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RESEARCH SURVEY ON USE OF OPPORTUNITY COST IN PROJECT EVALUATION AT SELECTED COMMERCIAL BANKS IN THE KINGDOM OF BAHRAIN A RESEARCH PAPER PRESENTED TO THE SCIENTIFIC RESEARCH AND DEVELOPMENT OFFICE AMA INTERNATIONAL UNIVERSITY KINGDOM OF BAHRAIN BY MUBEEN FATIMA August, 2012 ABSTRACT Accounting and Economics work for two different purposes. Today managerial decision making uses economics, as well as accounting concepts, methods & practices of scrutiny given by decision sciences.

Literature shows that there are four basic tools and techniques of decision making used by economists, these are; augmentation, statistical valuation, projecting, numerical study, and game theory, most of which are equally procedural in nature they helps us to gather the idea of how decisions are made in economics. Since resources are limited relative to wants, the usage of resources in one way hinders their use in other means.

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This implies the cost of opportunity, which is lost, is actually the profit of whose output is given up, this indicates that, lost time, satisfaction or any other benefit that provides usefulness should also be taken as opportunity cost. Opportunity cost in literature is the cost referred as the next-best choice available to a rational consumer who has to select between a number of mutually distinct projects. It is, thus the key concept in economics. It has been illustrated as conveying “the basic relationship between deficiency and choice. Yet its relation to the economic profit is seldom discussed.

CHAPTER 1 INTRODUCTION Background of the Study Prior research work provides us the idea that opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. Being treated as a cost, opportunity cost had always been considered vital in calculation of the true cost of a project & has always effected a management accountant decision However the modern economists, particularly the Austrian school of thought treats opportunity cost as something that has neither existence nor has any importance in decision making.

Though the field of economics gave birth to the concept of opportunity cost, the awareness about assessing the second best alternate is now taken over by management accounting, today this concept is being taught in academic graduate courses of economics however; in practice, the economists today emphasize on mathematical techniques in decision making there by ignoring various conceptual factors like opportunity costs and worth of projects being missed. Evaluating opportunity costs is important to find out the true cost of any project under consideration.

If the financial worth of second best alternative of an investment project is low, then, overlooking that opportunity costs, gives an impression that benefits of next best alternative, cost practically nothing. The invisible opportunity costs then become one of the hidden costs of that particular project. Mr. John Stuart Mill, a British philosopher and a civil servant was the first man to give the idea of Opportunity Cost in his economic theory of free markets as well as explaining his concept of liberty and an individual and freedom of choice.

Opportunity costs are thought of as the retrospective costs that cannot be recovered in the field of Economics and Corporate decision making. Opportunity costs are occasionally compared with “potential costs” which obviously are the future costs that may or may not incurr depending upon the decision taken. Both past aswell as prospective costs can be either static or dynamic Austrian school of thought pay attention to the concept of opportunity costs on both sides of the market links very deeply to the importance of finance and economic profit estimation in their model of the market process.

They argue that the money of an investor having opportunity cost means that his money has many uses but the uses are not unlimited. With the assumption of a market with seamlessly exclusive capital goods, those goods will have no opportunity cost as every exclusive good has only one yield. In a market of seamlessly standardized capital goods, they have no opportunity cost because all of the goods are same in terms of use and benefit thus can be used equally well for each yield. In practice the calculation of project cost by an accountant is different from that of an economist.

This variance is not grounded in different fundamentals on what to assess or how, but lies in the basic difference in understanding-of costs and profits. However if opportunity costs are not ignored by the economist then while calculating the GDP of Country the economist must also consider the large scale pearl diving industry in certain areas of Bahrain. Statement of the Problem The study aims to discuss the relevance of the concept of Opportunity Cost in project evaluation procedure adopted by commercial banks in Kingdom of Bahrain.

The opportunity cost has different importance in the opinion of economists and accounts professionals and therefore the use of this concept in project costing . This research will attempt to find out importance of Opportunity cost while considering an investment proposal. Specifically it sought to answer the succeeding questions. 1. What is the status of the opportunity cost in project evaluation at Selected Commercial banks in Kingdom of Bahrain? 2. What are the banking operations where opportunity cost is deemed important by Commercial Banks in Kingdom of Bahrain? 3.

What are the factors effecting the importance of opportunity cost faced by Commercial Banks in Kigdom of Bahrain? 4. What are the problems encountered in application of Opportunity cost concept by the Bankers while evaluating a project? Assumption The study assumed that the respondents are honest in answering all the questionnaire Significance of the Study The study is beneficial to the following: Decision Makers: the study will help the decision makers in Commercial Banking industry to find the true cost of a project and therefore finding the true profit or loss generated by it

Future Researches: the study will help in relating the two concepts i. e, opportunity cost and Project Costing by using the quantitative methodology of research. It will further help in decision making and project evaluation for the accounts Managers and Economists. Scope and Limitation The aim of this study is to deliberate the significance of the concept of Opportunity Cost in project evaluation procedure adopted by Commercial banks in Kingdom of Bahrain. The opportunity cost has different importance in the pinion of economists and accounts professionals and therefore the use of this concept in project costing . The study includes Bank Officers at selected Commercial Banks working in Kingdom of Bahrain. The target population is Executives and managers (top and middle level ) who are directly involved in decision making This research focused on finding out importance of Opportunity cost while considering an investment proposalstudy is conducted in Commercial Banks of Bahrain, the responses therefore reflect the most important sector of Bahrain economy. The study is conducted in the natural settings i. during the business hours and responses are taken while the samples are on their work places, therefore 100 percent reliability of responses is not possible due to various un controllable distractions. The period covered by this study is January till December 2012. All the data is collected in Bahrain and responses therefore will represent the local population. Definition of Terms Opportunity Cost (OC) The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action (John Stuart Mil)

Economic Value Added (EVA) A measure of a company’s financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (Stern Stewart) EVA is also referred to as “economic profit”. CHAPTER 2 Review of Related Literature and Studies Foreign Literature Mankiw ( 2000) from Harvard University USA and the author of” Principles of Microeconomics” explained here that Economic profits are calculated by using both explicit as well as implicit costs however Accounting profits are calculated using only explicit costs.

Therefore , accounting profits are higher than economic profits Neale( 2001) have found that due to forgoing opportunity costs, delayed decisions can be seen as option between certain loss and the risk of greater or zero loss. Chung, (2005)from Princeton University have conclude in their work “The Opportunity Cost of Admission Preferences at Elite Universities” that economic cost of a decision relies on the cost of the project that is selected and also the profits that the second best alternative project may had given if selected.

This perspective of scarcity of resource leads to the dimension of opportunity cost. Hawkins et. al ( 2008 ) in their article “ Cost and benefit Analysis” are of the view that the “next best alternative” is an important concept in cost and benefit analysis (CBA). The benefits gone by not implementing the second favorite choice are known as opportunity costs. Opportunity costs are relevant in calculating costs of a project. Opportunity costs help in economic scrutiny. In financial investigation market values are used as the market price for man power has the market value same as a person’s wage

The Indian scholars are also of the view that Opportunity Cost of Idle Capacity Zero, supporting the work of (Coase 1938). The researchers of M2 Presswire publications have found that opportunity cost of ignoring the markets, have disastrous results as eBay failed to beat yahoo in this regard. Buchanan (1969 ) says that it is just to bind the term opportunity cost to this idea that only decision changing cost represents an analysis of given up “opportunities. ” and to invent other vivid terms to mention ecision altering cost in a logic of choice and to the objective cost of the predictive theory. Hebert (1985 ) gave a very comprehensive idea about the market value. Yet his belief of fundamental value has quite possibly been a red-herring in the antiquity of economic analysis, according to him market value is sensitive to elements other than “on record costs” few of them are independent. Horwitz (2010) identifies the partiality of opportunity costs on either sides of the market connections so well to the importance of capital and economic calculation in the Austrian theory of the market process.

Aherns (2008) says that management accountants’ most prior duty is to relate the available reserves with the future dealings of the business. Whereas this process is rather simpler in economics to determine which of the available alternates is going to pay off highest future cash flows Kearing et. al (2005) are of the view that multiple allocation of capital funds , commercial analysis and manufacturer side opportunity costs are all the unified part of the Austrian ideology. Woodbery (2000) says that the true opportunity cost of using the additional capability is the change in the worth of the firm’s choices.

By emphasizing on the state-contingent nature of best decisions, his framework distinguishes that the cost is not always identical to the present value of explicit venture or manufacturing decisions. Taylor (2005) suggests that many proficient economists may not completely comprehend opportunity cost. Frank (2005) said that comparative prices helps in finding out the comparative worth of ordained opportunities. His hypothesis is based on an indepth study of consumer indifferense curves. According to the author the economic cost is virtually the opportunity cost.

Samuelson( 2009) puts stress on a close link between opportunity costs and cost of available resources. Economic cost consist of not only the noticeable monetary purchases or on record financial transactions but also more indirect opportunity costs, such as the profits on the manpower supplied by the owner of a resource company and other returns of similar nature. The factors mentioned are firmly controlled by the quotations available and demand in competitive markets. Henderson (2011), said that by “opportunity cost” of a resource, the economist mean the financial worth of the second favourite utilization of the available resource.

Opportunity costs as in (Lawrance Gitman 2000) are those profits or returns that could be obtained from best alternative use of an a retained asset. So opportunity cost is the cash that shall not be obtained because of engaging an asset in project under consideration. Due to this, opportunity cost should be included as an expense or loss while doing the project evaluation. Raftery et. al(1999) writes that consideration of opportunity cost is essential for the economist’s while determining the costs. As resources are less compared to the needs, so application of resources in one profitable project hinders their use in other profitable pojects

Bauman (2011) says that opportunity cost is the second best choice, he said that it is difficult to clearly frame the opportunity cost as identifying second best choices is a knotty matter. According to him the concept of opportunity cost can only be clearly defined in academic problems as in practical field a project “price to worth” calculations are complex Kimberly (1998) said that computerized accounting systems today solely emphasize on cash in and out of the firm, this eventually attracts clever dealers to dump credits that produce a big accounting profits.

By the introduction of opportunity cost in persuit of calculating the true costs enforces further control on reporting process. Such concept implication helps the auditors to identify the fake earnings shown in the financial statements made in the year end. Recklies (2001) argues that from economic perspective the cost include all those expenditures that are crucial for perpetual succession of a business as as going concern, it also consist of the reimbursement for owners in shape of profit so that they maintain their investment portfolio within the firm.

Marshall (2009) identifies the income as a total of personal skills, capital funds invested, assets possessed and the reputation of the business. Leeson (2008) has explained in his research work the uses if the concept of uncertainty and derives from this concept of the value of information and how it can be calculated. And emphasized upon the role of management accounting in the decision-making Berntell (2005) have focused on the optimum utilization of scarce resources like water to give maximum utility by reducing various costs and losses. For which economist must make a clear cut cost and benefit analysis

Dmytrenko (1997 )has elaborated in his price to value investigation the opportunity cost of increased automation in a firm via changing the human resource by computers and equipment Caplan (2003) says that the term opportunity cost is sometimes confusing. Sometimes it is used to submit to the profit foregone from the next best option, and Often it is used to mention the difference in benefit of decision made and the benift of second favourite decision that is given up Fraker( 2006) suggests that EVA is a unique financial performance determining tool .

Unlike other financial efficiency ratios, it gives a different outlook of a Bank’s financial health by including the cost of Capital employeed in the business and is more of concern to its shareholders. Shcherbakov( 2012) explains that implication of the concept of EVA is an enhanced measuring technique to find out the effect of internationalization on the commercial performance of any business King (2009) explained that Accountancy and Economics work for different purposes. He explained the multi-national corporation scenarios and compared the use of economic profits with that of accounting profits

Local Literature (Hasan Al-Basteki 1998) worked on the use of modern Accounting techniques in the decision making in Bahrain and he concluded that not just the western world is implementing the new costing techniques but the middle east is also adopting the modern techniques Synthesis of the Literature Review The synthesis of the literature reviewed enlightens few similarities and differences with this research studies . The main similarities found in the literature are as follows i) Opportunity cost has been used in different parts of the world particularly in Banks and Construction industry ii) The No. f alternatives available influence the Opportunity Cost iii) Economic factors like inflation has effect on the project evaluation by the Banks . A closer review of these research papers show that Economists belonging to the Austrian school of thoughts are of the view that i) Opprtunity cost is not as important as Economic Profits are for economic decision making ii) Scarcity of resource is a factor which effects the decision makers approach The literature explains the significance of opportunity cost in framing the actual picture of the financial position of a company, same is the case evaluation of an investment project.

Opportunity cost helps identifying the true cost of a project Opportunity cost is important in the determining the accurate financial position, hence in this research the relationship between the factors effecting opportunity cost and decision making is under study Theoretical Frame Work The study tends to explore the Opportunity cost and EVA for a given project in order to understand their relationship with each other. Very little literature is available in Economics and Accounting to determine the true profits of an organization(Denise Woodbery).

The idea behind this research is to establish the nature of relationship between Economic value added that reflects the monetory importance of a given project or in other words the economic profit and that of Opportunity Cost that reflects the accounting profit of the same project. Conceptual Frame Work The idea behind this research is to find out how effective is Opportunity cost in project evaluation perceived by the Bankers in the Kingdom of Bahrain.

The data is collected and analysed to understand what status opportunity cost concept holds in project financial evaluation and its relative efficiency perceived by the bankers at selected commercial banks of Kingdom of Bahrain The study tends to explore the two concepts for a given project in order to understand their relationship with each other. The Opportunity cost as discussed in literature like any other relevant cost adds to the overall project expenditure (Ferraro ; Laura O Taylor)

Opportunity cost effects the total Cost of a Project , any increase in Opportunity cost means increase I nthe total cost of the project The higher the Opportunity Cost of a Project is the Smaller will be the net profit of it However the higher the net profit of the project is Opportunity Cost of the Project will be lower. Financial decision making tends to go for a project with smaller cost and hence inclusion of opportunity cost will alter the project cost and alter the decision ultimately.

Various factors like availability of alternatives (James Raftery 1999), Scarcity of resources (Robert Frank 2005), Economic factors like trade cycle recession, inflation (Peter T leeson 2008) effects the use of opportunity cost in Project costing CHAPTER 3 RESEARCH METHODOLOGY This chapter presents the research design and methodology, sampling design, respondents of the study, research instrument, validity and reliability of the instrument, data gathering procedures, and statistical treatment of the gathered data.

Research Design This study used the descriptive type of research which involves assembling data which provide knowledge about the variables and then systematically tabularizing, portraying, and defining the data gathered (Glass ; Hopkins, 1984). To get evidence concerning the current standing of the incidences to describe what happens in terms of change in value of the variables or settings in a state of research.. Opportunity Cost reflects the monetary importance of the next best alternative project.

The study helps to find out how effectively this concept is incorporated in project evaluation procedure Research Design This is a descriptive research in which the population from which data is collected are the Management Personals from different business concerns established and working in Kingdom of Bahrain, directly or indirectly associated with the decision making and investment evaluation . Respondents of the Study The target population includes the working class particularly the managers , assistant managers and executives who work in Bahrain and their field esponsibility include Investment Analysis ,Project evaluation and decision making of similar nature. Sample Size The sample size is 50 and the response rate is well above the international standard of quantitative research required to validate the result of the study Sampling Design There are many methods of sampling; however for this study Random Sampling is used that is from the target population a sample of 100 is collected on random basis.

The study uses random sampling for convenience and to avoid bias of respondents that work in one organization have one opinion(as in cluster sampling) Research Instrument The instrument used in this study is Questionnaire, the content of the questionnaire that consist of 20 queries the first five of which are about the general information of the respondent, remaining queries for which the respondents will answer on a Likert Scale. All the queries will help to find the relation between the two variables Opportunity Cost (IV) and Decision Making (DV)

Part I: Provide demographics of the respondents in terms of age , gender, educational attainment, work experience in years Part II: Provide the data about the respondents opinion on various factors that influence their decision while making financial evaluation of a project. The answers to these questions will be given on a five point rating scale. 5. Strongly Agree 4. Agree 3. Moderately Agree 2. Disagree 1. Strongly Disagree Validity of the Instrument

The validity of instrument is carefully checked by the research committee that includes research professors, statisticians and advisors. The recommendations were incorporated. The justification of this validation was to avoid vague items and bias statements which have been correctly achieved. Reliability of the Instrument The questionnaire is pre-tested to test the reliability of it, with a small group of individualsworking in different companies in the Kingdom of Bahrain, in order to check their understanding of the questions.

Data collection Method Questionnaire copies were distributed among bank officers in different branches of distinct commercial banks in various regions of Kingdom of Bahrain. The target respondents are expected to be acquainted with the subject and questions, included in the questionnaire. There are other methods of data collection like documentary analysis and interview however for this study survey methodology is opted. A copy of questionnaire is provided in the appendix Statistical Treatment of the Data

There are many choices of appropriate statistical methods however Correlation Coefficient as statistical method is used, so to find out the relation between the two variables. The survey form was used the Likert five point scale for the respondents to choose from as follows: [pic] Very few enterprises are using opportunity cost for just one reason. It is clearly evident that Opportunity cost related information is being used to accurately manage wide range of activities across a banking organization. Activities influenced by Opportunity cost calculation Activities |% of respondents | |Product Costs ; Profitability |65 | |Performance Measurement |47 | |Shared Service Costing |41 | |Planning ; Budgeting |40 | |Customer costing |38 | |Customer/Channel Costs ; Profitability |38 | |Transfer pricing |25 | |Outcome / Output based management |25 | Expectedly, opportunity cost is used for product costing by approximately two by three of those respondants working in banking sector. It’s precision over traditional costing methods is borne out later in the survey with 87% finding that their Opportunity Cost product costs differed substantially from traditional costing methods, leading around 50% to reprice their products as a result!

Validating the views expressed by Kaplan ; Norton in their latest book ‘Strategy Maps: Converting Intangible Assets into Tangible Outcomes’, which lays emphesisis on the importance of using Opportunity Cos to support a Balance Scorecard, nearly half of all respondents are using their Opportunity Cost data to support their Performance Management The use of Opportunity Cost to support Shared Services costing has increased in popularity over the last few years. Now that internal services are represent up to 30% of an organisation’s costs, it has become imperative to accurately reflect how those services are consumed by business units. Over 40% of respondents are using opportunity cost to support Shared Service costing, enabling them to understand who and what is driving consumption of their internal services, and thereby increasing the effectiveness of their focus an core business. These trends are repeated by those who do not yet use opportunity cost, but are planning to. They want to use opportunity cost to support Initiative |% of respondents planning to use OPPORTUNITY COST | |Product Costing |55 | |Planning ; Budgeting |36 | |Customer costing |27 | |Process/Continuous Improvement |27 | The most noticeable difference is that only 18% are planning to use the information to support Performance Measurement. This could well be because the ease of which opportunity cost lends itself to Performance Measurement is not evident until an opportunity cost is up and running.

Alternatively, the respondents may be looking to introduce opportunity cost to solve a pressing business requirement, and the links between Opportunity Cost and performance metrics are not immediately apparent. Opportunity Cost for Planning The emphasis of Bankers has moved from historical costs to future costs. An enormous 94% of those questioned are now using opportunity cost, or plan to use, opportunity costs for developmental drives. Opportunity cost Planners are looking at all aspects of their organisations in order to identify improvement opportunities. Some 60% are looking to identify process improvements, with 55% looking at activity level improvements via resource planning, and 49% looking to affect strategy formulation. However, only 13% are questioning their organisation’s process design in a fundamental way.

Consistent with historic uses of opportunity Cost planning data is being used to support a variety of initiatives, although there is a surprising focus on opportunity cost for goal setting. |Initiative |% of OPPORTUNITY COST Planners | |Shared Service Costing |51 | |Product Costing |49 | |Defining team/dept goals |27 | |Defining organisational goals |13 | Product/Service Costing and Customer Profitability

By using cause and effect tracing rather than allocations, opportunity cost better reflects the value chain of how organisations consume costs and provides more accurate product, service and customer costings than achieved using traditional costing techniques. The difference in opportunity cost product costs to absorption or other allocation based costings can be dramatic. The survey shows that 87% of practitioners found that their product and service costs differed from traditional costings markedly. The majority had an average variation of between 5 and 10%, which can be dramatic at a gross or net margin level. However, a surprising number of respondents (11%) experienced variations of over 100%! |Average variation |% |Maximum variation % | |0 |13 |; 10% |25 | |1-5% |15 |10-25% |17 | |5-10% |26 |25-50% |25 | |10-15% |13 |50-75% |14 | |15-20% |10 |75-100% |8 | |; 20% |23 |; 100% |11 | Cost Reduction and Process Improvement

That ABC can improve your bottom line is beyond doubt, with potential cost savings amounting to 25% of cost bases being identified. Some organisations are yet to find where they can reduce their costs, but it is worth noting that over 70% of those who have not identified cost savings have less than 100 activities in their model. Whilst it is important to prevent ABC models become too large and unmanageable (primarily because they can induce analysis paralysis), it is essential that a reasonable level of detail is available, so that there is sufficient information on which to make cost reducing or revenue enhancing decisions. After all, profit outcomes are the result of process design and activity workflow… Maximum potential cost saving as a % of cost base |% | |0% |18 | |1-5% |21 | |5-10% |33 | |10-15% |8 | |15-20% |13 | |20-25% |2 | |;25% |5 | A variety of methods are being used to help organisations translate their ABC data into real cost reductions. Cost driver analysis is the most frequently used method for aiding cost reduction and/or process redesign, with 67% of organisations using this technique. Process mapping and benchmarking are also popular, as is repricing of products and/or services, and analysis of the value that an activity adds to an organisation. Top techniques used to aid cost reduction |% | |Cost driver analysis |67 | |Process mapping ; redesign |52 | |Benchmarking |52 | |Repricing |50 | |Value adding analysis |42 | |Product rationalisation |38 | |Value chain analysis |32 | Conclusions ABC can, and does, add value to organisations. 96% of respondents have found the experience to be beneficial to their organisations, and 98% are expecting their implementations to deliver even more positive returns on their investment in the future Level of benefit delivered by ABC |% achieved |% future | |Adverse impact |4 |2 | |Negligible benefit |22 |13 | |Moderate benefit |54 |60 | |Substantial benefit |20 |25 | Regardless of the benefit analysis above, respondents recommend the use of ABC unanimously! In particular, practitioners recommend using ABC for product costing and cost reduction, to derive the most benefits, although there is a general belief held by ABC practitioners that the methodology should be broadly used as shown below. ABC supporting |% of organisations | |Product/service costing ; profitability |80 | |Cost reduction |65 | |Continuous Improvement Program |56 | |Business Process Re-engineering |55 | |Shared Services Costing |51 | |Customer, channel or value chain analysis |44 | ABC is generating real benefits for all sorts of organisations across Australia. These benefits can only increase as more organisations are looking to start an ABC project for the first time, but the full potential of ABC will not be realised as so many existing ABC users are still not employing ABC to its full capabilities. It is important that experienced ABC companies capitalise on their implementations to achieve the maximum possible benefits.

Increasing the scale of an ABC project need not be an expensive, time-consuming process. There are cost-effective solutions that combine ABC, Process Mapping and Balanced Scorecard, to produce automated, regular reports with a minimum of manual intervention. With organisation-wide implementations providing much greater cost savings, expanding your ABC project can only be advantageous to your organisation’s bottom line. CHAPTER 4 Analysis and interpretation The data collection method for this study is survey questionnaire conducted face-to-face with 51 randomly chosen Bankers from various commercial banks in Bahrain from various cities. The questionnaire includes multiple choice, open-ended, and Likert scale questions.

Some questions of the survey were adopted form various previous studies (Brierly et al. , 2001; Van Triest and Elshahat, 2007; Wijewardena and Zoysa, 1999). The data collection period ranges from October 2012 to November 2012. (1) general information on the business organizations and respondents; and (2) cost and management accounting practices. Table 4. 1 Information gathered from the first part of the questionnaire. |Bank Classification |Percent | |Commercial Banks | 40 | |Islamic Banks | 10 | |Other Banks | 1 | |No. f Employees |Percent | |10 to 49 |  | |50 to 99 | 90% | |100 and more | 10% | |Age of the Banks |Percent | |10 years or less | 10% | |20 year or less | 80% | |20 years or more | 10% | In the Table 1, Bank classification, position of respondent, number of employees, and age of Banks are presented. In Bank classification, the highest percentage belongs to commercial banks (5banks), and “others” includes Banks dealing particularly in investment (1 bank) 4. 1. Product costing methods

The respondents were asked to specify the cost factors they implement in an investment project costing. According to the answers, the most widely used costing factor is Financing cost (31 respondent), followed by opportunity cost (11 respondent) and loan process cost (9 respondents). In Table 2, which shows the detailed answers to this question, the most significant points are the financing cost widely by lower managerial levels, and that of opportunity cost largely by top managerial level. Primary cause for the financing cost by banks is that they offer more of the saving accounts than fixed deposit accounts. Table 4. 2 Most important Cost elements in an Investment Project Bank Classification |Financial Cost |Loan Processing Cost |Opportunity Cost |Other | |Commercial Banks | 20 | 3 | 3 | 0 | |Islamic Banks | 6 | 3 | 5 | 0 | |Other Banks | 5 | 3 | 3 | 0 | |Total |31 |9 |11 |0 | 4. 2. Complications faced in product costing The respondents were also asked to point out the difficulties they encounter in Investment project costing. Out of 51 respondents, 22 see the limited Complexity in cost evaluation as top difficulty (43 percent), availability of alternative resources(33. 3 percent), followed by economic instability (24. 7 percent). 4. 3. Role of Opportunity Cost in Management Accounting Practices

In another part of the survey, which was adopted from Van Triest and Elshahat (2007)’s study, respondents were asked to score the role of opportunity cost in various financial analysis on a Likert scale of 1 (no role) to 5 (major role). To evaluate the results, one sample t-test was conducted (Table 4). The results showed that pricing decisions are the most important area where opportunity cost is deemed important at an average of 4. 16, followed by customer profitability and activity analysis at 4. 07. Performance measurement and make or buy decisions with an average of 4. 04 and 3. 96 respectively are also important areas where opportunity cost is used. However, opportunity cost is not seen important in product mix decisions, and adding or deleting products as much as other areas. Management Accounting Practicies |Mean |S. D |t-test | |Pricing decisions | 4. 15 | 1. 146 |4. 29 | |Customer profitability | 4. 08 | 1. 034 | 4. 01 | |Performance measurement | 4. 03 | 1. 071 | 3. 714 | |Activity analysis | 4. 08 | 1. 120 | 3. 793 | |Make or buy decisions | 3. 96 | 0. 62 | 3. 576 | |Product mix decisions | 3. 54 | 1. 168 | 0. 289 | |Adding or deleting products | 3. 47 | 1. 370 | 0. 199 | Table 4. Results of one sample t-test for use of Opportunity cost in management accounting practicies (Test value=3. 5) |Management Accounting Practicies |Mean |S. D |t-test | |Pricing decisions | 4. 15 | 1. 146 |4. 9 | |Customer profitability | 4. 08 | 1. 034 | 4. 01 | |Performance measurement | 4. 03 | 1. 071 |3. 714 | |Activity analysis | 4. 08 | 1. 120 | 3. 793 | |Make or buy decisions | 3. 96 | 0. 962 | 3. 576 | |Product mix decisions | 3. 54 | 1. 168 | 0. 289 | |Adding or deleting products | 3. 47 | 1. 370 | 0. 199 |

Furthermore, the findings are compared with the results of Van Triest and Elshahat (2007). The comparison indicated that two studies yielded parallel results. As seen in Table 5, first three items with the highest mean are the same. In both countries, pricing decisions, customer profitability, and performance measurement are the most prominent areas in which costing information is applied. Among the remaining four application areas, the rank of activity analysis is different. In this study, activity analysis is the fourth in ranking, but it is the last in ranking in Van Triest and Elshahat (2007)’s study. Table 5. Comparison of results with the results of Van Triest and Elshahat (2007) Management Accounting Practices |Mean |Rank |Mean* |Rank* | |Pricing decisions | 4. 15 | 1 | 4. 44 | 1 | |Customer profitability | 4. 06 | 2 | 4. 19 | 2 | |Performance measurement | 4. 06 | 3 | 4. 11 | 3 | |Activity analysis |4. 08 | 4 | 2. 33 |7 | |Make or buy decisions |3. 99 | 5 | 3. 5 | 4 | |Product mix decisions | 3. 54  | 6 | 3. 33 | 5 | |Adding or deleting products | 3. 50 | 7 | 2. 89 | 6 | * The results of Van Triest and Elshahat (2007) 4. 5. The ratio of opportunity cost to total cost In the questionnaire survey, the ratio of opportunity cost to total cost (O. C/T. C) was also questioned. Overall mean for all the banks is 34. 48 percent. (Table 6) was conducted to see the significant differences among banks. The results showed that there is a significant difference among industries (significant at 0. 10).

Duncan test from Post Hoc tests showed that Commercial Banks has the highest OC/TC ratio and is significantly different than Islamic Banks and Investment Banks and miscellaneous Banks. Table 6. The ratio of opportunity cost to total cost (percent) 4. 6. The reasons for the increased interest in opportunity cost manifestation in banks dealing The respondents were asked to score the reasons for the increased manifestation of Opportunity cost in their daily dealing on a Likert scale of 1 (completely disagree) to 5 (completely agree). A list of reasons was provided for the respondents so that they evaluated each. The results of one-sample t-test in Table 7 showed that decreasing profitability (4. 9) is the primary reason which increases the importance of opportunity cost. Other reasons which increase the importance of opportunity cost are increasing costs (4. 57), increasing domestic and global competition (4. 30), and economic crises (4. 23). Actually, means of four items above 4. 00 indicate that they are all factors considered important for the increased interest in opportunity cost . This means profitability of companies is decreasing, possibly due to increasing costs, and increasing domestic and global competition. Economic crises which hit companies from time to time are also important reason for the increased interest in opportunity cost identification and implication. Table 7.

The reasons for the increased interest in opportunity cost Calculation (Testvalue=3. 5) |Mean |S. D |t-test | |Decreasing profitability | 0. 566 |14. 170  | |Increasing costs | 0. 666 | 11. 929 | |Increasing domestic and global competition | 0. 940 | 6. 450* | |Economic crises | 1. 020 | 5. 399* | Significant at 0. 001 level 4. 7. Perceived importance of opportunity cost in overall Banking Operation Lastly, the respondents were asked to evaluate the perceived importance of Opportunity cost that are utilized in banking organizations on a Likert scale of 1 (unimportant) to 5 (very important). The results of one-sample ttest in Table 8 indicated that the most important management accounting practices in decreasing order are budgeting (4. 48), planning and control (4. 33), cost-volumeprofit analysis (4. 3), target costing (4. 16), quality cost reporting (4. 09), performance measurement and evaluation (4. 02), responsibility accounting (4. 0), standard costing and variance analysis (3. 89), and strategic planning (3. 78). Transfer pricing (3. 65) is unique practice that is significantly not important based on test value of 3. 5. These findings indicate that companies perceive traditional management accounting tools still important. For example, budgeting, planning and control, and cost-volume-profit analysis are perceived the most important of all management accounting practices. Quality costing and target costing as new management accounting practices are utilized by the companies. However, strategic planning, and transfer pricing are perceived the least important ones. This may be due to size of the sample firms.

Since the sample consists mostly of small and medium-sized enterprises (according to number of employees), some tools may be too sophisticated to be utilized. Szendi and Shum (1999) states that the larger the firm the more sophisticated the management accounting system and the more likely isthe firm to utilize sophisticated management accounting techniques and practices. Abdel-Kader and Luther (2008) also proved that large firms adopt more sophisticated management accounting techniques and practices than small firms. Table 8. Perceived importance of Opportunity Cost in routine banking operations (Test value=3. 5) |Mean |S.

D |t-test | |Budgeting |0. 754 | 9. 911** | |Planning and control |0. 819 | 7. 500** | |Cost-volume-profit analysis | 0. 871 | 6. 900** | |Target Costing | 0. 849 | 5. 820** | |Total Quality Management | 1. 115 | 3. 890** | |Performance measurement and evaluation | 1. 027 | 3. 39** | |Responsibility accounting | 1. 056 | 3. 450** | |Standard costing and variance analysis | 1. 140 | 2. 480* | |Strategic planning | 1. 011 | 2. 050* | |Transfer pricing | 1. 300 | 0. 860 | ** Significant at 0. 001 level * Significant at 0. 05 level CHAPTER 5 Summary and Conclusion The survey revealed the perceived importance of Opportunity Cost at selected commercial banks in the Kingdom of Bahrain.

The findings are expected to contribute to the existing literature about the subject, especially in developing markets. The major findings of the study are as follows: The most vital cost element for Commercial Banks is financial cost The complexity in loan costing poses as the highest ranking difficulty due to the availability of alternative projects, Customer Activity Analysis and pricing decisions are the most important area where opportunity cost is calculated (parallel to the finding of Van Triest and Elshahat, 2007), Overall mean of the ratio of overhead to total cost is 34. 48 percent for all Commercial Banks in the Kingdom of Bahrain,

The highest opportunity cost/total cost ratio belongs to non-islamic Commercial Banks, Decreasing profitability, increasing costs and competition, and economic crises are reasons which increase the importance of opportunity cost The most important use of Opportunity Cost is in Budgeting out of all routine functioning of Commercial Banks (parallel to the finding of Chenhall and Langfield-Smith, 1998) The findings indicate that Banks perceive traditional management accounting tools less important. The new management accounting practices such as strategic planning, and transfer pricing are perceived more important than traditional ones. Therefore, the banks have been calculating the Opportunity Costs for these management accounting tools. Scope for further research

Since the sample consists mostly of medium sized local branches of International banks , they may not reflect the applications of large scale banking corps. Secondly, the results are confined to the Commercial Banks and should not be generalized to the other sectors. Thirdly, since the survey conducted on companies operating in Bahrain , the findings may not be generalized for the worldwide policies of the Banks. For future research, whole region wide and more comprehensive survey could be conducted with the participation of more banking companies from different countries. Moreover, case studies can be conducted to make more in-depth analysis about cost and management accounting practices.

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