Activity Based Management an Overview

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Technical

Briefing
APRIL 2001

DEVELOPING AND PROMOTING STRATEGY

Activity-based Management – An Overview
IN THIS BRIEFING… ctivity-based management and activity-based costing (ABM/ABC) have brought about radical change in cost management systems. ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing-International (CAM-I). No longer is ABM’s applicability limited to manufacturing organisations. The principles and philosophies of activity-based thinking apply equally to service companies, government agencies and process industries. The acronym itself has evolved from ABC to ABCM (activity-based cost management) to ABM, and the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organisations other than manufacturing.

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Part 1 General FAQs

Part 2 Practical guidance on implementing ABM

ctivity-based costing and activity-based management have been around for more than fifteen years. Most forward-thinking companies have implemented them, or are in the process of doing so.

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Part 3 Checklist

Part 4 Further reading and bibliography

BC is not a method of costing, but a technique for managing the organisation better. It is a one-off exercise which measures the cost and performance of activities, resources and the objects which consume them in order to generate more accurate and meaningful information for decision-making. ABM draws on ABC to provide management reporting and decision making. BM supports business excellence by providing information to facilitate long-term strategic decisions about such things as product mix and sourcing. It allows product designers to understand the impact of different designs on cost and flexibility and then to modify their designs accordingly. ABM also supports the quest for continuous improvement by allowing management to gain new insights into activity performance by focusing attention on the sources of demand for activities and by permitting management to create behavioural incentives to improve one or more aspects of the business. The Chartered Institute of Management Accountants 63 Portland Place London W1B 1AB Tel: +44 (0)20 7637 2311 – Fax: +44 (0)20 7631 5309 www.cimaglobal.com

For further information please contact: Technical Services: Tel: +44 (0)20 7917 9237 Fax: +44 (0)20 7580 8956 techservices@cimaglobal.com

TECHNICAL BRIEFING

ACTIVITY-BASED MANAGEMENT – AN OVERVIEW

I

ABM is a fundamental shift in emphasis from traditional costing and performance measurement. People undertake activities which consume resources – so controlling activities allows you to control costs at their source. The real value and power of ABM comes from the knowledge and information that leads to better decisions and the leverage it provides to measure improvement. ABM enables management to make informed decisions about lines of business, product mix, process and product design, what services should be offered, capital investments, and pricing. ABM is more than an accounting tool; it's a system for continuous improvements. It is not a single answer but merely one of the many tools that can be used to enhance organisational performance management. ABM will not reduce costs, it will only help you understand costs better to know what to correct. The process of ABM does consume resources, and the manpower costs can be significant. Companies considering or already implementing ABM should realise that although certain product or market factors might make it potentially beneficial, those same factors might not lead to a successful implementation. ABM gives us a much better chance of establishing a useful costing for outputs. But there is a price to pay. It can be difficult to find out what costs apply in a particular activity, and those involved may be suspicious of others charged with finding out. Some areas of activity overlap and...
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