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Comprehensive Cost Management

CCInstitute – 2016

•Business Performance Management Model

•Developing & Administering an CCM Information Database

–CCM Responsibility Center Classifications

–CCM Cost Distribution Techniques for Integrated Profitability

–CCM Unit Cost Development Techniques

–CCM Unit Cost Development Case Study

Comprehensive Cost Management Agenda

Session I

Session II

•Cost Deployment – Integrated Resource Management–CCM Unit Cost Deployment Case Study

•Cost Deployment – Integrated Profitability Measurement

•Establishing Business Performance Management Targets

•Strategic Analyses and Pricing

Business Performance Management

(BPM) Model

Fostering the dialogue between

Service Provider and Service Receiver

Phase 1 - Budgeting and Responsibility Center Reporting

Phase 2 - Expense Pooling and Allocations

Phase 3 – Organization/Line of Business Profitability

Phase 4 - Product and Customer Value Estimates

Phase 5 - Comprehensive Cost Management

Phase 7 - Integration – Resource Mgmt. and Profitability Measurement

Business

Information

Value

Business Information Requirements

Financial Information

directly linked to

Business Events

and Customer

Interactions

Accounting

Integration

Performance Measurement Continuum

Phase 10 - Strategic Management

Phase 8 – Integrated and InformedPlanning and Forecasting

Phase 6 - Integration – Financial and Non-Financial Performance Metrics

Phase 9 – Strategic Business Analysis


• Business Performance Analyses & Strategies

– Analyze current Performance and Financial Operating Results (Trend Analyses, Internal Benchmarks, External Benchmarks, Business Performance Indicators, etc.)

• Set Performance Targets - Management Commitment

– Set Performance Metrics and establish Forecasts and Key Performance Indicator (KPI) Targets

• Measure Actual Realization - Management Accountability

– Measure Actual Results against Forecasts and Target KPIs

• Acknowledgement

– Acknowledge Meeting Targets and Performance

Improvements


Comprehensive Cost Management (CCM) Background:

•CCM includes the Activity-Based Costing methodology

(Capacity- Based and Allocation-Based Unit Costing), in

addition to other costing methodologies where appropriate, to

account for 100% of Non-Interest expenses.

•CCM also includes cost distribution rules and techniques, as

well as cost deployment criteria.

•CCM provides a linkage to non-financial performance metrics.

•CCM promotes the comprehensive performance aspects of

the Management Accounting processes.

•CCM provides for Integrated Profitability and Integrated

Resource Management.


Integrated

Resource

Management

Scorecard

Integrated Performance

Measurement Architecture

Strategic Management

Strategic

Analyses,

Pricing &

Forecasting

Integrated

Profitability

Measurement

Scorecard

Analyze Performance Results

Set Performance Targets

Measure Actual PerformanceResults vs. Targets

Acknowledge PerformanceImprovements

Integrated CCM

InformationDatabase


Accounting for Revenues

Accounting for Funds Transfer Pricing

Accounting for Risk and Capital

Accounting for Non-Interest Expenses

Management Accounting Challenge

in Banking



Activity Based Costing - Benchmarking Common Practices IISponsored by ALG Software, September 21, 2004 11:00 AM EST

# Questions and Answewrs # %

1 What is the current stage of ABC at your organization?

Exploratory - evaluation and review of the concept and it's potential need and impact 1 9%

Infancy - beginning cost studies to collect information and training staff 1 9%

Intermediate - continuing cost studies starting some maintenance and determining how to use 8 72%

Mature - Moved from ABC to ABM - maintaining and using data to support organizational decisions 1 9%

8 What BEST describes how your organization uses ABC?

Not currently implementing any cost allocations or other 0 0%

Using to evaluate organizational product & customer profitability 11 84%

Using it as a tool for cost control and cost management 1 7%

Using it for Budgeting and planning 0 0%

Using it for Incentive Compensation 0 0%

All of the above except for A 1 7%

8B What is your next planned use of ABC?

Not currently implementing any cost allocations or other 0 0%

Using to evaluate organizational product & customer profitability 1 9%

Using it as a tool for cost control and cost management 7 63%

Using it for Budgeting and planning 2 18%

Using it for Incentive Compensation 1 9%

All of the above except for A 0 0%

Integrated Profitability Measurement:

•Customer by Product

•Organization or LOB by Product

•Product by Organization

Integrated Resource Management:

•Delivery Channel by Resource Group

•Resource Group by Delivery Channel

•Business Process

Management Accounting Scorecards


Financial Accounting

vs.

Management Accounting

Expenses vs. Costs


Expenses (Incurred)

– to become liable for or subject to, within

an accounting period (i.e. month/quarter)

Costs (Derived)

– an outlay (i.e. $/effort) made to achieve

an object or unit of measure

Expenses vs. Costs


Product

Revenues

Expenses

Incurred

Net

Income

Top of the Institution

Financial Accounting View


Product

RevenuesProcessing

Credits

Distributed

Costs

Expenses

Incurred

Cost

Recovery

Residual

Management Accounting View

Product

Margins


(Customer, Product and LOB Profitability/Integrated Resource Management)

Product

Revenues

Cost

Recovery

Distributed

Costs

Expenses

Incurred

Product

Margins

Cost

Recovery

Residual

Recovery

Residual

Product

Revenues

DistributedCosts

Product

Margins

Net

Income

Expenses

Incurred

Management Accounting View Reconciliation


Linking

Integrated Profitability

and

Integrated Resource Management

Information


Product Cost

Drivers (PCDs)

Integrated Resource

Management

Integrated ProfitabilityMeasurement

Integrated

CCM

Information

DatabaseResource Cost

Drivers (RCDs)

Unit Costs for Integrated Profitability

and Integrated Resource Management

(e.g. Item Capture

in Check Processing)

(e.g. Deposit less Cash -

Basic Checking for

Customer X at Branch Y)

(Product, Customer,

Line of Business)

(Business Process,Delivery Channel,Resource Group)


Product

Revenues

Product

Margin

Analyses

Processing

Credits

Expenses

Incurred

CostRecoveryResidualAnalyses

Actual vs. Plan

Actual vs. Forecast

Forecast vs. Plan

Processing

Charges

Integrated

Profitability

IntegratedResource

Management

$ D

imen

sion

-Product

-Customer

-LOB/Org.


RCDs

PCDs

-Resource Group

-Delivery Channel

-Business Process

BRANCH

e.g. Customer Deposits

Costs and Usage along Processing Path – End-to-End View

COURIER

Operations

CHECK

PROC.

Automation

IT

POSTINGTOTAL

Branch Banking

ATM Banking

Internet Banking

Smart Phone Banking

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

e.g. Virtual Capture

PCDs

RCDs

XXXX

XXXXXXXX

XXXX

XXXX

Product Transaction View

Delivery Channel View, Integrated by Resource Group


Credit

Hours

Earned

Production

Hours

Positioned

Available Unused

Capacity

IntegratedResource

Management

Time Dimension


Actual vs. Plan

Actual vs. Forecast

Forecast vs. Plan

Integrated Profitability Measurement

Integration Points


Product

Revenues

LOB

Customer

Distributed

Costs

Product

Margins

Del. Chan.

Distributed

Credits

Bus. Proc.

Proc. Group

Del. Chan.

Expenses

Incurred

Cost

Recovery

Residual

Integrated Profitability Information


• Customer/

Relationship

• Organization/

Location/LOB

• Product

Integration

Integrated Profitability Information


Delivery Channel

Decisions

Customer Access Point

Decisions

ProductOfferings

ServiceOfferings

Access Point Offerings

Access Point Locations

Access Points to Promote

Customer Behaviors

Diversion Strategies

Performance Measurement

Product Pricing

DecisionsProduct Feature

Decisions

Product Offerings

Product Features

Products to Promote

Products to Discourage

Competitive Information


Product Pricing

Relationship Pricing

Volume Discounts

Market Prices

Compensation Strategies


Delivery Channel Costs

Delivery Channel Usage

Delivery Channel Capacity

Del. Channel Capacity Utl.

Process Improvement






Measure Actual Performance

Results vs. Targets

Acknowledge Performance

Improvements


Customer: R. McDonald

ABC Bank: YTD 2016Drill down into Products

Customer Profitability Integrated by Product

TOTAL

DEPOSIT

PRODUCTS

CREDIT

PRODUCTSFEE BASED

PRODUCTS

Cost of Servicing

Customers

INTEREST INCOME

CHARGE FOR FUNDS

NET INTEREST INCOME

INTEREST EXPENSE

CREDIT FOR FUNDS

NET FUNDS ADJUSTMENT

NET INTEREST MARGIN

PROVISION FOR LOSSES

GROSS FEES

WAIVED FEES

NON-INTEREST INCOME

NET REVENUES

SERVICING COSTS - BRANCH

SERVICING COSTS - ATM

SERVICING COSTS - TEL. BKG.

SERVICING COSTS - INTERNET

DIRECT PRODUCT COSTS

RELATIONSHIP MGT COSTS

SALES AND MARKETING COSTS

TOTAL COSTS

PRODUCT MARGINS

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX



Integration Points


Product

Revenues

Location

Customer

Distributed

Costs

Product

Margins

Del. Chan.

Distributed

Credits

Bus. Proc.

Proc. Group

Del. Chan.

Expenses

Incurred

Cost

Recovery

Residual



• Business Process• Delivery Channel

• Resource Group

Integration



FinancialManagement

Fixed, Variable, Semi-V Costs

Targeted Unit Costs

Hourly Rate Analyses

Unit Time Analyses

Throughput Analyses

Process Improvements


Fixed, Variable, Semi-V Exp.

Targeted Expenses

Targeted Recoveries

Actual Expenses

Actual Recoveries

Expense Residual Analyses


ExpenseManagement

CostManagement

ResourceManagement

Targeted Productivity

Actual Productivity

Productivity Improvements

Incentive Compensation

Integrated Productivity Mgmt.


Targeted Capacity

Targeted Capacity Utilization

Actual Capacity

Actual Capacity Utilization

Integrated Capacity Mgmt.


CapacityManagement

ProductivityManagement





Measure Actual Performance

Results vs. Targets

Acknowledge Performance

Improvements


DIRECT EXPENSES

SALARIES

BENEFITS

OCCUPANCY

EQUIPMENT

SUPPLIES

TOTAL DIRECT EXP.

INDIRECT EXPENSES

HUMAN RESOURCES

TECHNOLOGY

OTHER INDIRECT

TOTAL INDIRECT EXP.

TOTAL EXPENSES

COST RECOVERY RESIDUAL

TOTAL

PLAN

ABC Bank

YTD 2016

Site: Maitland

Center: 123

Integrated Resource Management(One Example of New Management Information Dimension)

Cost

Recovery

Residual

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

PROCESSING CREDITS

PROCESSING RCD #1

PROCESSING RCD #2

PROCESSING RCD #3

PROCESSING REJECT ITEMS

PROCESSING OFFLINE ITEMS

TOTAL PROCESSING CREDITS

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

Cost Recovery

Expenses

Incurred

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

TOTAL

ACTUAL

TOTAL

VARIANCE


Resource

Cost

Drivers

Developing and Administering a

Comprehensive Cost Management (CCM)

Information Database


Product

Revenues

Processing

Credits

Distributed

“Expenses”

Expenses

Incurred

Cost

Recovery

Residual

Expense Allocation View

of P&Ls for Lines of Business

Product

Margins

X

Little Information

Value For the

Expense Center

Managers


INTEREST INCOME

CHARGE FOR FUNDS

NET INTEREST INCOME

INTEREST EXPENSE

CREDIT FOR FUNDS



GROSS FEES

WAIVED FEES

NON-INTEREST INCOME

ALLOCATED EXPENSES

NET CONTRIBUTION

INCOME TAX

NET EARNINGS

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX


ABC Bank: YTD 2015

TOTAL

Customer Value Estimate

This P&L is

driven by balances

and

not reflective of

customer transaction

behavior

These are usually

fixed amounts

per account and

not usage based

Could also be

Net Funds

Used/Provided


CostRecovery

Bus. Proc.

Res. Group

Cost

Recovery

Residual

Product

Revenues

LOB

Customer

Distributed

Costs

Product

Margins

Expenses

Incurred


•Create a Shared Vision for the Business Information Value of a CCM

Cost Development and Deployment initiative

•Conduct Cost Information Requirements meetings with Line of Business

Management Partners:

–Service Receivers

–Service Providers

•Establish Management Accounting Policies and Standards for NIE

in Integrated Profitability Measurement and Integrated Resource

Management

•Develop Maintenance and Administration processes for the CCM

Information database

Developing and Administering a CCM Information Database


Expense Classifications &

Cost Distribution Techniques

for



Responsibility Center Classifications:

•Centralized Expense Centers

•Service Centers

•Local Overhead Centers

•Processing Centers

•Profit CentersProduct Management

Sales & Marketing

Relationship Management

•Corporate Overhead Centers


•Unit Cost Rate “X” Volume

•Fixed Percentage

•Dynamic Percentage

•Fixed Dollar Amount

•Expense to Expense Ratio

•Expense to FTE Ratio

•Expense to Revenue Ratio

•Expense to Equity Ratio

•Rate “X” Customer Classification

CCM Cost Distribution Techniques for Integrated Profitability Measurement

Cost Distribution

Rates & Rules


•Centralized Expense Centers•Service Centers•Local Overhead Centers


•Profit Centers

Product Management

Sales & Marketing



Product

Revenues

LOB

Customer

Non-Interest Expenses

Distributed

Costs

Product

Margins




•Profit Centers

Product Management

Sales & Marketing



Product

Revenues

LOB

Customer


Distributed

Costs

CCM Cost Development

& Distribution Rules

for Indirect ExpensesCenter

to Center

Distributions


Product

Margins

Center Classification:

Certain types of institution operating expenses are often managed centrally to obtain

purchasing efficiencies or improved controls (for example: occupancy, utilities, bulk

office supplies, etc.). Typically these expenses are accounted for in separate

responsibility centers to facilitate ease of analysis and reporting from the general

ledger. If these expenses are centrally recorded, material and not distributed in the

GL, consideration should be given to distributing these expenses to the specific centers

that consume the resources.

•Service CentersService Center expenses are for resources positioned to provide internal support

services to other organizational units throughout the institution. Examples include

Human Resources, Procurement Services, certain IT services such as Network and PC

support, etc. Service Centers do not process for bank Customers or bank Products

directly.

•Local Overhead CentersLocal overhead centers are those centers that are responsible for the administration of

a specific group of centers. Examples of local overhead centers include Branch

Administration and Operations Administration.



The Funds Transfer Pricing rate applied to non-earning Fixed Assets

(e.g. Facilities, Leasehold Improvements, Equipment, etc.) is often

called the Cost to Carry that asset. The calculation results are

reported as an Income Statement line item and classified as part of

Indirect Expenses for the period.

Expense Classification:

•Cost to Carry Fixed Assets


HRService Center

ITService Center

UnderwritingProcessing Center

Lending UnitProfit Center

Centerto

Center

Distributions

Distribution Sequencing and Cascading


Direct Expenses

Compensation

Occupancy

Equipment

Supplies

Other

Indirect Expenses

IT Distribution

HR DistributionLOH DistributionCost to Carry FAOther Indirect

Product

Revenues

LOB

Customer

Indirect ExpensesDistributed

Costs


•Profit Centers


for



•Service Centers


•Cost of Carry Fixed Assets


Product

Margins

Direct Expenses

Compensation

Occupancy

Equipment

Supplies

Other

Indirect Expenses

IT Distribution

HR Distribution

Other Indirect

Product

Revenues

LOB

Customer


Cost Development


to Product Revenues

Distributed

Costs

BranchWe’re now ready to open

example…


Product

Margins



•Profit Centers

Product Management

Sales & Marketing



Product

Revenues

LOB

Customer


Distributed

Costs

Cost Development


to Product Revenues


Product

Margins



Processing Center Expenses are resources positioned to process

activities for bank Customers and the Products that they purchase.

Examples include Branch Tellers, Bank Operations and certain IT

related functions.

The distribution of Processing Center expenses is typically usage-

driven (rate X volume) and classified as Processing Costs or

Servicing Costs on the P&Ls for Integrated Profitability

measurement.


•Typically Unit Cost Rate “X” Volume

–Capacity-Based Unit Costing

–Allocation-Based Unit Costing

Cost Distribution Techniques:


Distribution

Rates & Rules:

Unit Cost Development Techniques




•Profit Centers

Product Management

Sales & Marketing



Product

Revenues

LOB

Customer


Distributed

Costs

Cost Development


to Product Revenues


Product

Margins


•Profit CentersProduct Management

Sales & Marketing


Profit Centers are Responsibility Centers that have a GL booking of

Product Revenues and Product Balances, in addition to their own

Non-Interest Expenses and positioning of resources to perform

activities.

The distribution of Profit Center expenses is typically a re-

classification to the P&L view as Direct Product Costs, Sales &

Marketing Costs and Relationship Management Costs – how much

and why the expenses are incurred.


Product

RevenuesProcessing

Credits

Distributed

Costs

Expenses

Incurred

Cost

Recovery

Residual

Management Accounting View

Product

Margins

Reclassification

of

Expenses Incurred

to

Costs and Purpose ID


BranchesProfit Center

Tellers

Resource Group

Personal Bkg.

Resource Group

Branch Mgmt.

Resource Group

Centers with Multiple Resource Groups




•Profit Centers

Product Management

Sales & Marketing



Product

Revenues

LOB

Customer


Distributed

Costs

Cost Development


to Product Revenues


Product

Margins



Corporate Overhead Center expenses are those expenses that cannot be

directly aligned to a specific Product or group of Products, Customer

Segments, or Organizational Units. Therefore, they are aligned to all

Products, Customer Segments and Organizational Units. Examples

include office of the CEO, enterprise level advertising, directors fees,

external reporting, etc.

The distribution technique is typically an expense to expense ratio, but

could also be expense to revenues or equity or some combination




•Profit Centers

Product Management

Sales & Marketing



•Cost Recovery Residual

Product

Revenues

LOB

Customer


Distributed

Costs

Cost Development


to Product Revenues


Product

Margins

The Cost Recovery Residual is the difference between processing credits

and expenses incurred for the period. This could be the result of a rate/

utilization variance for Capacity-Based cost studies or a volume/spending

variance for Allocation-Based-based studies. The Management

Accounting Policies & Standards will define the management accounting

treatment. One option is to leave the residual with the processing centers.

Another option is to distribute the residual based on the processing charge

distributions. However, this should be to a dedicated line item on the

P&L, along with Corporate Overhead, in order to maintain the

management information value of the contribution margin on the P&L.

Distributions Techniques:

•Cost Recovery Residual– Markup on Processing Charges


Product

Revenues

Cost

Recovery

Distributed

Costs

Expenses

Incurred

Product

Margins

Cost

Recovery

Residual

RecoveryResidual/

COH

Product

Revenues

DistributedCosts

Product

Margins

Net

Income

Expenses

Incurred

Accounting for the Cost Recovery Residual



•Service Centers


•Cost to Carry Fixed Assets


•Profit Centers

Product Management

Sales & Marketing




•Fixed Dollar, Fixed %, Dynamic %

•All

•Expense to Expense or to FTE Ratio

•FTP Rate

•All



•Rate “X” Customer Classification

•Expense to Expense or to Other Ratio

•Markup on Processing Cost Distributions

Center Classification Distribution Technique Guidelines

Recap


•Centralized Expense Centers•Service Centers

•Local Overhead Centers•Processing Centers

•Profit Centers

Product Management

Sales & Marketing




Product

Revenues

LOB

Customer


Distributed

Costs

100% of NIE


Product

Margins

Large Corporate LOB



TOTAL

DEPOSIT

PRODUCTS

CREDIT

PRODUCTSFEE BASED

PRODUCTS

INTEREST INCOME

CHARGE FOR FUNDS

NET INTEREST INCOME

INTEREST EXPENSE

CREDIT FOR FUNDS


NET INTEREST MARGIN


GROSS FEES

WAIVED FEES

NON-INTEREST INCOME

NET REVENUES








TOTAL COSTS

CONTRIBUTION


CORPORATE OVERHEAD

NET INCOME

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

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XXXX

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_____

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_____

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_____

_____

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_____

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_____

_____

_____

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_____

_____

_____

XXXX

_____

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XXXX

NON-

PRODUCT

100% Association

of Expenses

to Revenues

in the form of

Various Cost

Distribution

Techniques


Capacity-Based Unit Costing

Allocation-Based Unit Costing


A very interesting question asked was about the most important determinant in choosing a

cost distribution methodology. The participants were asked to rank from the following list

in order from 1 to 5 with 1 being the most important:

•Fairness

•User Comprehension

•Cost Effectiveness

•Consistency

•Information Integrity

For the tier 1 and tier 3 institutions, information integrity was the most important. For the

tier 2 institutions, it was fairness [Graph 9]. User comprehension was last across the

board.

Graph 9

50%

42%

45%

36%

38%

40%

42%

44%

46%

48%

50%

Tier 1 - Info Integrity Tier 2 - Fairness Tier 3 - Info Integrity

Most Important Derterminant for Cost Distribution Methodology

Best Practice Costing – Treasury Management

Loan Products Deposit Products

Product Cost Drivers# of Active Accounts by Loan

Account Type (e.g. Home Equity

Loans, Commercial Loans)

# of Transactions (e.g. Installment

Loan Payments, Line of Credit

Draws)

Product Cost Drivers# of Active Accounts by Deposit

Account Type (e.g. Student

Checking, Commercial DDA)

# of Transactions (e.g. ATM

Withdrawals, Branch Deposits)


Capacity-Based and Allocation-Based Costing:


•Provide stable and consistent Product and Resource

Cost Driver rates from period to period

•Provide for an end-to-end view of unit costs with

Study Group contributions along a Processing Path

•Provide for Integrated views of the Cost Information:

–by Product

–by Customer

–by Location

•Provide for Integrated views of the Cost Information:

–by Resource Group

–by Delivery Channel

–by Business Process


Support Costing Information Analyses, such as:

•Pricing Analyses

•Productivity Analyses

•Capacity Analyses

•Fixed vs. Variable and Semi-Variable Analyses

•Breakeven Analyses

•Location Analyses

•Delivery Channel Alternatives

•Marketing Strategies

The management information value of both the Capacity-Based

and Allocation-Based cost development approaches:


Capacity-Based Approach:

Build unit rates with a unit time and an hourly rate calculation

Allocation-Based Approach:

Full absorption expense pools divided by relevant volumes

- unit rate calculation

GL line items distributions to expense pools:

Management Estimate/Survey – Fixed %/Fixed $

Volume Based – Dynamic %

Relative Value Technique – Dynamic %

Two Unit Cost Development Techniques


Financial Data

Resource Production HoursVolume Statistical Data

Business

Performance

Management

Capacity-Based Approach


Pooling:

Expenses Statistical Volumes = Pooled Expense per Item

Time Statistical Volumes = Throughput Rate per Unit

Expenses Available Production Hours =

Resource Group Hourly Rate

Measure: Activity or Transaction “Unit Times”

Build: Measured “Unit Time” X Resource Group

“Hourly Rate” = Capacity-Based Unit Cost

Capacity-Based Costing


Capacity-Based Costing

Example:

Total Expenses = $500,000

Total FTE = 7

Total Production Hours = 12,768 (7 * 152 * 12)

Hourly Rate = $39.16 ($500,000/12,768)

RCD #1 takes 1 minute to process

RCD #2 takes 3 minutes to process

Unit Cost for RCD #1 = 1/60 * 39.16 = $0.6527

Unit Cost for RCD #2 = 3/60 * 39.16 = $1.9580


Capacity-Based Cost Study Execution

June 2016

Credit

Hours

Monthly

Volumes

Decimal

Hours

Calculation Fixed

Semi-

Variable Variable

Total Unit

Costs

Cost Recovery

Calculation

RCD 1 101.93 30,010 0.003397 0.0738$ 0.0777$ 0.0467$ 0.1982$ 5,947.52$

RCD 2 387.37 33,442 0.011583 0.2518$ 0.2649$ 0.1592$ 0.6759$ 22,602.33$

RCD 3 7.38 510 0.014472 0.3146$ 0.3309$ 0.1989$ 0.8444$ 430.64$

RCD 4 49.69 13,879 0.003580 0.0778$ 0.0819$ 0.0492$ 0.2089$ 2,899.41$

RCD 5 609.41 3,697,281 0.000165 0.0036$ 0.0038$ 0.0023$ 0.0096$ 35,557.50$

RCD 6 33.89 410,809 0.000083 0.0018$ 0.0019$ 0.0011$ 0.0048$ 1,977.54$

RCD 8 292.73 79,117 0.003700 0.0804$ 0.0846$ 0.0509$ 0.2159$ 17,080.27$

RCD 9 13.53 2,697 0.005017 0.1090$ 0.1147$ 0.0690$ 0.2927$ 789.42$

RCD 10 34.75 1,298 0.026774 0.5820$ 0.6122$ 0.3680$ 1.5622$ 2,027.71$

RCD 11 74.77 672,906 0.000111 0.0024$ 0.0025$ 0.0015$ 0.0065$ 4,362.49$

RCD 13 5.24 191 0.027450 0.5967$ 0.6277$ 0.3773$ 1.6016$ 305.91$

RCD 14 1.00 NA NA 21.74$ 22.87$ 13.75$ 58.35$ 58.35$

RCD 15 264.00 4,319 0.061125 1.3286$ 1.3976$ 0.8402$ 3.5665$ 15,403.61$

1,875.70 Total Cost Recovery 109,442.71$

Total Hours 2,061.56 Hourly Rate 58.35$ Total Expenses 120,286.99$

90.98% 90.98%

Capacity Utilization % = Total Cost Recovery Ratio

Capcity-Based Unit Costs


RCD/PCDAccount Classifications Total 1 2 3 4

Direct ExpensesSalaries & BenefitsOccupancyEquipmentSuppliesOther

Indirect ExpensesIT DistributionHR DistributionOther Indirect

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

Allocation-Based Approach

Expense Pooling: Fixed %, Dynamic %


RCD/PCDAccount Classifications Total 1 2

Direct ExpensesSalaries & Benefits 100% 30% 70% OccupancyEquipmentSuppliesOther

Indirect ExpensesIT DistributionHR DistributionOther Indirect

Management Estimate/Survey Technique: Fixed %

Allocation-Based Costing


Example:


RCD #1 Volume = 100,000

RCD #2 Volume = 300,000

Total Volume = 400,000

Distribution % for RCD #1 = 25% (100,000/400,000)

Distribution % for RCD #2 = 75% (300,000/400,000)

Unit Cost for RCD #1 = 500,000*25%/100,000 = $1.25

Unit Cost for RCD #2 = 500,000*75%/300,000 = $1.25


Volume Based Distribution Technique: Dynamic%


Example:


RCD #1 Volume = 100,000

RCD #2 Volume = 300,000 Weighted Volumes

Relative Value for RCD #1 = 1 100,000

Relative Value for RCD #2 = 2.5 750,000

Distribution % for RCD #1 = 11.76% (100,000 * 1/850,000)

Distribution % for RCD #2 = 88.24% (300,000 * 2.5/850,000)

Unit Cost for RCD #1 = 500,000*11.26%/100,000 = $0.5630

Unit Cost for RCD #2 = 500,000*88.24%/300,000 = $1.4707


Relative Value Distribution Technique: Dynamic%


Allocation-Based Cost Study Execution2016 Forecast

Total RCD 1 RCD 2 TOTAL

Total Personnel 866,992 Survey 216,748 650,244 866,992$

Total Equipment 1,376,579 Direct Association 166,667$ 166,667$

- Weighting Factor 126,433$ 1,083,480$ 1,209,912$

Total Occupancy 170,892 Volume 14,591$ 156,301$ 170,892$ -

IT SUPPORT EXPENSE 2,630,302 Volume 224,582$ 2,405,720$ 2,630,302$

PRINTING & OFFICE EXPENSE 97,843 Volume 8,354$ 89,489$ 97,843$

TRAVEL & ENTERTAINMENT 40,404 Weighting Factor 4,222$ 36,182$ 40,404$

MISC PROFESSIONAL FEES 850,000 Volume 72,575$ 777,425$ 850,000$

HIRING EXPENSE 800 Weighting Factor 84$ 716$ 800$

FREIGHT & EXPRESS EXPENSE 6,600 Volume 564 6,036 6,600$

OPERATING LOSSES/RECOV 400,000 Volume 34,153$ 365,847$ 400,000$

TOTAL IT INTERNAL 1,105,201 Volume 94,365$ 1,010,837$ 1,105,201$

Total Other Operating 5,131,150 438,898 4,692,252 5,131,150

Total Direct Expenses 7,545,613 963,336 6,582,277 7,545,613

Total Indirect Expenses 622,783 Direct Controllable 79,510 543,273 622,783

Total Expenses 8,168,396 1,042,846 7,125,550 8,168,396

Total Unit Costs 0.0272$ 0.0174$

RCD 1 @ 1.25 RCD 2 @ 1 Total

Weighting Factor Distribution 47,903,170 410,511,402 458,414,572.2

10.45% 89.55% 100.00%

RCD 1 RCD 2 Total

Volume Base Distribution 38,322,536 410,511,402 448,833,938.2

8.54% 91.46% 100.00%


Fixed, Semi-Variable

and

Variable Classifications


A calculated contribution margin is the difference between price and the variable cost. It

represents how much is left to contribute to fixed costs and profits after covering variable

costs only. The number of institutions reporting contribution margins was 59% for the tier

1 institutions, 27% for tier 2 and 25% for tier 3 [Graph 15]. Less than 1/3 of the

respondents also have a semi-variable component, which is designed to account for

personnel related expenses. Of those respondents, 1/3 took associated semi-variable with

the variable classification for the contribution margin calculation and 2/3 split it into both

variable and fixed [Graph 16].

Semi-Variable Cost Treatment

SV to V

9%

SV to F

0%

SV to V and F

18%

No SV

73%

Graph 15 Graph 16

59%

27%25%

0%

10%

20%

30%

40%

50%

60%

Tier 1 Tier 2 Tier 3

% of Respondents who Report Contribution Margin


Fixed/Variable/Semi-Variable Analysis

Volumes

Expenses

Run

Rise

The classification of expenses as fixed, variable and semi-variable defines

how expenses will behave over a relevant range of volume during a pre-

defined time period (typically defined as at least one year). The

incorporation of volume ranges and time requires a “run/rise” analysis

when defining whether an expense is fixed, variable or semi-variable.

This type of analysis defines the “run” as the relevant range of volume

over which the associated expense will be remaining stable. The “rise” is

the magnitude of the increase (or decrease) the expenses will experience

once the relevant range of volume is surpassed. The following diagram

illustrates “run” and “rise”:



Volumes

Expenses

Yr 2Yr 1

Volumes

Expenses

Yr 2Yr 1

Volumes

Expenses

Yr 2Yr 1

Fixed Variable

Semi-Variable


Account Classifications: Fixed Variable Semi-VDirect Expenses

PersonnelOccupancyEquipmentSuppliesPostageOther

Indirect ExpensesIT DistributionHR DistributionCost to Carry FAOther Indirect

X

XX

X

X

X

X

X

X


X


•Centralized Expense and Service Center Distributions;

•Local Overhead Distributions;

•Cost to Carry Fixed Assets;

•Fixed/Variable/Semi-Variable Components;

-Applied to Hourly Rates for the Capacity-Based

unit cost development approach.

-Applied directly to Expense Pools for Allocation-Based

unit cost development approach.



Treasury Management Cost Structure at Wells Fargo


TM Variable costs are charged to the LOBs using a consumption based

rate X volume methodology at the Account Analysis billing element

level.

TM Direct Fixed costs are associated to TM Products and are charged

to the LOBs using a fixed $ methodology (plan/12) for services at a TM

Product level such as Cash Vault Occupancy to the Cash Services

Product.

TM Indirect Fixed expenses are incurred on behalf of all TM (not

associated to TM Products) and are charged to the LOBs using a fixed

$ methodology (plan/12) for services such as TM Marketing and TM

Risk Management.

TM Sales costs are charged to LOBs based geographic assignments or

industry specific support using a fixed $ methodology (plan/12).

CCM unit cost development is a structured project approach

designed to streamline the costing effort, while maximizing the

information value

StudyPreparation

StudyExecution

StudyApproval

Study Information

Rollout

CCM Unit Cost Development Techniques


StudyPreparation

•Leverage and optimize the skill sets of the cost analyst team

•Analyze and classify processing centers

•Establish study group IDs

•Determine study period

•Communicate expectations with study group management

•Look for quick management information wins

Cost Study Process



StudyExecution

Activity

Definition

Activity Time

Development

Expense

Analysis

Calculate

Component

Rates

Define

Activities

Develop

Activity

Unit

Times

Develop

Resource

Hourly

Rate(s)

Calculate

Capacity-

Based

Costs

Statistical

Volume

Analysis

RCD &

PCD

Unit Rates

Capacity-Based Cost

Study Execution

Processes



StudyExecution

Activity

Definition

Distribution

Techniques

To Cost Pools

Expense &

RCD Analysis

Calculate

Unit

Rates

Define

Activities

Determine

GL Line

ItemDistribution

Bases

ExecuteDistributions

to

Expense

Pools

Calculate

Fully

Absorbed

Costs

Statistical

Volume

Analysis

RCD &

PCD

Unit Rates


Allocation-Based Cost

Study Execution

Processes


StudyApproval

•Communicate study period results with Study Group management

•Obtain approval (sign-off) for results

•Reinforce the role of the rates representing the Study Group and

Study Period in Integrated Profitability

• Reinforce the role of the Study Period results as a new balance type

for Integrated Resource Management reporting

Cost Study Process



Study Information

Rollout

•Use the cost information database to support ongoing business

ad hoc analyses, such as pricing, capacity, fixed vs. variable, etc.

•Deploy the Product Cost Driver (PCD) rates and business logic in

Integrated Profitability measurement.

•Deploy the Resource Cost Driver (RCD) rates and business logic in

Integrated Resource Management.

Cost Study Process




Case Study

Development - Capacity-Based Methodology

Vs.

Allocation-Based

If you can do cost accounting for financial institutions,

you can do it for ANY industry…


Study Period Data Assumptions

Personnel Expense $250,000

Equip. Depreciation Expense $ 35,000

Occupancy Expense $ 65,000

Raw Materials Expense $ 30,000

Total Expenses $380,000

Calculate the following:

Capacity Utilization %

Hourly Rates (Fixed, Semi-Variable, Variable)

Capacity-Based unit cost

Allocation-Based Fully Absorbed unit cost

Capacity-Based Cost Recovery %

Productivity

Hours worked 10,000

Bottles processed 1,000,000

Unit time per Bottle 30 seconds

Comprehensive Cost Management Case Study


Capacity Utilization % = 83.33% [(1,000,000 * 30 seconds/3600)/10,000 Hours]

Hourly RateVariable $03.00 ($03.00 = $30,000/10,000)Semi-variable $25.00 ($25.00 = $250,000/10,000)Fixed $10.00 ($10.00 = $100,000/10,000)Total $38.00

Capacity-Based MethodologyVariable unit cost = $0.0250 (30 seconds/3600*$03 per hour)Semi-variable unit cost = $0.2083 (30 seconds/3600*$25 per hour)Fixed unit cost = $0.0833 (30 seconds/3600*$10 per hour)Capacity-based unit cost= $0.3166Available unused capacity = $0.0634 ($0.380 - $0.3166)Total unit cost = $0.3800 ($380,000/1,000,000)

Allocation-Based Methodology Variable unit cost = $0.0300 ($30,000 expense/1,000,000 items)Semi-variable unit cost = $0.2500 ($250,000 expense/1,000,000 items)Fixed unit cost = $0.1000 ($100,000 expense/1,000,000 items)Total unit cost = $0.3800 ($380,000/1,000,000)

Capacity-Based Cost Recovery % 83.33% ($0.3166 unit cost*1,000,000 items/$380,000)

Productivity 100 per Hour (1,000,000 Bottles/10,000 Hours)



Cost Deployment

for



Product

Revenues

LOB

Customer

Distributed

Costs

Del. Chan.

Distributed

Credits

Bus. Proc.

Proc. Group

Del. Chan.

Expenses

Incurred

Cost

Recovery

Residual

CCM Deployment for Integrated Resource Management


Product

Margins

•NIE Financial Data

•Statistical Volume Data

•FTE (Production Hours) Data

Linking involves the Integration of:


by Balance Type to generate New Performance Measurement

criteria, including:

•Statistical Volumes in Budgeting & Forecasting

•The dimension of Production Time and FTEs in

Integrated Costing

•Comprehensive Variance Analyses – Actual

Performance results vs. Performance Targets


•Actual

•Budget

•Forecast (Multiple Forecasts)

•Study Period (if Applicable)

Balance Type Comparisons

Financial Data


Plaza 48 Hour Processing

0

2

4

6

8

10

12

14

16

0:00

2:00

4:00

6:00

8:00

10:0

0

12:0

0

14:0

0

16:0

0

18:0

0

20:0

0

22:0

00:

002:

004:

006:

008:

00

10:0

0

12:0

0

14:0

0

16:0

0

18:0

0

20:0

0

22:0

0

Time

So

rters

@54,0

42 ite

m p

er/

ho

ur

IBFS

Capture

Available Unused capacity versus Excess capacity

- no Available Unused capacity at 2:00, therefore no Excess capacity overall

Window Capacity By Time of Day


Excess Capacity

Available Unused

•Processing Group Expense Analyses $

•FTE Analyses #

•Statistical Volume Analyses #

•Hourly Rate Analyses $

•Capacity Utilization Analyses #

•Productivity per Unit Analyses #

•Productivity Recovery Analyses #

•Capacity-Based Unit Cost Analyses $

•Capacity-Based Cost Recovery Analyses $

•Allocation-Based Unit Cost Analyses $

•Allocation-Based Cost Recovery Analyses $

Recap of the financial ($) and non-financial (#) performance metrics:

Capacity-

Based

approach

brings new

Performance

Metrics


•Error Rates

•Reject Rates

•Turnaround Time

•Response Time

•Customer Satisfaction

•Employee Tenure

•Employee Turnover

In addition, the analyses should align certain quality

indicators and other relevant information against the

performance metrics to look for patterns and/or trends

against the performance results. Examples include:


Performance Metrics can also be presented across

multiple balance types. Comprehensive Variance Analyses

across balance type comparisons include:

•Actual vs. Budget

•Actual vs. Forecast (Multiple Forecasts)

•Budget vs. Forecast

•Actual vs. Study Period (if Different from

Budget/Forecast)


Analysis

Module

Analysis Outputs

Monthly Performance Metrics

• Monthly Results by Balance Type

• Balance Type Comparatives

Comprehensive Variance Analyses

• Performance Variance Calculations

• Variance Explanations

Analysis Inputs

Costing Information Database:•Unit Costs by Study Group•Unit Times by Study Group•HR FTE/Production Hours by Study Group •Study Period Hourly Rates•Study Period Performance Ratios

Monthly Production Values:

•RCD Volumes by Proc. Center

•PCD Volumes

•GL $ by Processing Center

•FTE/Hours by Processing Center•Quality Indicators by Processing Center

Monthly Analysis Balance Types:

•Budget by Period

•Forecast by Period

•Actual by Period

•Study Period Results



Treasury Operations

January February March April May June

$ 365,060 $ 334,842 $ 353,857 $ 358,986 $ 369,217 $ 377,349

$ 366,200 $ 366,200 $ 374,200 $ 366,200 $ 366,200 $ 366,200

$ 375,858 $ 375,858 $ 375,858 $ 375,858 $ 375,858 $ 375,858

Strategic Business Analysis


36.91 34.95 39.28 35.00 37.00 40.00

40.00 40.00 40.00 40.00 40.00 40.00

37.50 37.50 37.50 37.50 37.50 37.50

Treasury Operations

1 2 3 4 5 6

Actual

Study Period$310,000

$320,000

$330,000

$340,000

$350,000

$360,000

$370,000

$380,000

Month

Expense Analysis

Actual

Forecast

Study Period

1 2 3 4 5 6

Actual

Study Period32

33

34

35

36

37

38

39

40

Month

FTE Analysis

Actual

Forecast

Study Period



$ 65.07 $ 63.03 $ 59.27 $ 67.48 $ 65.65 $ 62.06

$ 60.23 $ 60.23 $ 61.55 $ 60.23 $ 60.23 $ 60.23

$ 65.94 $ 65.94 $ 65.94 $ 65.94 $ 65.94 $ 65.94

Treasury Operations

Strategic Business Analysis


95.22% 96.01% 87.73% 102.15% 92.54% 94.30%

85.54% 85.54% 85.54% 85.54% 85.54% 85.54%

90.00% 90.00% 90.00% 90.00% 90.00% 90.00%

Treasury Operations

1 2 3 4 5 6

Actual

Study Period54

56

58

60

62

64

66

68

Month

Hourly Rate Analysis

Actual

Forecast

Study Period

1 2 3 4 5 6

Actual

Study Period75%

80%

85%

90%

95%

100%

105%

Month

Capacity Utilization Analysis

Actual

Forecast

Study Period


Analysis

Module

Analysis Outputs

Monthly Performance Metrics

• Monthly Results by Balance Type

• Balance Type Comparatives

Comprehensive Variance Analyses

• Performance Variance Calculations

• Variance Explanations

Analysis Inputs

Costing Information Database:•Unit Costs by Study Group•Unit Times by Study Group•HR FTE/Production Hours by Study Group •Study Period Hourly Rates•Study Period Performance Ratios

Monthly Production Values:

•RCD Volumes by Proc. Center

•PCD Volumes

•GL $ by Processing Center

•FTE/Hours by Processing Center•Quality Indicators by Processing Center

Monthly Analysis Balance Types:

•Budget by Period

•Forecast by Period

•Actual by Period

•Study Period Results



Processing

Credits

Expenses

Incurred

CostRecoveryResidual

IntegratedResource

Management

$ Dimension

Residual

Analysis

By Ledger Type:

•Actual

•Budget

•Forecast•Multiple Forecast


When using standard or published costs for cost allocations, a residual is created each

period. As a result, the cost pools will either be over-allocated or under-allocated. For the

tier 1 financial institutions, 67% create a residual when running cost allocations. For tier 2

institutions responding, 50% create a residual and for tier 3, less than 30% [Graph 5].

When asked whether calculated residuals are distributed, two thirds of the tier 1

institutions said yes, 57% of the tier 2 institutions and half of the tier 3 institutions said yes

[Graph 6].

Graph 5 Graph 6

67%

50%

32%

0%

10%

20%

30%

40%

50%

60%

70%


% of Respondents Creating Residuals

67%

57%

50%

0%

10%

20%

30%

40%

50%

60%

70%


% of Respondents Allocating Residuals


A follow up question for those institutions that allocate the residual each period was to

what level, including:

•Line of Business (LOB)

•Product

•Customer

•Customer Account

Across all three tiers, 13% allocate to LOB only, 21% to Product only and nearly 2/3 to

both LOB and product. None of the respondents allocate residuals to a customer or

customer account level. [Graph 8].

Graph 8

Residual Distributions

LOB

13%

Product

21%

LOB & Product

66%

Customer

0%


Actual

Expenses

$135,425

Actual

Expenses

Forecast

Expenses

Forecast

Volumes

Forecast

Alloc-Based Unit Cost

“X”

Actual Volumes

Alloc.-Based

Cost Recovery

Residual

$144

Volume

Variance

$3,739

Spending

Variance

($3,595)

Actual

Volumes

Example: Allocation-Based Cost Recovery Analysis

$135,569

Volume Variance

“X”

Forecast

Alloc-Based Unit Cost

Forecast Expenses

Less

Actual Expenses




Allocation-Based Expense Recovery Variance Analysis January February March April May June

Study Period vs. Actual

Expense Recovery Variance

Portfolio Loans 5,166$ 5,187$ 5,083$ 5,148$ 5,285$ 5,329$

Loan Payoffs 52,945$ 53,154$ 53,115$ 53,429$ 52,263$ 52,978$

Loan Disbursements 20$ 17$ 23$ 12$ 20$ 17$

Loan Payments 77,438$ 77,663$ 77,083$ 78,379$ 78,088$ 76,774$

Total 135,569$ 136,021$ 135,305$ 136,967$ 135,657$ 135,098$

Actual Expenses 135,425$ 136,244$ 135,152$ 136,517$ 135,731$ 135,091$

Total Expense Recovery Variance 144 (223) 152 450 (75) 7

RCD Volume Variance

Portfolio Loans 73$ 94$ (10)$ 54$ 192$ 236$

Loan Payoffs 4,359$ 4,568$ 4,529$ 4,843$ 3,677$ 4,392$

Loan Disbursements (20)$ (23)$ (17)$ (28)$ (20)$ (23)$

Loan Payments (673)$ (448)$ (1,028)$ 268$ (23)$ (1,337)$

Total RCD Volume Variance 3,739$ 4,191$ 3,475$ 5,137$ 3,827$ 3,268$

Spending Variance

Study Period 131,830$ 131,830$ 131,830$ 131,830$ 131,830$ 131,830$

Actual 135,425$ 136,244$ 135,152$ 136,517$ 135,731$ 135,091$

Total Spending Variance (3,595)$ (4,414)$ (3,322)$ (4,687)$ (3,902)$ (3,261)$

Total Expense Recovery Variance 144 (223)$ 152$ 450$ (75)$ 7$






Portfolio Loans 5,166$ 5,569$ 5,684$ 5,791$ 5,791$ 5,813$

Loan Payoffs 51,246$ 52,604$ 53,665$ 53,978$ 53,912$ 52,681$


Loan Payments 73,688$ 77,663$ 84,583$ 89,629$ 89,338$ 93,649$

Total 130,117$ 135,856$ 143,956$ 149,416$ 149,062$ 152,163$

Actual Expenses 145,425$ 149,244$ 149,152$ 149,517$ 143,731$ 144,091$

Total Expense Recovery Variance (15,307) (13,388) (5,196) (101) 5,330 8,072

RCD Volume Variance

Portfolio Loans 73$ 476$ 591$ 698$ 698$ 719$

Loan Payoffs 2,660$ 4,018$ 5,079$ 5,392$ 5,326$ 4,095$

Loan Disbursements (23)$ (20)$ (17)$ (23)$ (20)$ (20)$

Loan Payments (4,423)$ (448)$ 6,473$ 11,518$ 11,228$ 15,538$

Total RCD Volume Variance (1,712)$ 4,026$ 12,126$ 17,586$ 17,232$ 20,333$

Spending Variance

Study Period 131,830$ 131,830$ 131,830$ 131,830$ 131,830$ 131,830$

Actual 145,425$ 149,244$ 149,152$ 149,517$ 143,731$ 144,091$


Total Expense Recovery Variance (15,307) (13,388)$ (5,196)$ (101)$ 5,330$ 8,072$






Portfolio Loans 5,166$ 5,187$ 5,083$ 5,148$ 5,285$ 5,329$

Loan Payoffs 58,442$ 51,505$ 53,115$ 50,680$ 52,263$ 51,878$


Loan Payments 92,438$ 87,038$ 84,583$ 84,004$ 85,588$ 88,024$

Total 156,249$ 143,747$ 142,805$ 139,843$ 143,145$ 145,234$

Actual Expenses 155,425$ 159,244$ 159,152$ 169,517$ 173,731$ 174,091$

Total Expense Recovery Variance 824 (15,497) (16,348) (29,674) (30,586) (28,857)

RCD Volume Variance

Portfolio Loans 73$ 94$ (10)$ 54$ 192$ 236$

Loan Payoffs 9,856$ 2,919$ 4,529$ 2,094$ 3,677$ 3,292$

Loan Disbursements 163$ (23)$ (17)$ (28)$ (31)$ (37)$

Loan Payments 14,327$ 8,927$ 6,473$ 5,893$ 7,478$ 9,913$

Total RCD Volume Variance 24,419$ 11,917$ 10,975$ 8,013$ 11,315$ 13,404$

Spending Variance

Study Period 131,830$ 131,830$ 131,830$ 131,830$ 131,830$ 131,830$

Actual 155,425$ 159,244$ 159,152$ 169,517$ 173,731$ 174,091$


Total Expense Recovery Variance 824 (15,497)$ (16,348)$ (29,674)$ (30,586)$ (28,857)$

Productivity Measurement

Links total Production Volumes to total

Production Hours (e.g., # of FTEs or # of CPU Hours)

to Calculate a Throughput Rate per Hour


With a plan commitment to increase Productivity

from 10,000 items per FTE to 12,000 items per FTE,

improvement can be represented as follows:

Total

Plan Volume

400,000

FTEs Required

at 10,000 per FTE

40.0

FTEs Required

at 12,000 per FTE

33.33

FTEs Required

at 12,000 per FTE

40.0

Potential

Plan Volume

480,000

Potential

FTE Re-Deployment

6.67


Actual

Expenses

$175,425

Actual

Expenses

Study Period

Expenses

Study Period

Volumes

Study Period

Cap-Based Unit Costs

“X”

Actual Volumes

Cap.-Based

Cost Recovery

Residual

($36,611)

Hourly Rt.

Variance

$23,217

Utilization

Variance

($59,828)

Actual

Volumes

Example: Capacity-Based Cost Recovery Analysis

$138,814

Hourly Rate

Variance

“X”

Actual Hours

Actual Unused

Capacity

“X”

Study Period

Hourly Rate



Example: Capacity-Based Cost Recovery Analysis

Capacity-Based Cost Recovery Variance Analysis January February March April May June


Cost Recovery Variance

Portfolio Loans 4,590$ 4,608$ 4,515$ 4,573$ 4,695$ 4,734$

Loan Payoffs 51,921$ 45,757$ 47,188$ 45,025$ 46,431$ 41,206$


Loan Payments 82,123$ 68,997$ 75,145$ 74,630$ 76,038$ 66,541$

Total Recovery 138,814$ 119,378$ 126,870$ 124,239$ 127,172$ 112,484$

Total Expenses 175,425$ 149,244$ 139,152$ 169,517$ 133,731$ 134,091$

% Recovery 79.13% 79.99% 91.17% 73.29% 95.10% 83.89%

Total Cost Recovery Variance (36,611)$ (29,866)$ (12,283)$ (45,278)$ (6,559)$ (21,607)$

Hourly Rate Variance

Study Period Hourly Rate 40.70$ 40.70$ 40.70$ 40.70$ 40.70$ 40.70$

Actual Hourly Rate 35.94$ 28.90$ 27.82$ 34.30$ 27.49$ 29.49$

Rate Variance per Hour 4.76$ 11.80$ 12.88$ 6.39$ 13.21$ 11.20$

Actual Hours 4,880.72 5,164.96 5,002.32 4,941.52 4,864.00 4,546.32

Total Hourly Rate Variance 23,217$ 60,966$ 64,439$ 31,599$ 64,230$ 50,941$

Utilization Variance

ABC Unit Times X Actual Volumes 3,411 2,933 3,117 3,053 3,125 2,764

Actual Hours 4,881 5,165 5,002 4,942 4,864 4,546

Utilization Variance (1,470) (2,232) (1,885) (1,889) (1,739) (1,783)

Study Period Hourly Rate 40.70$ 40.70$ 40.70$ 40.70$ 40.70$ 40.70$

Total Utilization Variance (59,828)$ (90,832)$ (76,721)$ (76,878)$ (70,789)$ (72,548)$

Total Cost Recovery Variance (36,611)$ (29,866)$ (12,283)$ (45,278)$ (6,559)$ (21,607)$

Capacity Utilization Measurement

Links total Production Volumes

Extended by Unit Times against

Practical Capacity, Expressed in Hours


With a plan commitment to increase Capacity

Utilization from 75% to 85%, improvement

can be represented as follows:

Total

Plan Capacity

400,000

Capacity Utilization

at 75%

300,000

Potential Reduction

to Total Plan Capacity

353,000

Potential Volume

Increase to Plan

40,000


at 85%

340,000


at 85%

300,000


Criteria-Based Rate Administration

•Residual Variances (sustained over a three month period)

> 15% Cost Pools under $X MM

> 10% Cost Pools over $X MM

•Changes in forecasted expenses associated with strategic

efficiency or productivity initiatives

•Changes is projected volumes associated with significant new

business or the loss of key customers

•New Service / Drivers

•New Service (e.g. Image Cash Letter)

•New Drivers (e.g. Clearing Checks via ACH)

•Exceptions considered case-by-case


Criteria-Based Rate Administration

3 Scenarios – Rate Updates for Residual Variances

(Criteria exceeded and sustained over a three month period)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Scenario 1

Historically Based Rate Development


Historically Based Rate Development

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Annual Budget/Forecast Based Rate Development


Rolling Budget/Forecast Based Rate Development



Case Study

Deployment - Capacity-Based Methodology

Vs.

Allocation-Based

If you can do cost accounting for financial services,

you can do it for ANY industry…


Monthly Production Data Assumptions:

Personnel Expense $ 31,000

Equip. Depreciation Expense $ 3,000

Occupancy Expense $ 6,000

Materials Expense $ 4,500

Total Expenses $ 44,500

Calculate the following:

Capacity Utilization %

Hourly Rates (Fixed, Semi-Variable, Variable)

Capacity-Based Cost Recovery %

Capacity-Based Cost Recovery Residual $

• Hourly Rate Component

• Utilization Component

Fully Absorbed Cost Recovery %

Fully Absorbed Cost Recovery Residual $

• Spending Component

• Volume Component

Productivity

Hours worked 1,000

Bottles processed 110,000



Capacity Utilization % = 91.67% [(110,000 * 30 seconds/3600)/1,000 Hours]Hourly RateVariable $ 4.50 ($ 4.50 = $4,500/1,000)Semi-variable $31.00 ($31.00 = $31,000/1,000)Fixed $ 9.00 ($ 9.00 = $9,000/1,000)Total $44.50

Full Capacity Unit Cost $0.3166Fully Absorbed Unit Cost $0.3800

Capacity-Based Cost Recovery% 78.26% ($0.3166 unit cost * 110,000 Bottles/$44,500)

Capacity-Based Cost Recovery Residual $(9,667) ($0.3166 unit cost * 110,000 Bottles = $34,833) less $44,500

-Hourly Rate Component $(6,500) (Study Period Hrly. Rate less Actual Hrly. Rate) * Actual Hours

-Utilization Component $(3,167) [(Unit Time * Actual Volume) – Actual Hours]

* Study Period Hourly Rate

Fully Absorbed Cost Recovery % 93.93% ($0.3800 unit cost * 110,000 Bottles/$44,500)

Fully Absorbed Cost Recovery Residual $(2,700) ($0.3800 unit cost * 110,000 Bottles = $41,800) less $44,500

-Spending Component $(12,833) ($380,000/12) less $44,500-Volume Component $10,133 [(110,000 - (1,000,000/12)] * $0.3800

Productivity 110 per Hour (110,000 Bottles/1,000 Hours)



Cost Deployment

for

Integrated Profitability


Product

Revenues

LOB

Customer

Distributed

Costs

Product

Margins

Del. Chan.

Distributed

Credits

Bus. Proc.

Res. Group

Expenses

Incurred

Cost

Recovery

Residual

CCM Deployment for Integrated Profitability


Usage –Driven

Transaction Costs by

Delivery Channel


They have to anticipate Resource Requirements every day:

Too many resources positioned today by Delivery Channel

Not enough resources positioned today by Delivery Channel

Resource Managers are frustrated without

Management Information:

What about tomorrow?

Customers of the Bank do not announce their

transaction intentions nor their

Delivery Channel preferences.

Delivery Channel Alternatives


Branch Teller Transaction

Delivery Channel

ATM Transaction

Telephone Transaction

Online Bkg. Transaction

Average Total

Unit Cost /Transaction

$1.00

$3.00

$1.50

$0.015

“Total Unit Costs”

by Delivery Channel

also provide

insight into

Diversion Strategies

End-to-End “Total Unit Costs”

Summarization - PCD Unit Costs for Integrated Profitability Measurement



Understanding Costs and Usage by Delivery Channel provides

insight into Integrated Profitability and Integrated Resource Management

Branch Teller Transactions

Delivery Channel

ATM Transactions

Telephone Banking Transactions

Online Banking Transactions

Utilization %

67%

72%

50%

10% Available Unused Capacity




TOTAL

DEPOSIT

PRODUCTS

CREDIT

PRODUCTSFEE BASED

PRODUCTS

INTEREST INCOME

CHARGE FOR FUNDS

NET INTEREST INCOME

INTEREST EXPENSE

CREDIT FOR FUNDS


NET INTEREST MARGIN


GROSS FEES

WAIVED FEES

NON-INTEREST INCOME

NET REVENUES








TOTAL COSTS

PRODUCT MARGINS

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

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_____

XXXX

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_____

_____

_____

XXXX

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XXXX

XXXX

XXXX

XXXX

Usage-Driven Transaction Costs

Usage-Driven

Transaction

Costs by

Delivery Channel


Delivery Channel

Alternatives:

•Same Customer

•Same Product

•Same Transaction

Different Costs



TOTAL

DEPOSIT

PRODUCTS

CREDIT

PRODUCTSFEE BASED

PRODUCTS

INTEREST INCOME

CHARGE FOR FUNDS

NET INTEREST INCOME

INTEREST EXPENSE

CREDIT FOR FUNDS


NET INTEREST MARGIN


GROSS FEES

WAIVED FEES

NON-INTEREST INCOME

NET REVENUES








TOTAL COSTS

PRODUCT MARGINS

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

_____

XXXX

XXXX

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XXXX

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XXXX

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XXXX

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XXXX

XXXX


Credibility

with CCM brings

Renewed Focus

to the Product

Margins Line


Customer Profitability Integrated by Product

TOTAL

DEPOSIT

PRODUCTS

CREDIT

PRODUCTSFEE BASED

PRODUCTSINTEREST INCOME

CHARGE FOR FUNDS

NET INTEREST INCOME

INTEREST EXPENSE

CREDIT FOR FUNDS


NET INTEREST MARGIN


GROSS FEES

WAIVED FEES

NON-INTEREST INCOME

NET REVENUES








TOTAL COSTS

PRODUCT MARGINS


CORPORATE OVERHEAD

NET INCOME

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

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XXXX

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XXXX

XXXX

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XXXX

XXXX

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NON-

PRODUCT

Credibilitywith CCM also

Brings RenewedFocus to the

Net Income Line

Large Corporate LOB

Usage –Driven Transaction

Unit Cost Components

and

Contribution Margins


Large Corporate LOB


TOTAL

DEPOSIT

PRODUCTS

CREDIT

PRODUCTSFEE BASED

PRODUCTS

INTEREST INCOME

CHARGE FOR FUNDS

NET INTEREST INCOME

INTEREST EXPENSE

CREDIT FOR FUNDS


NET INTEREST MARGIN


GROSS FEES

WAIVED FEES

NON-INTEREST INCOME

NET REVENUES

VARIABLE COSTS

CONTRIB. TO SEMI-V. & FIXED

SEMI-VARIABLE COSTS

CONTRIB. TO FIXED

FIXED COSTS

AVAILABLE UNUSED CAPACITY

NET INCOME

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

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XXXX

_____

XXXX

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_____

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NON-

PRODUCT


CCM

also brings

Unit Cost

Components

And Capacity

Information for

Various

Contribution

Margins

_____

_____

_____

XXXX

_____

XXXX

XXXX

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_____

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Establishing


Targets


Another very interesting topic is planning or budgeting. Participants were asked what

form of planning/budgeting best describes the practices at their institution from the

following list:

•Static Budgeting (budget remains unchanged all year)

•Moving Budget (one that is updated only for material changes)

•Rolling Budget (one that is updated in a continuous pattern, such as monthly or

quarterly)

•Volume-Based Budgeting

•Zero-Based Budgeting

The answers are stratified by institution tier below [Graph 13]:

Graph 13

25%

37%

38%

0%

55%

23%

14%

8%

65%

24%

11%0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Budgeting Practices

Zero-Based

Rolling

Moving

Static

Best Practice Costing – Treasury Services

Another question asked participants the extent to which costing efforts are integrated with

the budget or planning process from the following:

•Fully Integrated

•Mostly Integrated

•Somewhat Integrated

•No Integration

The answers are again stratified by institution tier below [Graph 14]:

Graph 14

13%

38%

38%

13%

9%

9%

45%

36%

5%

11%

47%

37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Costing Integrated with Budgeting Process

Not Integrated

Somewhat Integrated

Mostly Integrated

Fully Integrated

Best Practice Costing – Treasury Services

• Business Performance Analyses & Strategies

– Analyze current Performance and Financial Operating Results (Trend Analyses, Internal Benchmarks, External Benchmarks, Business Performance Indicators, etc.)

• Set Performance Targets - Management Commitment

– Set Performance Metrics and establish Forecasts and Key Performance Indicator (KPI) Targets

• Measure Actual Realization - Management Accountability

– Measure Actual Results against Forecasts and Target KPIs

• Acknowledgement

– Acknowledge Meeting Targets and Performance

Improvements



Business performance optimization is not an end goal, but

rather a relentless commitment to continuous business

process improvement. To optimize is to make something

function at its best or most effective, or to use something to

its best advantage. Activity-based metrics quantify business

processes and resource utilization. Baseline financial

information, together with indentifying business process

value-add opportunities, are the means to prioritize and

measure evidence of continuous business process

improvement.

Business Performance Optimization


The approach to process improvements looks first for

business processes that can be eliminated, either because

they are redundant tasks or because they add no value to

the end product.



Second is to look for processes that can be simplified.

This step considers ideas such as alternative techniques or

procedures, non-concession shortcuts, and processing

path hand off and/or receipt logistics, for example.



Finally, this improvement approach looks for process

automation opportunities to achieve efficiencies and

quality enhancements for only legitimate and value-add

business processes.


Key Product and Non-

Product growth projections

by Market and Customer

Segment are provided by

each LOB through Business

Analyst liaisons.

The process to establish projected volumes follows a logical sequence

to align Resource Managers with front office LOB Managers’ plans as

follows:

Projected growth and Product

mix factors are transformed

and applied to projected

PCDs and functional RCDs,

which are aligned by area or

site providing the services.

Planning and Forecasting


With published Budget (or

Forecast) volume projections,

establish Key Performance

Indicator Targets, including

Capacity Utilization and

Productivity Improvements.

Combine Volume Projections

with Performance Targets by

site to establish Budget (or

Forecast) Resource

Requirements and related

Budget (or Forecast) Expenses.

Secure “Management Commitment”

to achieving Performance Targets

and Budget (or Forecast) results.

Planning and Forecasting


Product

Growth

Forecasts

Product

Cost Driver

Volume

Forecasts

Resource

Cost Driver

Volume

Forecasts

Productivity/

Capacity

Utilization

Targets

Forecast

Resource

RequirementsIntegrated

Resource

Management

ForecastPlanning & Forecasting

Product

Account

Volume

Forecasts

CCM

Study

Update

Integrated

Profitability

Forecast

Product

Balances,

Revenue

Forecasts


Delivery Channel Migration Strategies

Paper to Electronic Migration Strategies

Capacity Management & Planning Strategies

New Deal and Pricing Scenarios

Business/Product Exit Strategies

Key Customer Retention Strategies

Unprofitable Customer Exit Strategies

Strategic Business

Analyses and Pricing


Integrated

Resource

Management

Scorecard

Integrated Performance

Measurement Architecture


Strategic

Analyses,

Pricing &

Forecasting

Integrated

Profitability

Measurement

Scorecard



Measure Actual PerformanceResults vs. Targets

Acknowledge PerformanceImprovements

Integrated CCM

InformationDatabase


B. Pricing Practices

In part B of the survey, financial institutions were asked a series of questions regarding pricing

practices. When asked if price modeling tools were used, all tier 1 institutions answered in the

affirmative with over 80% differentiating fixed and variable costs. Eighty percent of tier 2

institutions use a price modeling tool with about one half differentiating fixed and variable

costs. Fifty percent of tier 3 institutions use a price modeling tool, yet only about 35%

differentiated fixed and variable costs [Graph 21]. When asked about considering the value of

balances when pricing new business, tier 1 institutions indicated they consider the value 100%

of the time, while tier 2 and tier 3 institutions consider the value 70% and 35%, respectively

[Graph 22].

80%

50%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%


Pricing Model Tool with Fixed & Variable

Costs

Graph 22Graph 21

100%

73%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Consider the Value of Balances when Pricing

New Business


When asked the basis for most pricing decisions, 38% of tier 1 institutions indicated they used

market-based pricing exclusively, while 62% used a combination of market-based AND cost-

based strategies. Tier 2 and 3 institutions also predominately used a combination of the two

approaches, but only 8% and 14% respectively, use just a cost-based approach [Graph 23]. The

limited use of a cost-based pricing strategy was reinforced when we asked the degree financial

institutions’ relied on cost information when pricing new business. Seventy percent of tier 1

institutions said they had slight to moderate reliance on costs data when making pricing

decisions while tier 2 and 3 institutions indicated that 50% have slight to moderate reliance on

cost data when making pricing decisions [Graph 24].

70%

50% 50%

0%

10%

20%

30%

40%

50%

60%

70%


Slight to Moderate Reliance on Cost Data when

making a Pricing Decision

Graph 24Graph 23

38%

0%

62%

25%

8%

67%

13%

14%

73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Market Pricing vs. Cost Pricing (or both)

Both

Cost

Market


Delivery Channel Migration Strategy

The measurement of the transaction costs and customer usage

of the various Delivery Channel alternatives supports an

informed and proactive customer migration strategy. A

strategy that could offer pricing or service incentives to

customers who use the less costly Delivery Channels. The

migration strategy could also provide disincentives for

customers using the costly channels, such as charging for

certain transactions done at the branch or transactions with

live telephone service representatives.

As mentioned previously, it is no longer the case where the

same transaction for the same product and the same customer

all cost the same.


One of the hottest topics in banking today is the paper-to-electronic migration of

payments. When asked what impact this will have on institutional profitability, most

respondents agreed the impact would be either positive or neutral [Graph 31].

Graph 31


33%

33%

33%

0%

30%

30%

30%

10%

41%

47%

12%0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Impact of Paper-to-Electronic Migration of

Payments on Profitability

Neg

Neg, then Pos

Nuetral

Pos

Paper to Electronic Migration Strategy

The migration era from paper to electronic transactions has arrived in

full force. Paper check volumes were predicted to peak in the early 1990s

but kept climbing until about 2002. Now we have debit and credit cards,

electronic bill payment, ACH, Point of Sale transactions, etc. to name a

few alternatives. All contributing to the fall of the paper check. The

implications for the entire payment system and the infrastructure to

process paper checks are huge.

It is critical to measure and understand capacity utilization and to

respond to changes. An example is now replacing traditional paper check

clearing with ACH. The cost is less, but so is the price to the customer. A

slow response would mean declining revenues without a corresponding

decrease in expenses. A good strategy for customers and pricing, but

without a coordinated effort enterprise-wide, it’s not a good strategy for

the costs and bottom line.


Strategic Business

Analyses and Pricing Example:

using

Capacity and Cost Information


Capacity Utilization - Staff

0%

20%

40%

60%

80%

100%

120%

1 2 3 4 5 6 7 8

Sites

Available Unused Capacity


100% Capacity

Available Unused Capacity


Total Capacity

22% 20% 24% 27% 12% 19% 14% 10%

78% 80% 76% 73% 88% 81% 86% 90%

100% 100% 100% 100% 100% 100% 100% 100%


This slide is designed to show that the largest sites from an expense standpoint don’t

necessarily mean the most costly. In this example, Site #3 expenses are more than three

times as much as Site #1 and four times as much as Site #7. When aligning the expenses with

the FTEs however, Site #3 is actually less costly from an hourly rate perspective. This

information would help with potential migration strategies, moving processing from high cost

sites to lower cost sites where feasible .

Hourly Rate Analysis by Site

Hourly Rate Analysis Sit

e 1

Sit

e 2

Sit

e 3

Sit

e 4

Sit

e 5

Sit

e 6

Sit

e 7

Sit

e 8

136,239$ 391,731$ 465,335$ 89,174$ 152,870$ 697,472$ 119,253$ 332,281$

13.02 36.00 50.00 8.00 15.50 60.44 10.50 34.00

60.42$ 62.83$ 53.73$ 64.36$ 56.94$ 66.63$ 65.57$ 56.43$


Unit Cost Components by Site

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1 2 3 4 5 6 7 8

Sites

Variable Unit Cost

Semi-Variable Unit Cost

Fixed Unit Cost

$3.98 Site Average

Fixed Includes Avail. Capacity

Total Variable Unit Cost

Total Semi-Variable Unit Cost

Total Fixed Unit Cost

Total Unit Cost

0.84$ 0.90$ 0.85$ 0.87$ 0.86$ 0.84$ 0.88$ 0.87$

0.80$ 0.83$ 0.87$ 0.78$ 0.81$ 0.86$ 0.79$ 0.78$

2.17$ 2.31$ 2.22$ 2.29$ 2.32$ 2.45$ 2.21$ 2.39$

3.81$ 4.05$ 3.95$ 3.94$ 3.99$ 4.16$ 3.88$ 4.04$


This slide is designed to quantify the revenue and incremental margin impacts of forecasting

and committing to additional volumes by quarter through 2016. In this example, the new

volumes would be absorbed by available unused capacity identified in both staff and

equipment, therefore maximizing the incremental margin opportunity.

Criteria for the sales pipeline and tiered reality probabilities, which would include a new

volume commitment classification, need to be established


P&L Forecast Analysis

Ramp Up Strategy – Site 1

Q1 -

2008

Q2 -

2008

Q3 -

2008

Q4 -

2008

Q1 -

2009

Q2 -

2009

Q3 -

2009

Q4 -

2009

Total

20% Staff

Increase

Total Volumes 100,452 105,475 108,111 113,009 117,529 121,055 127,107 130,285

Cumulative Volume Increases 5,023 2,637 4,897 4,520 3,526 6,053 3,178

% Increase 5.0% 2.5% 4.5% 4.0% 3.0% 5.0% 2.5%

Available Unused Capacity - Staff 22.00% 18.10% 16.05% 12.25% 8.74% 21.67% 17.75% 15.70%

Incremental Margin Opportunity - Staff -$ 15,470$ 8,122$ 15,083$ 13,923$ 9,837$ 16,887$ 8,866$

Incremental Margin Opportunity - Staff (per Item) 3.08$ 3.08$ 3.08$ 3.08$ 2.79$ 2.79$ 2.79$

Available Unused Capacity - Equipment 44.00% 41.20% 39.73% 37.00% 34.48% 25.02% 21.27% 19.30%

Incremental Margin Opportunity - Equipment -$ -$ -$ -$ -$ -$ -$ -$

Incremental Margin Opportunity - Equipment (per Item)

Total Incremental Margin Opportunity -$ 15,470$ 8,122$ 15,083$ 13,923$ 9,837$ 16,887$ 8,866$ 88,187$

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

20% Staff

Reduction

Total Volumes 100,452 95,429 93,044 90,252 85,740 84,882 82,760 81,105

Incremental Values (5,023) (2,386) (2,791) (4,513) (857) (2,122) (1,655)

% Decrease -5.0% -2.5% -3.0% -5.0% -1.0% -2.5% -2.0%

Available Unused Capacity - Staff 22.00% 25.90% 27.75% 29.92% 33.42% 17.61% 19.67% 21.28%

Incremental Margin Opportunity - Staff (per Item) -$ -$ -$ -$ -$ -$ -$ -$

40% Equip.

Reduction

Available Unused Capacity - Equipment 44.00% 46.80% 48.13% 49.69% 52.20% 32.40% 34.09% 35.41%

Incremental Margin Opportunity - Equipment (per Item) -$ -$ -$ -$ -$ -$ -$ -$

Total Fixed Cost Per Unit 2.17$ 2.29$ 2.34$ 2.42$ 2.54$ 2.06$ 2.11$ 2.15$

Total Unit Cost - Fully Absorbed 3.81$ 3.93$ 3.98$ 4.06$ 4.18$ 3.70$ 3.75$ 3.79$

Total Net Income Opportunity 211,747$ 190,254$ 180,045$ 168,100$ 148,789$ 188,743$ 179,662$ 172,579$

Efficiency Ratio 64.39% 71.67% 75.73% 81.11% 91.64% 57.79% 60.71% 63.21%

This slide is designed to quantify the total impact of right sizing resources, and therefore expenses

and unit costs, by proactively managing for permanent declines in customer volumes. There is a

redeployment of unnecessary staff and a reduction in unused equipment. The vast majority of the

financial impact is reflected in the fixed cost per item and the total fully absorbed unit cost. The

take down success is reflected in the Net Income per item and the Efficiency Ratio

improvements over time


Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

P&L Forecast Analysis

Take Down Strategy – Site 1

Phase 1 - Budgeting and Responsibility Center Reporting

Phase 2 - Expense Pooling and Allocations

Phase 3 – Organization/Line of Business Profitability

Phase 4 - Product and Customer Value Estimates

Phase 5 - CCM/Capacity-Based Costing

Phase 7 - Integration – Resource Mgmt. and Profitability Measurement

Business

Information

Value

Business Information Requirements

Financial Information

directly linked to

Business Events

and Customer

Interactions

Accounting

Integration

Performance Measurement Continuum

Phase 10 - Strategic Management

Phase 8 – Integrated and InformedPlanning and Forecasting

Phase 6 - Integration – Financial and Non-Financial Performance Metrics

Phase 9 – Strategic Business Analysis


M


CCInstitute – 2016


Appendix


Activity-Based Costing (ABC)

Also known as Capacity –Based Costing, activity-based costing quantifies (e.g., salaries, supplies, equipment, etc.) and links the

consumption of resources to the activities (e.g., process new account application) performed by financial institutions and then links those

activities to product cost drivers (e.g., fixed rate installment loan) and customers.

Study Group

A study group consists of one or more responsibility centers that perform similar functions, such as check processing, human resources,

controllers, etc. Each center with non-interest expenses is analyzed and mapped to a study group. The ABC Production Analyst is

responsible for developing an overview for each study group.

Study Period

A study period is an elapsed period of time during which an ABC study is performed including developing (or refreshing) unit times,

hourly rates, frequency of occurrence ratios, etc. The duration of a study period can vary based upon a number of factors such as the

quality of statistical data or the consistency of the unit times collected.

Resource Cost Driver (RCD)

A resource cost driver (RCD) is a unit that represents a logical grouping of activities performed within a processing center. An RCD may

represent a single activity or a combination of activities. All RCDs have a unique ID, a unique unit cost and can be counted in a

production application with a processing center ID attached.

Product Cost Driver (PCD)

A product cost driver is a unit that represents a logical grouping of RCDs to business events or product transactions. All PCDs have

unique identities and unit costs, and can be counted in product application systems. PCD volumes must be counted by responsibility

center of record (center that owns the account) and center of processing. For example, Branch A (center of processing) cashes a check

for a customer of Branch B (center of record). This is required to execute cost transfers in the profitability systems and to align costs to

accounts where their associated revenues are booked (e.g., open new account via call center).

Glossary of Terms


Cost Transfer

The Cost Transfer process creates cost information that is used for integrated profitability measurement and resource management. It

integrates unit cost information, distribution rules, source system statistical data and General Ledger financial information resulting in

costs that are aligned to products, customers and owning centers, and cost offsets aligned to processing centers. The most common cost

transfer technique is “Rate X Volume,” which is usage driven.

Frequency of Occurrence (FOC) Ratio

The frequency of occurrence ratio is developed during the ABC study period and equates to the number of activities for every 1 RCD

and/or the number of RCD’s for every 1 PCD. The unit cost and unit times that are developed during the study period are developed at the

activity level and only through this type of frequency analysis are RCD and PCD unit costs derived.

Equivalent Production Unit (EPU)

A time-weighted volume that is derived from a statistical volume (RCD) multiplied by an EPU factor to adjust for the unit time required to

process a single unit of volume. The purpose is to establish a common basis so that volumes can be aggregated and utilized to determine a

meaningful measure of throughput. As an example: 1 unit of RCD1 takes 30 seconds to process and 1 unit of RCD2 takes 15 seconds to

process. If RCD2 is used as the base unit it will be assigned an EPU factor of 1. Since RCD1 takes twice as long to process it will be

assigned an EPU factor of 2. If a processing center processes 100 units of RCD1 and 40 units of RCD2 in an hour their throughput equals

240 EPUs per hour. If RCD1 and RCD2 volumes were not converted to an EPU measure, they could not be aggregated in a meaningful

way to determine throughput per hour since their processing time per unit is different.

Glossary of Terms (continued)


Direct Product expenses are expenses incurred directly on behalf of a Product and are typically not related to specific customer transactions. When there is a material and direct relationship between expenses and a product ID such as Product Management expenses, these expenses should be reclassified as Direct Product Costs and added directly to the P & L as such. Other Direct Product treatments include:

Balance driven product expenses, such as FDIC Insurance Premiums, can be distributed based on applying the appropriate rate to product balances, and calculating the relevant distribution by product.

Direct Product expenses can also be service related expenditures. Examples include Fed ACH and Wire Transfer fees, Check Processing presentment fees, specific Outsourcing services, etc. The distribution can be calculated on per unit basis and distributed to product revenues by extending the unit costs by the actual product volumes. The unit rates could also be calculated based on product revenues.

Direct Product related expenses are reclassified as Direct Product Costs

Direct Product Costs (Details)


Sales and Marketing expenses are expenses incurred bringing in potential new customers or product revenues to the bank. Certain Sales and/or Marketing related expenses can be associated directly to a Product. An example might be a promotion campaign for Credit Cards. Certain other Sales and/or Marketing related expenses can be associated only with an Organizational Unit or Customer identity, such as Sales and Marketing type resources positioned and deployed specifically for that purpose. Sales and Marketing Expenses can be distributed employing one of two Management Accounting treatments as follows:

Product specific Sales and Marketing expenses that can be associated directly to a Product can be calculated on a per unit basis or as a markup on processing costs. The unit rates could also be calculated based on product revenues.

Sales and Marketing expenses that cannot be associated with a Product should be aligned at an Organizational Unit level in Product / Organization Profitability and at a Customer level in Customer Profitability, and presented as a non-product aligned cost component of the P & L.

S & M related expenses are reclassified as S & M costs.

Sales and Marketing Costs (Details)


Relationship Management (RM) expenses are expenses incurred in managing

existing customer relationships (vs. sales and marketing for new business). RM

expenses are not typically directly associated with revenues at a product level, but

rather at a customer or relationship level. The management accounting for the

RM expenses can be stratified, and based on a customer or relationship type

classification. A scale, such as 1 to 5 can be established with criteria to assign a

classification type based on relationship complexity and/or amount of time and

effort required. The RM expenses are pooled and distributed based on the total

number of customer relationships by classification. Relationship Management

expenses are then aligned at an Organizational Unit level in Product /

Organization Profitability and at a Customer level in Customer Profitability, and

presented as a non-product aligned cost component of the P & L.

Relationship Management Costs (Details)


The classification of expenses as fixed, variable and semi-variable defines how expenses will

behave over a relevant range of volume during a pre-defined time period (generally defined as at

least one year). If the concepts of relevant volume ranges and time are discarded, it can be

argued that all expenses are variable. In other words, at some volume level during some period

of time all expenses will increase (or decrease) as volume increases (or decreases).

The incorporation of volume ranges and time requires a “run/rise” analysis when defining

whether an expense is fixed, variable or semi-variable. This type of analysis defines the “run” as

the relevant range of volume over which the associated expense will be remaining stable. The

“rise” is the magnitude of the increase (or decrease) the expense will experience once the relevant

range of volume is surpassed. The following diagram illustrates “run” and “rise”:

Fixed/Variable/Semi-Variable Analysis (Details)

Volumes

Expenses

Run

Rise


Fixed expenses remain stable over the largest relevant volume range, which means that it takes

a significant or very material volume increase or decrease before these expenses are impacted.

This yields the longest run and highest rise on the run/rise step curve. While fixed expenses

stay flat as volume is increased within the relevant volume tolerance range, fixed unit costs

actually go down within the same tolerance range. The opposite is true when volume decreases

within the relevant volume tolerance range defined for the fixed classification. To illustrate,

let’s say an expense stays flat at $100 per year during years 1 and 2. Volume, on the other hand,

increases from 10 items to 20 items. The resulting per item unit costs will drop from $10 ($100

/10) to $5 ($100/20) since the fixed expense is assigned to a larger number of items. Examples

of fixed expenses or resources include Occupancy or large equipment devices, such as Reader-

Sorters in Check Processing or CPUs in IT.

Volumes

Expenses

Yr 2Yr 1

Fixed Analysis (Details)


Semi-variable expenses fit logically into a relevant volume tolerance range between the fixed

classification and the variable classification. This yields a shorter run and rise on the run/rise

step curve than fixed expenses, but more than the linear nature of variable expenses. While

these expenses don’t vary with volume increases or decreases directly, they do change on a

smaller scale and within a smaller defined relevant volume tolerance range than fixed expenses.

A good example of semi-variable expenses is salaries and benefits for personnel, where increases

or decreases can be one or very few FTEs at a time within a tighter relevant volume tolerance

range than fixed.

Semi-Variable Analysis (Details)

Volumes

Expenses

Yr 2Yr 1


Variable expenses vary in direct relation to each unit of volume. Expenses move directly with

volume increases (or decreases) in a linear fashion and therefore have no volume tolerance

ranges. The linear nature yields a line to define the relationship between expenses and volume

rather than a run/rise step curve. When expressed as a unit cost, the variable cost component

remains constant, regardless of the relevant volume. Examples include postage, EPN fees for

ACH transactions, certain supplies and per-item presentment fees to the Fed or Correspondent

Banks for check clearing.

Variable Analysis (Details)

Volumes

Expenses

Yr 2Yr 1


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