Activity-based management (ABM) is an approach to management that directs the focus of cost managers towards activities analysis. Theoretically by concentrating on activities, this will increase the ability of management to control costs be improving efficiencies. Activity-based management (ABM) uses activity-based costing (ABC) information. ABM/ABC has been around for over 25 years and has gone through its peaks and valleys. This paper will give a short overview of ABM/ABC as well as discussing the main points of ABM including its goals, merits and drawbacks.
Activity-Based Costing (ABC)
“Where It Begins” for ABM
Activity-based costing (ABC) is a costing method that assigns resource costs to products or services based on activities performed. The whole idea of this costing approach is that an organization’s products or services are produced or performed as a result of activities and activities use resources which incur costs. The costs of resources are assigned to activities based on the activities that use or consume resources and costs of activities are assigned to products or services based on activities performed. It is imperative in using ABC to identify the relationships between resource costs, cost drivers, activities, and products/services in assigning costs to activities and then from activities to products/services.
The order of this process in determining these relationships would start with indentifying the product or service that you wish to analyze. Then an organization would attempt to indentify all the resources and processes that are required to make the product or deliver the service and identify their particular costs. Determining the cost drivers for these costs would be the next step. This is a very critical step and determining the correct cost drivers can be more difficult that it may seem. After these steps are preformed, it becomes a data collecting process for each activity and resource to eventually come up with the means of calculating the actual total cost of a product or service.
When discussing activity-based management (ABM) is very difficult to separate the two terms ABM and ABC. Activity analysis is an important component of the process and is frequently referred to when speaking of either one. However one way to distinguish between the two terms would be to say ABC performs the math to provide accurate cost information so that management can gain a more thorough understanding of the cost behavior of its processes during ABC analysis. ABM focuses on using this information obtained through ABC to manage activities to help management to continually improve the business processes concerning their product or service. ABC indentifies the relationships of activities, cost and cost objects and ABM is used to make these processes more efficient and to possibly help decrease costs or at the very least control costs. ABM brings the full benefits of ABC to an organization. Activity-Based Management (ABM):
As stated earlier when speaking of Activity-based management (ABM) and activity based costing (ABC), a person can not get away from the word activity. So to restate in another way, “ABM is defined as a discipline focusing on the management of activities within business processes as the route to continuously improve both the value received by customers and the profit earned in providing that value” (Cokins & Căpuşneanu, 2011, pg 48). However, another key word not previously discussed is value or better phrased value added. As noted in our earlier discussion, one of the steps in ABC is the identification and evaluation of the activities involved in producing a product or delivering a service within an organization. Part of this evaluation of these activities is segregating the...