Why you should be interested in cost accounting.

AuthorCoffey, John J.
PositionDatabase Marketing

Banks need to assign items of income and expenses to branches and departments, products and transactions, as well as to customers. This assignment is calico "cost accounting." There are several approaches driving this:

  1. Organizational profitability. This involves identifying, classifying and assigning the income and expenses to each functional unit--typically branches and departments. While many banks have broken out their noninterest income and expenses by functional unit, a bank, to complete this process, also needs to allocate funds transfer pricing as well as provision for loan losses to its branches and departments.

  2. Product profitability. This involves identifying and assigning the income and expenses of each functional unit to the products with which each one works. It has four components:

    * Net interest income. This is by far the largest driver of profitability. It is the difference between the interest income that ks generated by loans and investments and the interest expense that is paid on deposits and borrowed funds. There are various means of calculating this at the product level, but the most accurate method is called historical funds transfer pricing (HFTP). This method assigns a funds transfer rote to each term-loan and term-deposit as of the date the account was opened.

    * Noninterest income Your bank probably has detailed noninterest income that breaks out fees generated by your products. However, these fees are not typically organized by product. For instance, your NSF fees need to be assigned to only the checking accounts that generated those fees. Using transactions that give rise to these fees provides the necessary variable...

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