See Also:
Activity Based Costing vs Traditional Costing
Total Quality Management
Capital Structure Management
Retainage Management and Collection
Implementing Activity Based Costing
Management DefinitionActivity Based Management (ABM)In accounting, activity-based management (ABM) is a method of internal analysis that identifies business activities within a company and evaluates them based on the costs incurred by the activities and the value added by the activities. The idea is to analyze the activities related to the company’s operations and to identify opportunities to improve efficiency and profitability.
The analysis involves classifying business activities as either value-added or non-value-added. Value-added activities increase the customer’s perceived value of the company’s products. Non-value-added activities incur costs but do not increase the customer’s perceived value of the company’s products. Once activities have been identified as being either value-added or non-value-added, the company can focus on enhancing the value-added activities and reducing or eliminating the non-value-added activities. Company’s utilizing ABM may rank value-added activities on a scale of 1-5 or 1-10 in order to demonstrate different degrees of the customer’s perceived value added by each value-added activity.
Activity Based Management – ObjectivesActivity-based management has three primary objectives. First is to identify and enhance value-added activities. Second is to identify and eliminate or reduce non-value-added activities. Third is to redesign the company’s operational procedures so as to improve efficiency, maximize value-added activities, and cut wasteful spending on non-value activities.
1. Identify and enhance value-added activities
2. Identify and reduce non-value-added activities
3. Redesign processes to improve efficiency and profitability
Activity Based Management – Implementation Activity based management builds off of an activity-based costing system. Once a company has developed and implemented an activity-based costing system, implementing activity-based management involves three steps:
1. Classify activities as either value-added or non-value-added
2. Rank value-added activities in terms of added customer-perceived value
3. Enhance value-added activities and eliminate or reduce non-value activities
A company should only implement ABM if the benefits of doing so exceed the costs. Implementing ABC and ABM can be costly in terms of time and resources. Implementing ABM is recommended for company’s facing intense price competition. It is also recommended more for companies with many complex products and processes as opposed to companies with simple products and processes.
Source: Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.