ACTIVITY-BASED COSTING IN THE SERVICE SECTOR - NAM DUONG BANK

Nam Duong Bank began operations in the mid-1990s. The bank quickly grew by providing checking account services to many small businesses that preferred to do business with a "local" bank. Although Nam Duong initially offered checking account services for individual accounts (retail customers), the bank primarily focused on serving its business customers. During the Asian financial crisis after the mid-1990s that weakened the Vietnamese economy, growth in business customer accounts began to decline. In response, Nam Duong's senior management adopted a new strategy, focusing on increasing the number of retail customer accounts. By aggressively marketing individual retail accounts, Nam Duong continued to grow. Today, Nam Duong Bank strives to maintain a stable base of business customers, while actively competing for an increased market share of retail customers.

Recent income statements (Exhibit A) reveal a decline in the bank's profits. The bank's primary (noninterest) expense consists of salaries and employee benefits. Most full-time employees' first priority is providing services to customers; these employees conduct their administrative responsibilities during slack times. The Bank schedules additional part-time employees to work during peak demand times, from 11 am - 2 pm and Friday afternoons. Flexibility in scheduling part-time employees means that the bank's staff is lean and fully utilized. Nam Duong's CEO, Anh Tran, believes that this staffing arrangement allows the bank to provide speedy customer service, while operating at practical capacity. (That is, the bank's staff is fully utilized in efficient operations, after allowing for bank holidays and other scheduled staff activities such as training.)

To counter falling profits. Nam Duong's directors took two actions last year, both aimed at