Activity Based Costing and Savings

Publication Date: Jul 2003
Published by: MicroBanking Bulletin
Document Type: Paper (Microsoft Word)

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Advantages of Activity Based Costing?

This article examines the potential for Activity Based Costing (ABC) to answer several key questions regarding the costs of savings for microfinance institutions (MFIs).

The paper states that ABC:

• Traces costs to specific activities undertaken by the MFI, such as opening a savings account or handling cash transactions;
• Attributes the cost of these activities to products using estimates of usage of these activities by the cost objects;
• Incorporates activities into the costing process, thereby providing information about how and why costs are incurred.

It describes how:

• Information can lead directly to specific adjustments in an MFI’s activities in order to streamline costs;
• SafeSave in Bangladesh used ABC to discover that their cost of collecting delinquent payments was high and made appropriate changes to increase fee yield;
• ABC offers a means of evaluating the role of savings within an institution by answering important questions about cost structure, process and viability.

The paper illustrates, with examples, the manner in which ABC can help answer key questions regarding existing savings products and pilots, such as:

• Is a savings product viable?
• What activities contribute to the cost of savings?
• How can an institution weigh costs against its institutional priorities?

It concludes by making a list of steps involved in ABC, and comparing these with normal cost allocation steps.