Activity Based Management

Topics: Management accounting, Process management, Costs Pages: 14 (4079 words) Published: June 16, 2013
TOPIC: ACTIVITY-BASED MANAGEMENT

INTRODUCTION

Activity based management (ABM) is an approach to management that aims to maximize the value adding activities to the customers while minimizing or eliminating non-value adding activities. The objective of ABM is to improve the efficiency and effectiveness of an organization in securing its markets. It draws on activity based-costing (ABC) as its major source of information and focuses on managing activities to (1) reduce costs, (2) create performance measures, (3) improve cash flow and quality and, (4) produce enhanced value products in order to improve customer value (Business Dictionary.com). This ABM system's top priority is in eliminating or improving those activities to increase profitability by seeking out areas where a business is losing money such as the factors which cause activities to be performed or activity cost to change.

Undeniably, in order to improve an organization's work processes and activities to effectively and efficiently meet the rapidly changing environment in this globalisation world, management practices and methods have changed over the last decade and will continue to change in future. THE TRADITIONAL ABSORPTION COSTING is the first system implemented to keep track of the true cost of a product or service. It assigns indirect cost to cost object and uses unsophisticated methods to assign indirect costs. It allocates overheads to production and service departments and uses small number of 2nd stage cost drivers to allocate costs from cost centres or pools to productions or cost objects. This system will only be appropriate when the (i)direct costs were the dominant costs, (ii)indirect costs were relatively small, (iii)information costs are high, (iv)there is a lack of intense global competition and (v)a limited range of products is produced, it might be difficult for every organization to use it. For instance, this system might not be appropriate for companies with complex processes and manufacturing practices. The large increase of indirect and overhead expenses will make the traditional costing method less efficient. Therefore, in 1980s, ACTIVITY-BASED COSTING (ABC) was introduced to overcome these problems.

ABC is a system for managing the organization better. It is a one-off exercise that measures the activities' cost and performance, resources and the objects which consume them so as to generate more accurate and meaningful information for decision-making. It uses sophisticated or modern methods to assign the indirect costs. This ABC system allocates overheads to each major activity but not to departments and allocates costs to products or cost objects. However, it limits the company to have advantage of the ABC technique. It cannot be used for official record keeping as the IRS and stockholders require the use of traditional methods to create necessary reports for taxes. In another words, companies need to use two different costing methods in order to get the benefit. The system is costly to build, complex to sustain and to modify. Therefore, the emphasis has shifted from ABC to ACTIVITY-BASED MANAGEMENT (ABM) which is also known as ACTIVITY-BASED COST MANAGEMENT (ABCM) later on. ABC is a subset of ABM as the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organizations (Business Dictionary.com).

ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing-International (CAM-I) (Investopedia). The CAM-I has initiated the development of a comprehensive glossary on ABCM terms by clarifying the significant confusion regarding the semantic and acronym associated with the activity based information (Investopedia). This ABM system makes the cost and operating information useful to improve decision making. Through the ABM analysis process, the management will gain a thorough understanding of its...


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