Activity Based Management (ABM)

NotesObjective Test

ACTIVITY BASED MANAGEMENT

It is focused on value added by the activities which helps to identify key products, activities and customers in order to gain a competitive advantage.

There are two levels of ABM

  1. Operational 

    - actions based on activity driver analysis that increase efficiency, lower costs and improve asset utilisation.

  2. Strategic

    - actions based on activity based cost analysis that aim to change the demand for activities so as to improve profitablity.

ABM

is a management system using ABC information to analyse relationships between costs and activities carried out, and to base decisions aimed at

  • Reducing costs

  • Improve quality

  • Reduce idle time and eliminate bottlenecks

  • Enhance process flexibility and promote innovation

ABM approach to cost measurement

  • Focus on activity costs (whether cross-departmental or not) rather than department
    costs

  • Focus on indirect costs (overheads) and overhead generating areas, given their
    significance and the fact that their degree of controllability is higher

  • Focus on individual customer profitability

Problems with ABM

  1. Significant amount of work in setting-up the system and in data collection

  2. Organisational changes and behaviour consequences - may not be in line with the formal organisational structure

NotesObjective Test