Reference no: EM13489264

You are a management accountant in the Automatic Teller Machine (ATM) division of Brown Bank Ltd. As part of the bank's review of its customer service strategy, which aims to grow the market penetration in the medium to lower income segment of the personal market aggressively, you have been requested to assist in a review of the ATM strategy.

While Brown Bank Ltd has an extensive branch infrastructure, ATMs have proved to be a cost effective way of servicing a large proportion of the basic banking requirements of its target market. It is therefore a strategic objective to move as many deposit and withdrawal transactions as possible out of the branch network to ATMs.

The bank makes use of two types of ATM devices:

• The XpressCash machine that currently costs R150 000 to purchase and allows customers to withdraw cash, make electronic transfers between accounts and obtain information such as account balances and abridged statements.

• The XpressTeller machine that currently costs R250 000 and allows customers to deposit cash (notes and cheques) in addition to all the functions performed by the XpressCash machine. Brown Bank Ltd has 1 200 of each of these machines in operation. Machine placements are a function of expected customer utilisation. A model developed some years ago to evaluate the viability of ATM sites has resulted in a generally accepted rule that an XpressCash machine needs a minimum of 4 000 "value transactions" per month while an XpressTeller machine needs a minimum of 6 000 "value transactions" per month to be economically viable.

For the purposes of the model, "value transactions" comprise deposit and cash withdrawal transactions only. The costs associated with processing electronic transfers and information request transactions are negligible and therefore customers are not charged for these services.

Other actual relevant information relating to ATMs:
XpressCash
machines
XpressTeller
machines
Average number of monthly transactions per ATM
Cash withdrawals
Deposits
Average number of monthly servicing visits per ATM
Average number of "value transactions" between
ATM servicing visits
7 500
n/a
20
375
12 000
500
50
250
The bank uses an activity-based costing system. Activity-based costs (ABC) are reviewed annually and are designed to include all relevant direct and indirect costs on a fully absorbed basis. Where appropriate, detailed time and motion studies are performed to assist in deriving the ABC rates. The current relevant ABC information is as follows:
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A Transaction costs
The relevant costs of processing a "value transaction", regardless of whether the transaction has been
initiated on an XpressTeller or XpressCash machine, are as follows:
Cost per transaction Deposit
R
Withdrawal
R
Verify content of deposit envelope 0,75
Compare amounts to transaction log 0,50
Clear transaction 0,25
Allocated network costs 0,75 0,75
Claims and queries 0,10
General machine operating and
maintenance costs
0,15
0,15
2,50 0,90
ATM servicing costs - still to be determined ? ?
Total cost per transaction ? ?
Additional information
1 While the costs of the ATM servicing visits have been analysed (see note B below), the allocation of such costs to deposit and withdrawal transactions has yet to be performed.

2 The above ABC rates exclude depreciation expenses. Both types of ATM machines have a fiveyear economic life with negligible residual value.
B ATM servicing costs
XpressCash
machines
R
XpressTeller
machines
R
Unlock safe doors
Disable machine (off-line)
Clear machine counters and print transaction log
Clear deposits and confirm to log
Replenish and service cash dispenser
Service printers
Check and replace printer ribbons
Enable machine (on-line)
Secure safe doors
7,50
3,50
3,50
40,00
28,00
21,50
2,50
6,00
7,50
3,50
3,50
37,00
30,00
28,00
20,00
2,50
6,00
Servicing cost per ATM per visit 112,50 138,00
Additional information
1 ATMs are serviced frequently in order to replenish cash, service printers and collect deposit envelopes.

1.1 In the case of XpressCash machines, the servicing frequency is a function of cash withdrawal transaction volumes. A centralised ATM monitoring system warns service personnel when a machine reaches a minimum level of cash holding, triggering a service visit.

1.2 XpressTeller machines require servicing at least once a day, as deposits have to be cleared on a daily basis. On average every XpressTeller machine has at least one deposit transaction per day.

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2 In order to service the ATMs, machines can be accessed in one of the following two alternative ways:

2.1 From inside a branch: These are serviced by a designated official (the ATM custodian), who is permanently stationed at the branch. The custodian also has other duties apart from servicing the ATMs. For security reasons, a branch-based custodian only services ATMs that can be accessed from inside the branch. About 60% of all devices are serviced in this manner.

2.2 From central departments located in all major cities: For these machines, a number of custodians are centrally employed, each with a set allocation of ATMs. Each custodian visits the allocated ATMs, accompanied by armed security guards. The routes used to travel to
the ATMs are continually varied.

The servicing costs in the table above make no distinction between the differences in the forms of machine access. Traveling costs are not allocated to the servicing activities as they are too varied to be apportioned with any degree of reliability.

Revenue generation

Brown Bank Ltd does not charge its customers for deposit transactions. The question of charging customers for deposit transactions has been raised on numerous occasions in the past. The decision historically has been not to charge fees for deposit transactions as none of Brown Bank Ltd's competitors do.

Cash withdrawal transactions are charged a minimum fee of R1,50 per transaction plus an additional cost which is determined on a sliding scale depending on the amount of cash withdrawn. The average revenue (before deducting transaction costs) per cash withdrawal transaction is currently R2,10. Consultants' review of ABC system

An outside firm of consultants was asked to assist in the review of the customer service strategy. Their report contained the following comment with regard to ATMs:
The placement of XpressTeller and XpressCash machines is not optimised. The break-even calculations that have been used to establish the existing minimum transaction volumes of 4 000 and 6 000 transactions per month for XpressCash and XpressTeller machines, respectively, are outdated.

The general manager responsible for the ATM network is of the opinion that the viability of the ATM delivery channel can be improved considerably and has proposed two alternatives:

• Eliminate the functionality for taking deposits at ATMs entirely as this will significantly reduce the costs associated with servicing ATMs. This will furthermore enable the bank to concentrate on the cheaper XpressCash machines and make a much wider ATM presence in the market affordable; or
• As the cost associated with providing the deposit functionality results in a very small volume of transactions being responsible for a large incremental cost, it would be appropriate to recover the cost of providing this service from customers who make use of it. Even a nominal fee of R2,50 per deposit transaction would significantly enhance the ability to place additional machines. In reply to the above suggestions the marketing general manager pointed out that research has indicated that customer behaviour in response to price increases in the past has shown a lack of sensitivity to the level of withdrawal fees. He expressed the view that an increase of 5% in the withdrawal transaction fees would be a significantly better alternative than to charge for deposit transactions.

REQUIRED

(a) Analyse the ATM servicing costs for withdrawals and deposits and recommend an allocation of these servicing costs to transaction costs for XpressCash and XpressTeller ATMs for each transaction type.

(b) Recalculate the break-even monthly "value transaction" volumes for XpressCash and XpressTeller machines given the revised transaction cost structures you have calculated in (a) above. You should assume for the purposes of this calculation that all ABC costs are
variable in nature.

(c) Highlight the issues, including those apparent from the results of your break-even analysis in (b), that Brown Bank Ltd should consider in the placement and rollout of further ATMs in pursuing its strategy of increasing market share.

(d) Outline the key benefits and pitfalls of using ABC costing in a service organisation such as Brown Bank Ltd.

(e) Evaluate the impact on profitability of increasing withdrawal transaction fees by 5% and charging a fee of R2,50 per deposit transaction.

(f) Critically evaluate and discuss the two alternative proposals by the general manager responsible for the ATM network to improve the viability of the ATM delivery channel.