Belltown National Bank[1]

To increase its share of the checking account market, Belltown National Bank in Seattle took two actions: (1) established a customer call center to respond to customer inquiries about account balances, checks cleared, fees charged, etc., and (2) paid year-end bonuses to branch managers who met their branch’s target increase in the number of customers. While 80% of the branch managers met the target increase in the number of customers, Belltown National’s profits continued to decline. Roger Welton, the CEO, didn’t understand why profits were declining, even though the bank was serving more customers. The Pierce County branch manager, Rose Martinez, noticed that while small retail customers flocked to the bank, the number of business customers was declining.

Belltown National’s existing costing system, developed back in 1990, is straightforward. No costs are traced directly to customers. The bank assigns the total indirect costs to customer lines (retail customer line or business customer line) by dividing the total indirect costs by the total number of checks processed to compute a cost per check processed. The cost by customer line is then the number of checks processed for the customer line multiplied by the cost per check.

Martinez suspected that Belltown National’s cost system might be part of the problem. Martinez learned about activity-based costing (ABC) in school, but the applications she studied involved manufacturing firms. She wonders whether Belltown National could develop an ABC system, with the customer-line as the primary cost object.

Rose’s boss was skeptical. (“Our profits are going down the tubes and you want me to spend money developing a new accounting system???”) However, Rose persuaded her boss to allow a pilot ABC study, using the three Tacoma branches for the pilot test.

The ABC implementation