Employee headcount. It can also be used in activity-based costing analysis to determine the causes of overhead, which can be used to minimize overhead costs. A firm's cost performance in all of its major discrete activities adds up to establish its relative cost position. Banks have been digitizing their products, services, and processes over the past decade—a shift that was expected to reduce operating costs. Growth For example, you may apply indirect overhead to direct labor hours as $50 dollars per hour. The difference between $280 (marginal cost) and $268 (average profit) is a lot smaller than the difference between $350 (average cost) and $268. The opportunity to improve process costs often is underappreciated in banks, in part because it involves taking a more manufacturing view of business processes. Highlights » Compared with other areas of asset and liability management (ALM), regulation is on the lighter side for funds transfer pricing (FTP), leaving banks a wide gambit of operation. and explaining their cause and effect relationship between the activity and cost driver. This is where cost drivers come in. Avenues for Optimizing Costs in the Banking Sector 5 Cost of Funds 5 Fund Distribution and Infrastructure Costs 7 Staffing Costs 7 IT Operations and Maintenance Costs 7 Marketing Expenses 7 Risk Management and Compliance Costs 7 How Banks can Achieve Optimum Cost Efficiency 10 Transform Business Processes 10 Right-staff and Right-source 11 Cost driver analysis means analyzing the various possible cost drivers for a particular type of cost or activity etc. Cost drivers can be fixed costs, such as in the case of set-up costs. These include expected growth, banking risks, earnings potential, and the cost of capital. A cost driver triggers a change in the cost of an activity.The concept is most commonly used to assign overhead costs to the number of produced units. 1. A cost driver rate is the amount of indirect or variable cost assigned to each unit of cost driver activity. Certain costs have a lot to do with how many employees you have, and how they will increase or decrease over time based on your headcount. It is advisable to use the most correlated cost driver for making any decisions relating to apportionment of cost, reduction of costs, etc. As you’ve learned, the most common bases for predetermined overhead are direct labor hours, direct labor dollars, or machine hours. 34 Describe and Identify Cost Drivers . A cost driver can be completely or partly or not at all under the control of a firm. According to Michael Porter , there are 10 major cost drivers : Additionally, the technology function should play a critical role in banks’ structural cost transformation efforts. Each of these costs is considered a cost driver because of the causal relationship between the base and the related costs: As the cost driver’s usage increases, the cost of overhead increases as well. What is a Cost Driver? Yet, from 2010 through 2016, banks in the US and the European Union saw costs increase by 8%, on average. First, this can help ensure technologies are used deliberately to change cost structures. Banks’ rising costs … Examples of cost drivers are as follows: Second, to cut costs, banks should reexamine the build-buy-outsource/offshore model for technology projects. Investors can use all of these valuation factors when evaluating the share price of a bank stock. Every cost in your business model can be correlated to one of five main cost-drivers, or factors that determine how much the cost is. Cost Driver Rates. 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