Activity-Based Management - An Overview (Technical …

1 Activity-Based Management and Activity-Based costing (ABM/ABC)have brought about radical change in cost Management has grown largely out of the work of the Texas-basedConsortium for Advanced Manufacturing-International (CAM-I). Nolonger is ABM s applicability limited to manufacturing principles and philosophies of Activity-Based thinking applyequally to service companies, government agencies and processindustries. The acronym itself has evolved from ABC to ABCM (activ-ity- based cost Management ) to ABM, and the application of ABCevolved from a manufacturing product costing orientation to a man-agement philosophy of activity Management applied in industries andorganisations other than manufacturing.

2 Activity-Based costing and Activity-Based Management have beenaround for more than fifteen years. Most forward-thinking compa-nies have implemented them, or are in the process of doing so. ABC is not a method of costing, but a technique for managing theorganisation better. It is a one-off exercise which measures thecost and performance of activities, resources and the objects whichconsume them in order to generate more accurate and meaningfulinformation for decision-making. ABM draws on ABC to provide Management reporting and decision supports business excellence by providing information tofacilitate long-term strategic decisions about such things asproduct mix and sourcing.

3 It allows product designers to understandthe impact of different designs on cost and flexibility and then tomodify their designs accordingly. ABM also supports the quest forcontinuous improvement by allowing Management to gain new insightsinto activity performance by focusing attention on the sources ofdemand for activities and by permitting Management to create behav-ioural incentives to improve one or more aspects of the AND PROMOTING STRATEGYAPRIL 2001 Activity-Based Management An Overview IN THIS 1 General FAQs Part 2 Practical guidance on implementing ABMPart 3 ChecklistPart 4 Further reading and bibliographyFor further

4 Information please contact: technical Services:Tel: +44 (0)20 7917 9237 Fax: +44 (0)20 7580 TechnicalBriefingThe Chartered Institute of Management Accountants 63 Portland PlaceLondon W1B 1 ABTel: +44 (0)20 7637 2311 Fax: +44 (0)20 7631 BRIEFINGACTIVITY- based Management AN OVERVIEW2 ABM is a fundamental shift in emphasis fromtraditional costing and performance undertake activities which consumeresources so controlling activities allows you tocontrol costs at their source. The real value and power of ABM comes from theknowledge and information that leads to betterdecisions and the leverage it provides to measureimprovement.

5 ABM enables Management to make informed decisions about lines of business, product mix,process and product design, what services shouldbe offered, capital investments, and pricing. ABM is more than an accounting tool; it's a systemfor continuous improvements. It is not a singleanswer but merely one of the many tools that canbe used to enhance organisational performancemanagement. ABM will not reduce costs, it will only help youunderstand costs better to know what to correct. The process of ABM does consume resources, andthe manpower costs can be significant.

6 Companies considering or already implementingABM should realise that although certain productor market factors might make it potentially beneficial, those same factors might not lead to asuccessful implementation. ABM gives us a muchbetter chance of establishing a useful costing foroutputs. But there is a price to pay. It can be diffi-cult to find out what costs apply in a particularactivity, and those involved may be suspicious ofothers charged with finding out. Some areas ofactivity overlap and are difficult to separate.

7 And,of course, ABM is a costly exercise in its own right. Other priorities, top Management commitment, IT capabilities, and integration with financial andbudgeting systems should be considered beforeimplementation. Organisations have begun to look at ABM for avariety of reasons. Among the most commonlycited are: top-down pressure to reduce costs; competitive pressure/market conditions; organisation-wide programme; the introduction of benchmarking; regulatory issues; seeking world-class status through process Management .

8 ABC and ABM are a continuum of value. ABM isthe application of ABC data to manage productportfolios and business processes better. Part 1 General FAQsWhy have organisations turned to Activity-Based techniques? Management practices and methods have changed overthe last decade and will continue to change. Organisations are moving from managing vertically tomanaging horizontally. It is a move from a function orientation to a process orientation. Total quality man-agement (TQM), just-in-time (JIT), benchmarking andbusiness process reengineering (BPR) are all examples ofhorizontal Management improvement initiatives.

9 Theseinitiatives are designed to improve an organisation'swork processes and activities to effectively and efficientlymeet or exceed changing customer requirements. Management information systems to track and provideinformation about the horizontal aspects of a businesshave lagged significantly behind the needs of its costing/ Activity-Based Management fillsthis information need by providing cost and operatinginformation that mirrors the horizontal view. The focus of ABC is on accurate information about the true cost ofproducts, services, processes, activities, distribution channels, customer segments, contracts, and Management makes this cost and operat-ing information useful by providing value analysis, costdrivers, and performance measures to initiate, drive orsupport improvement efforts and to improve decision-making.

10 What is the difference between Activity-Based costing andactivity- based Management ?ABC has been around for some time. It has promisedcompanies a new way to understand costs and a newway to limit these costs to the products and customersdriving them. It has been heralded as the cost accountingmodel that would help Management improve profitabil-ity. And it is fair to say that it does do that gains a thorough understanding of itsbusiness processes and cost behaviour during theABC analysis process; applies the insights gained during ABCfact gathering and analysis to improve decision mak-ing at both operating and strategic levels.