Modeling the Cost of Banking Services Using the Activity-Based Costing Method and System Dynamics

Abstract

Introduction: Meeting the needs of shareholders and investors, generating profit and income, and covering current expenses are the primary objectives of any economic entity. Banks and financial institutions are no exception, and calculating and understanding costs is one of their most critical activities. In today's competitive environment, organizations must adopt strategies that enhance the quality of services and products while reducing their costs. To achieve this, having tools for analyzing related costs and formulating cost policies for services and products is essential. Companies that previously used traditional costing systems have had to transition to newer, more dynamic, and flexible costing systems that account for various costs, including products, activities, distribution channels, and customers, reflecting the complexity of modern business and production processes. This article presents a model for calculating the cost of banking services using activity-based costing. Methods: The research described in this article is developmental-applied. Given the various factors affecting costs and their nonlinear and cyclical effects, which render banks as complex systems, the methodology of system dynamics was used for modeling. This research is descriptive in terms of data collection methods, which included library studies reviewing sources and references on activity-based costing and systems dynamics principles, simulations concerning the cost of banking services using systems dynamics, and other sources such as books, magazines, articles, and theses from reputable libraries, information search centers, and credible websites. Results and discussion: In this study, detailed models for two products, mudarabah and deposits, were developed. Cause-and-effect diagrams and their rates and statuses were drawn, and after testing the models, proposed scenarios were designed and compared. Four scenarios were suggested to improve system behavior: improving productivity, adjusting human resources, re-engineering business processes, and automating processes. To select the best policy—one that achieves the most significant cost reduction over a similar period—all policies were compared. The study's findings indicate that the policy of mechanization and process re-engineering is the most effective. Therefore, the bank's general policy for reducing product costs can be a combination of re-engineering and mechanizing processes. Conclusions: Considering the dynamic business environment and banks as complex systems where many variables influence each other, the systems dynamics approach was employed to model the cost of banking services. The simulation results show that a combination of process re-engineering and automation can serve as an effective policy for reducing the cost of banking services.

Keywords

• cost of banking services
• activity-based costing
• system dynamics
• process re-engineering
• automation of processes