Activity-Based vs. Allocated Costs

Activity-based costing looks at the total cost of a transaction, from end to end. Says Tom Richards, a Meridien Research director who specializes in customer relationship management: "Activity-based costing and profitability help us understand which customer is which and therefore where we should focus our attention." Typically, the financial services industry has determined customer profitability through allocated costing, which divides costs by total transactions and therefore assigns a cost per transaction. "Allocated costing cannot account for excess resources; it cannot account for resources that the bank is carrying that aren't utilized because it doesn't know the difference." For a number of U.S. commercial banks, a more in-depth understanding of individual customer profitability would reveal as many as half are essentially unprofitable today. Long-term potential exists, however, particularly in the past decade's slow-but-sure expansion of America's burgeoning middle class, including a rise in the income of minority-headed households, where the Census Bureau statistics are broken out by women, African-Americans or Hispanics.