Activity based costing in banking: reasons for the use and perceived usefulness by Italian banks

Ever since Activity Based Costing (ABC) was presented by Kaplan, Johnson and Cooper in 1987, it had a progressive and significant application in industry. In the past few years, increasing interest in the business world as well as arising academic debates have led to a reflection on the use of this costing system beyond the manufacturing sector, showing potential advantages related to its own distinctive features in comparison to "traditional" costing systems. The first idea of "extending" the scope of ABC to banking is found in a 1990 article by Sapp, Crawford and Rebishcke, which was followed by other doctrinal contributions. In particular, the implementation of the ABC in many financial institutions allows them to be able to allocate primary costs to various cost objects, including customers (taken individually or by a targeting basis). With this contribution, we want to primarily focus on the reasons that should prefer an "activity based" approach to banking cost accounting, and then try to understand, through empirical analysis, if there is an adequate diffusion within the banking industry (related to ABC’s potential advantages) and, most importantly, how it is perceived as useful by that system. If the use of ABC brings significant benefits to the adopting entity, as highlighted by vast and authoritative literature, it also presents difficulties in measuring and evaluating the above mentioned benefits. If we expected these advantages by the use of ABC, at the same time their identification brings about complications in extrapolation from the firm as a whole phenomenon. The sensitivity of the data related to their own cost accounting and non-relevance of information provided by financial statements have therefore directed attention toward measuring such benefits under a quality aspect. Through a proven method, a measurement of those benefits that are "perceived" by the adopters as advantageous was carried out; this was a subjective appraisal provided by the bank’s operational management. The findings consistently show, with the empirical analysis of other studies, a greater superiority in perceived advantages by ABC adopters rather than by non-adopters that use the "traditional" costing system. Non-adopters motivate the failure of ABC adoption as long as the costs exceed the benefits alleged. This aspect is in some ways contradictory considering that, in addition to a greater satisfaction perceived by ABC adopters, the impact of these projects in terms of resources involved were mostly modest. For the above reasons, we could argue that non-adopters overestimate the cost of implementing and/or underestimate the potential benefits achieved or, in addition, there is some degree of resistance to change, justified by better knowledge and familiarity with traditional costing systems used.