More than 74% of the United States work force for example is employed on this sector (Li H. & Smith L.2001).With a dramatic fall in labour cost, the cost of processing information, overheads has become far more important in the present age of advanced manufacturing technology (AMT) with direct labour representing 5%. Thus, it therefore now appears difficult to justify the use of direct labour or direct material as the basis for absorbing overheads.ABC was developed to overcome some of the major problems of the traditional cost accounting. The 80s witnessed an influx of research in to this concept. Activity based costing involves the identification of the factors which cause the costs of an organisations major activities (Lewis; J.R., 1993). In this regard overhead are charged on the basis of their usage of factor causing the overhead.
In the UK and the US, information and manufacturing technology are widely used in both manufacturing and the service sector, with both sectors experiencing different degree of the usage (Palmer, A.2000). The four main characteristics inherent to services provide an answer to the main problem of ABC in the service industry.
There is a strong possibility that the same enquiry would be answered slightly differently by different people.
1.2 Activity based costing and the service industry in the UK (Banking Sector).
By the end of the 1980s, ABC became the focal point within the realms of academic researchers, consultants and managers as a means of overcoming the disadvantages of traditional cost allocation methods. Cost accounting was limited to it s usage of one volume sensitive driver (Cooper & Kaplan 1991). By 1990 initial followers of ABC in the manufacturing sector were able to reduce cost, identify opportunities for improvement and determine a more profitable product mix (Cooper & Kaplan 1991). Thus, the concept gradually gain grounds and became popular in the manufacturing sector.
In the service sector, the adoption of ABC has been relatively slow, and the concept was rarely used apart from the health and banking sector. A recent study however, by Schultz & Rostocki (2004) concluded that, the rate of adoption of ABC in service and manufacturing industry was now similar.
An essential part of managing and ensuring the long term competitiveness of banking institutions in the United Kingdom will be to configure, manage the service deliveries and their chain of distribution processes. The financial sector in the UK, like in any other country is characterised with the following characteristic
Banking institutions and other financial houses are price takers. This is so because the prevailing market price has to be accepted.
Large number of institutions offering the same services with none of these institutions being able to influence price. However, their actions are not negligible. As a move by institution A will trigger a whole chain of event, in the form of competitive service