995, p.37-38), Kimball (1993., p.5-20), Mabberly (1992, p.17-79), Sapp, Crawford and Rebischke (1990, p.53-62; 1991, p.75-86), Mrindol and Obadia (1998, p. 27) or (Bos, Bruggink et al., 1994, p.12-16). The development of a series of different theoretical approaches has gone hand in hand with the increasingly widespread use of the ABC system among banking institutions. Kimball (1997, p.31), Weiner (1995, p.19) Innes and Mitchell (1997, p.190-205), (Berry and Britney, 1996, p.36), Hartfeil (1996, p.23), Carroll and Tadikonda (1997, p.1) and Sweeney (1994, p.19; 1997, p.26) point to the fact that from the beginning of the nineties North American and British banking companies began adopting activity based costing in an attempt to attain a better understanding of the factors that influence the behaviour of their costs and to improve the allocation of costs to cost objects. According to Obadia and Faubert (2000, 33), "ABC analysis enables us to draw up a model of the logical sequence of cost formation and to reconcile the degree of profitability of different products, customers and distribution channels. The ABC system enables us to draw up a model of the following chain of sequences: customers consume products and services via a distribution channel (branches, internet, telephone...), the product-service/ distribution channel combination involves the performance of a series of activities, these activities use up the company's resources".

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For Mrindol and Obadia (1998, p.26) the ABC method works under a different logic and to a large extent does away with long lists of allocation components (Figure 3). Kimball (1997, p.32) and Hankes (1995, p. 9) suggest that the ABC system enables banks to reduce the number of costs that are regarded as indirect costs in relation to cost objects. In this way, a larger proportion of costs that were initially regarded as indirect costs can be directly allocated to products, customers or centres of responsibility that are directly responsible for their existence due to activities' consumption of resources.
Figure 3: BC cost models in banking institutions.
ACTIVITY BASED COST POOLS HIERARCHY

Activity Management Security Auditing.. Cost drivers

All products

Activity Marketing

Product group Deposit taking Means of payment Cost drivers Loan investment...

INDIRECT COSTS

Data processing Accounting...

Activity Introduction Development Advertising Cost drivers

Types of products Credit accounts Sales discount Mortgage loans...

Activity Opening Closing Withdrawals... Cost drivers

Product unit XYZ Credit account XYZ Sales discount XYZ Mortgage loans

Source: By the author, adapted from Bos, Bruggink et al. (1994, p.16).

With regard to the applicability of the ABC system to banking institutions, Kaplan and Cooper, (1991, p.467) and Kaplan and Cooper (1999, p.229) highlight the fact that there are no substantial differences between the implementation of activity based costing in cost centres belonging to a manufacturing company and costs centres of a service company. And indeed, there don't appear to be any substantial differences between the specific proposals in the literature for applying the ABC system in banking companies ABC (Sapp, Rebischke et al., 1990, p.53-62, Sapp, Rebischke et al., 1991, p.75-86; Mabberly, (1992), Ruff and Hill, 1992, p.28-37; Weiner, 1995, 19-44; Ernst and Young, 1995, p.123-133; Helmi and Hindi, 1996, p.5-19) and the ABC models for manufacturing companies 3.

We believe that, although the description of the ABC model applied to banking institutions does not differ from that developed for industrial companies, the nature and type of activities carried out by the former and the latter vary significantly. Similarly, the hierarchy of activities in these two types of companies can be established based on different criteria.

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8. Survey Universe and Methodology

Our survey universe is made up of 47 savings banks that are registered in the Official Bank's Registry of the Bank of Spain in 2006. We sent out 47 questionnaires, and received 26 replies, which represents a response rate of 55.31%. The 26 savings banks that responded to the survey represented 73.6% of the total assets of all savings banks in Spain. This response rate is comparable to those of similar research initiatives, both nationwide and internationally. For example, the BAI (Bank Administration Institute) carried out a survey with the aim of finding out which accounting and management control systems were being used by North American banks. The BAI questionnaire was sent out to the 250 biggest banks in the United States, and 40 banks responded (16%) although the respondents accounted for 43% of the sector's total assets. Similarly, Gadner and Lammers (1988) carried out a survey on the application of management accounting between banks and saving and loans associations. They selected the 50 largest banks and the 20 largest saving and loans associations according to their asset volume and sent out 70 questionnaires through the post. They received responses from 49 institutions, with a response rate of 68%. Innes and Mitchel (1997) carried out a survey with postal questionnaires in order to find out to what extent the ABC costs system was being used by financial institutions in Great Britain. They sent out their questionnaire to the 60 largest financial companies in Great Britain and the response rate was 51.6% (31 companies). The response rate to our questionnaire is comparable to those obtained in other research studies on banking management accounting carried out using the same methodology. The responses were segmented according to company size, measured based on their total assets. They were divided into three categories: the larger savings banks with assets above six billion euros (segment A); medium sized savings banks with assets above three billion euros (segment B); and smaller savings banks with assets below three billion euros (segment C). The research method we used consisted of a questionnaire sent out by post to the heads of management control of all Spanish savings banks. Two variant analysis was used to tabulate this questionnaire. This is the method of choice for studying relationships between variables taken two by two (Pedret, 1997, p. 31). This type of analysis is useful for finding answers to questions such as for example, whether the size of the savings bank influences the costs system that is used or whether there is any relation between the size of the institution and the funds transfer system it uses. The data was treated using the programme SPSS version 6.12. In our case we used two variant analysis between two qualitative variables and contingency tables were used to present the results.

9. Costs Systems in Spanish Savings Banks

In this section we will go on to study the use that savings banks make of cost accounting. In order to do this we have thought it useful to identify the costing systems they use in order to allocate transformation costs to centres, products and customers. In addition, in the light of the current conditions of competition, the diverse range of products and services savings banks offer and the structure of their transformation costs, these companies appear to be ideal candidates for the introduction of the activity based costing system. We studied how much knowledge savings banks have of the ABC system and how widespread its use is in these institutions. The majority of costing systems used by savings banks are based on the organizational chart (Table 1). In 76.9% of savings banks, the centres that make up their organisational structure overlap with the cost centres they use for accounting purposes.

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Table 1:

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The use of organic cost systems in savings banks.
Total Size of Savings Bank B

C NO. Count Row Pct Col Pct Tot Pct Yes. Count Row Pct Col Pct Tot Pct Total. Count Row Pct Col Pct Tot Pct 4 66.7% 40.0% 15.4% 6 30.0% 60.0% 23.1% 10 38.5% 100.0% 38.5%

A 2 33.3% 25.0% 7.7% 6 30.0% 75.0% 23.1% 8 30.8% 100.0% 30.8% 6 100.0% 23.1% 23.1% 20 100.0% 76.9% 76.9% 26 100.0% 100.0% 100.0%

40.0% 100.0% 30.8% 8 30.8% 100.0% 30.8%

In Table 2 we can see that the costs centres set up in savings banks are not only related to the organisational structure but that in the majority of cases (61.5%) the banks make a differentiation between operational and support cost centres. However, there are considerable differences between the different savings bank segments. Whereas 75% of banks in segment A distinguish between operational and support centres, this percentage drops to 60% for segment C and 50% for segment B.
Table 2: The use of suuport cost centres in savings banks.
Total Size of Savings Bank B 4 40.0% 50.0% 15.4% 4 25.0% 50.0% 15.4% 8 30.8% 100.0% 30.8%

C NO. Count Row Pct Col Pct Tot Pct Yes. Count Row Pct Col Pct Tot Pct Total. Count Row Pct Col Pct Tot Pct 4 40.0% 40.0% 15.4% 6 37.5% 60.0% 23.1% 10 38.5% 100.0% 38.5%

A 2 20.0% 25.0% 7.7% 6 37.5% 75.0% 23.1% 8 30.8% 100.0% 30.8% 10 100.0% 38.5% 38.5% 16 100.0% 61.5% 61.5% 26 100.0% 100.0% 100.0%

Tables 3, 4 and 5 show which transformation costs are transferred to the final cost objects (offices, products and customers). A differentiation was drawn between different cost objects, given that, as we have already discussed, a significant part of the transformation costs of savings banks are direct costs from the point of view of offices but indirect from the point of view of products and customers. Thus, by identifying which costs affect the cost objects, we can determine whether savings banks opt in favour of partial or full cost systems. Table 3 outlines the characteristics of the costing system used to allocate transformation costs to the branches network. As we can see, the use of the direct costs system is not at all widespread. Only two banks replied that they only allocate direct costs and do not allocate any kinds of indirect costs to the branches. In fact, 92.3% allocate their direct costs to the branches as well as a part of their indirect

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costs. In order to find out what criteria they used to allocate indirect costs we asked the savings banks to identify the procedures they use, offering them different options which were not intended to be mutually exclusive, because a bank could use simultaneously both approaches:
Table 3: Attribution of direct and indirect costs to the branches network.
C Total Size of Savings Bank B A 1 50.0% 12.5% 3.8% 2 15.4% 25.0% 7.7% 5 35.7% 62.5% 19.2% 8 30.8% 100.0% 30.8% 2 100.0% 7.7% 7.7% 13 100.0% 50.0% 50.0% 14 100.0% 53.8% 53.8% 26 100.0% 100.0% 100.0%

Only allocates direct costs. Count 1 Row Pct 50.0% Col Pct 10.0% Tot Pct 3.8% Allocates Direct Costs And Indirect Costs Depending On Volume Count 6 5 Row Pct 46.2% 38.5% Col Pct 60.0% 62.5% Tot Pct 23.1% 19.2% Allocates direct costs and indirect costs depending on real consumption. Count 5 4 Row Pct 35.7% 28.6% Col Pct 50.0% 50.0% Tot Pct 19.2% 15.4% Total. Count 10 8 Row Pct 38.5% 30.8% Col Pct 100.0% 100.0% Tot Pct 38.5% 30.8%

the allocation of indirect costs in proportion to the business volume generated by each branch: the criterion is applied by 13 banks (50% of the study sample). The majority of banks that use this procedure belong to the smaller savings banks segment. We can therefore conclude that the allocation of indirect costs based on business volume criteria decreases as the size of the savings bank increases. the allocation of indirect costs according to the real consumption the branches make of them: 14 savings banks said that they follow this criterion (53.8% of the sample). With this approach the bank calculates the unit cost of the services the operational and/or discretional centres perform for the branches and these are then debited to the profit and loss account of the branches, multiplying the volume of services by their unit cost. It should be pointed out that use of one of the abovementioned criteria for certain types of indirect costs does not impede out the use of other procedures for other types of indirect costs, because if we add up the number of banks that allocate them according to volume (50%) and those that do so according to the actual consumption of indirect costs (53,8%), this gives us more than 100%. We can therefore conclude that Spanish savings banks are clearly in favour of allocating indirect costs as part of the planning and control of the profit and loss accounts of their branches. In doing so they make use of procedures which combine the allocation of indirect costs based on the business volume that each branch generates and allocation based on the actual consumption of indirect costs by the branches. Having said this, it should be pointed out that the bigger the savings bank the less frequent the allocation of indirect costs based on business volume. Another cost object that management accounting focuses its attention on are products. Product portfolio management involves estimating the profit and loss of different products and services with a certain degree of reliability. In order to do so, the savings banks have two alternative options; in the first place they can deduct only the direct costs of products from the financial margin generated by

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these products. The second alternative, apart from taking into account direct costs also enables them to allocate to products a part of the indirect transformation costs that contribute to their maintenance. As we have mentioned previously, the transformation costs of savings banks are easily traceable to the branches, which explains why the full costs system is so widespread at this level. In contrast, the possibility of establishing a correlation between these costs and products is much more limited. Hence, the direct costing system is more likely to predominate at the level of products. Table 4 shows us that the majority of savings banks simply assign to products their direct transformation costs (73.1%) and do not on the other hand allocate any indirect costs that may correspond to them.
Table 4: Attribution of direct and indirect costs to products.
Total Size Of Savings Bank B

A 5 26.3% 62.5% 19.2% 1 50.0% 12.5% 3.8% 2 40.0% 25.0% 7.7% 8 30.8% 100.0% 30.8% 19 100.0% 73.1% 73.1% 2 100.0% 7.7% 7.7% 5 100.0% 19.2% 19.2% 26 100.0% 100.0% 100.0%

Allocates only Direct Costs. Count 8 6 Row Pct 42.1% 31.6% Col Pct 80.0% 75.0% Tot Pct 30.8% 23.1% Allocates Direct Costs and Indirect Costs Depending on Volume Count 1 Row Pct 50.0% Col Pct 10.0% Tot Pct 3.8% Allocates Direct costs and Indirect costs Depending on Real Consumption. Count 1 2 Row Pct 20.0% 40.0% Col Pct 10.0% 25.0% Tot Pct 3.8% 7.7% Total. Count 10 8 Row Pct 38.5% 30.8% Col Pct 100.0% 100.0% Tot Pct 38.5% 30.8%

This leads us to the conclusion that the direct costs system is the most widespread costing system used by savings banks to assign their transformation costs to their product portfolio. This practice is especially more significant in the case of the smaller savings banks. If we look at our findings for the allocation of transformation costs to customers in Table 5 this leads us to similar conclusions. 73.1% of the savings banks in the sample simply allocate to customers the direct costs that are clearly assigned to them. We once again observe that this practice is much more widespread among the smaller savings banks than it is among the large ones. The banks that choose to allocate part of their indirect costs to customers (26.9%), generally tend to do so based on the real consumption of services represented by indirect costs (85.7%) whereas a minority (14.2%) allocate them proportionally to the business volume of each customer or market segment. Hence, as far as the customer category in cost objects is concerned, savings banks also prefer to use the direct costs system to allocate their transformation costs to customers.

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Table 5: Allocation of direct and indirect costs to customers.
Total Size of Savings Bank B 6 31.6% 75.0% 23.1%

47

A 5 26.3% 62.5% 19.2% 19 100.0% 73.1% 73.1%

Only Allocates Indirect Costs. Count 8 Row Pct 42.1% Col Pct 80.0% Tot Pct 30.8% Allocates Direct Costs and Indirect Costs Depending On Volume Count 1 Row Pct 100.0% Col Pct 10.0% Tot Pct 3.8% Allocates direct costs and Indirect Costs Depending on Real Consumption. Count 1 Row Pct 16.7% Col Pct 10.0% Tot Pct 3.8% Total. Count 10 Row Pct 38.5% Col Pct 100.0% Tot Pct 38.5%

1 100.0% 3.8% 3.8%

2 33.3% 25.0% 7.7% 8 30.8% 100.0% 30.8%

3 50.0% 37.5% 11.5% 8 30.8% 100.0% 30.8%

6 100.0% 23.1% 23.1% 26 100.0% 100.0% 100.0%

Table 6 shows the level of importance that savings banks give to having relevant analytical information on the different cost objects. In order to measure this, we asked the savings banks to order by order of importance from (1) to (6) (one being the most important and six the least) the usefulness of different types of information listed in Table 6. In the event that the savings bank did not have analytical information on a particular factor we asked them to evaluate its potential usefulness. From Table 6 we can conclude that all the savings banks coincide in pointing out that the most relevant cost object are customers and customer segments. The second most important item are the branches. Consequently, whereas the use of full cost systems seems to focus almost exclusively on the branches and centres of responsibility, from the point of view of usefulness and importance to management, savings banks attach greater importance to information on profit and loss by customers/segments.
Table 6: The importance of costing systems and cost objects.

Total Size of Savings Bank C B Revenue/total costs of products/prod. Groups Average 4.50 4.37 Revenue/total costs customer/customer segment. Average. 2.30 2.62 Revenue/total costs of centres/branches. Average 4.10 4.50

A 3.75 2.12 3.00 4.23 2.35 3.88

As we have already seen, given the cost structure of banking institutions, the use of an activity based costing system may be an alternative for improving the process of allocation of indirect costs to cost objects and the following tables study the prevalence of the ABC system in savings banks. We found that savings banks are widely familiar with the activity based costing system. 96.2% of the heads of management control of savings banks replied that they were familiar with the activity based costing system. However, comprehensive knowledge of the ABC system does not go hand in hand with its

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widespread use on the part of savings banks. Table 7 shows that 69.2% of savings banks in the sample do not use the ABC system. We can also see that the use of this costing system is related to size and that only one bank from the small savings banks segment says that it uses the ABC system.
Table 7: Use of activity based costing.
Total Size of Savings Bank B 4 22.2% 50.0% 15.4% 4 50.0% 50.0% 15.4% 8 30.8% 100.0% 30.8% Total 18 100.0% 69.2% 69.2% 8 100.0% 30.8% 30.8% 26 100.0% 100.0% 100.0%

C NO. Count Row Pct Col Pct Tot Pct SI. Count Row Pct Col Pct Tot Pct Total. Count Row Pct Col Pct Tot Pct 9 50.0% 90.0% 34.6% 1 12.5% 10.0% 3.8% 10 38.5% 100.0% 38.5%

A 5 27.8% 62.5% 19.2% 3 37.5% 37.5% 11.5% 8 30.8% 100.0% 30.8%

In Table 8 we can see that of the 8 savings banks which state that they are using the activity based costing system, only 1 of them does so in a generalised fashion throughout the organisation whereas 5 banks use it only in certain business processes and 2 banks use it in conjunction with other cost systems.
Table 8: The use of activity based costing systems in savings banks.
C Jointly with Other Systems. Count Row Pct Col Pct Tot Pct In a Generalised Fashion. Count Row Pct Col Pct Tot Pct Only in Some Processes. Count Row Pct Col Pct Tot Pct Does not use ABC. Count Row Pct Col Pct Tot Pct Total. Count Row Pct Col Pct Tot Pct 1 50.0% 10.0% 3.8% Total Size of Savings Bank B A 1 50.0% 12.5% 3.8% 1 100.0% 12.5% 3.8% 4 80.0% 50.0% 15.4% 9 50.0% 90.0% 34.6% 10 38.5% 100.0% 38.5% 4 22.2% 50.0% 15.4% 8 30.8% 100.0% 30.8% 1 20.0% 12.5% 3.8% 5 27.8% 62.5% 19.2% 8 30.8% 100.0% 30.8% 2 100.0% 7.7% 7.7% 1 100.0% 3.8% 3.8% 5 100.0% 19.2% 19.2% 18 100.0% 69.2% 69.2% 26 100.0% 100.0% 100.0%

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Table 9 measures the importance that the savings banks which use the ABC system (8 banks) place on the different applications of the ABC system. In order to do this they were asked to evaluate the relevance of a series of proposed objectives on a 1 to 5 scale (1= none at all, 5= very high) The most relevant objective was the reduction and control of transformation costs (4 points, which means that this objective was assessed as having a "high" degree of relevance. From Table 9 we can conclude that the interest that savings banks show in the ABC system is basically limited to its use as a transformation costs reduction and control system and that the remaining objectives trailed far behind.
Table 9: The applications of ABC systems in savings banks.
Total Size of Savings Bank B 3.75 1.75 2.25 2.00 2.00 2.50

C Reducing and Controlling Costs. Average. 5.00 PRICING. Average 1.00 Drawing up Budgets. Average 5.00 Design New Products and Services. Average. 1.00 Analysis of Customer Profitability Average 1.00 Information for Management Assessment. Average. 1.00

A 4.00 3.33 2.67 1.67 4.00 3.00 4.00 2.25 2.75 1.75 2.62 2.50

Finally, having already mentioned the fact that the use of ABC systems is quite limited (only 30.8% of savings banks declared that they use it in their companies), we decided to find out if they were likely to increase its use in the future. In order to do this we decided to ask the heads of management control who had stated that they didn't employ this system (18 savings banks) whether they considered its introduction appropriate. In Table 10 we can see that 38.8% of banks which currently don't use the ABC system do not consider its introduction necessary or appropriate. It should be pointed out that of this percentage, the majority, (71.4%) were smaller savings banks. 50% of the savings banks that do not use the ABC system consider that its introduction is a good idea.

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Table 10: Convenience of introducing the ABC system.

Total Size of Savings Bank B

C No. Count Row Pct Col Pct Tot Pct Yes. Count Row Pct Col Pct Tot Pct Uses abc. Count Row Pct Col Pct Tot Pct Doesn't Know/No Reply Count Row Pct Col Pct Tot Pct Total. Count Row Pct Col Pct Tot Pct 5 71.4% 50.0% 19.2% 2 22.2% 20.0% 7.7% 1 12.5% 10.0% 3.8% 2 100.0% 20.0% 7.7% 10 38.5% 100.0% 38.5%

A 2 28.6% 25.0% 7.7% 7 100.0% 26.9% 26.9% 9 100.0% 34.6% 34.6% 8 100.0% 30.8% 30.8% 2 100.0% 7.7% 7.7%

4 44.4% 50.0% 15.4% 4 50.0% 50.0% 15.4%

3 33.3% 37.5% 11.5% 3 37.5% 37.5% 11.5%

8 30.8% 100.0% 30.8%

8 30.8% 100.0% 30.8%

26 100.0% 100.0% 100.0%

Given the above, we can therefore conclude that, although the ABC system is not prevalent among savings banks, its use is likely to increase in future, especially among large savings banks. Given the findings of our study we consider that the future introduction of the ABC system in savings banks is compatible with the use of other costing systems and that its use will generally be limited to specific key business processes and activities or to processes which represent a large percentage of their transformation costs.

10. Conclusions
This study has looked at the peculiarities of the non financial costs structure of savings banks. Our findings show that a significant part of these transformation or overhead costs are indirect in relation to customers and products and to a lesser extent in relation to the branches and centres of responsibility. Given this state of affairs, we expected that the use of partial cost systems would be widespread in the case of customers and products and that the full costs system would be more common in the latter case. Our findings did in fact show that as regards branch management control, savings banks tend to use full costs systems whereas direct costs systems predominate in the case of products and customers. As a way of getting around these limitations we suggested that the activity based costing system is especially suited to multi-product industries with a high degree of indirect costs, a category which universal retail banking and consequently savings banks fall into. However, our findings show that activity based costing is not at all widespread, and that those savings banks that do use it generally do so only for specific business processes. However, we found that the ABC system is basically used with the aim of reducing and controlling transformation costs. Hence the development of ABC systems could lead to significant improvements in this area. It could lead to a more objective allocation of the majority of indirect transformation costs and thus provide more relevant information for decision making, considering that certain types of decisions need to be based on the total costs allocated to

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products and customers, not just on their direct costs. Otherwise, they run the risk of basing decisions on maximising business volume instead of on profitability criteria.

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