The Bank Of Al Ain Assignment 2 The Bank of Al Ain has operated for many years under the assumption that profitability could be increased by increasing dirham volumes. Historically, BAAs management efforts had been directed towards increasing total dirham sales by offering personal loans and credit cards and the total of dirhams held by customers in their account balances. In recent years, however, BAAs profits have been declining. Increased competition, particularly from Mortgage Lenders, Credit Unions and Building Societies, was the cause of the difficulties. Also, BAAs managers had no idea what their products were costing. Upon reflection, they realized that they had often made decisions to offer a new product, which promised to increase dirham balances, without any consideration of the actual cost to provide the service. There are currently five products that the bank offers Chequing Accounts, Personal Loans, Savings accounts, Mastercard and Gold Mastercard. In 2018, the total costs for the bank to provide the five services was 5,075,882 AED. Management had determined that the direct costs to all products was 1,280,727. The amount of direct costs for each product is shown in Appendix 1. The total indirect costs of 3,797,155 AED was incurred last year in support of all products. To determine the total cost for each product the bank allocated the indirect costs based on the direct costs that is 3,797,155/1,280,727 for an allocated overhead rate of 2.96 AED per direct AED. This traditional approach yielded the results as shown in Appendix 1. Managers at the bank are not certain that the way they costed the products is a true reflection of the products contribution to profit. They have been advised that there is an alternative method of product costing known as Activity Based Costing. After some discussion, the bank decided to hire an Activity Based Costing consultant to compute the costs of the banks products. You, (the expert in Activity Based Costing) began by analyzing the total indirect costs (Appendix 2) and have identified five cost pools ATM transactions, Computer transactions. Customer transactions, Administration and Over the Counter transactions cost pools. Based on discussions and interviews with the banks staff and a review of the banks annual data you have determined the percentage of each cost that could be associated with the five cost pools. This shown in Appendix 2. You have also identified the type of cost driver that would most likely drive the cost in each pool. You then estimated the total number of times the cost driver activity would be performed in a year and also broke that number down for each cost pool. (Appendix 3). With the information gathered you are ready to determine the total cost to provide each of the Banks products. Required: Develop an Activity Based Costing model for the Bank of Al Ain. PART 2 Analysis of the Chequing account profitability In view of the new cost information, Dana Hussein, the General Manager, wants to know whether a decision made two years ago to modify the banks cheque account product was sound or not. At that time the service charge was eliminated for accounts that had an average balance greater than 1,000. Based on increases in the total dollars in cheque accounts, Dana felt very pleased about the new product at the time. This cheque account product is described as follows: Chequing account balances greater than 500 earn interest of 2% per year, and A service charge of 5% per month is charged for balances less than 1,000. The bank earns 4% on cheque account deposits. Fifty percent of the accounts are less than 500 and have an average balance of 400 per account. Ten percent of the accounts are between 500 and 1,000 and average 750 per account Twenty-five percent of the accounts are between 1,000 and 2,767. The average balance is 2,000. The remaining accounts carry a balance greater than 2,767. The average balance for these accounts is 5,000. Research indicates that the 2,000 category was by far the greatest contributor to the increase volume when the cheque account product was modified two years ago. Required 1. Evaluate the cost and profitability of the cheque account product. Are all accounts profitable? Identify any products that could be dropped/cancelled. Compute the average annual profitability per account for the four categories of accounts described. Make recommendations to increase the profitability of the cheque account product. 2. Write a management report to the Bank of Al Ains senior Management outlining the Activity Based Costing model that you developed for the Bank and how you used the results to analyse the profitability of the chequing account.

Standard Costs Overhead Costs Direct Costs Overhead Rate Appendix 1 Traditional Costing of the Bank's Products Gold Cheques A/C Personal Loans Savings A/C Mastercard d Masters Total Direct Costs 466,242 480,000 170,700 152.866 10,919 1,280,727 3,795,155 Overhead costs assigned 1,381,606 1,422,375 505,832 452,985 32,356 3,795,155 1,280,727 Total Costs 1,847,848 1,902,375 676,532 605,851 43,275 5,075,882 2.96 Per direct AED Number of Accounts 45,000 20,000 38,000 35,000 12,000 150,000 Cost per Product AED 41 AED 95 AED 18 AED 17 AED 4 AED 34 Appendix 2 Indirect Costs Pools EXPENSES ATM Computer Administration Total Customer % % 10 Counter % 30 60 10 15 15 100 35 100 25 100 100 Computer Stall Administration Staff Cleaning Auditing Statement Staionary ATM Stationary Stationary General Electricity ATM Phonelines Telephone Insurance Postage Depreciation Rent/Leases AMOUNT AED 375,000 AED 950,000 AED 300,000 AED 384,273 AED 38,000 AED 12,000 AED 10,882 AED 240,000 AED 50,000 AED 34,000 AED 720,000 AED 36,000 AED 280,000 AED 365,000 10 15 30 10 60 30 100 100 100 100 100 100 100 100 100 100 100 100 100 100 40 5 100 60 10 25 5 10 25 20 5 10 30 30 25 25 5 40 25 5 5 15 30 35 35 25 AED 3,795,155 Appendix 3 Number of times the Activity was performed Cost Drivers Gold Number of Customer accounts Number of Counter transactions Number of Customer Inquiries Number of Computer Transactions Number of ATM Transactions Total 150,000 90,580 688,000 2,581,000 330,000 Cheques A/C 45,000 66,000 366,000 2,000,000 180,000 Personal Loans 20,000 500 60,000 200,000 8,000 Savings A/C 38,000 24,000 134,000 1,000 82,000 Mastercard 35,000 30 120,000 300,000 38,000 Matercard 12,000 50 8,000 80,000 22,000