CIMA P2 Syllabus A. Managing The Costs Of Creating Value - Practical Consequences Of ABM - Notes ^{7 / 11}

Cost reduction and process improvement

Deals with two main questions:

1. Why costs are incurred?

2. What is the output?

ABM and Activity analysis provides information in a different way than traditional cost analysis. It helps to find out inefficiencies and unutilised resources.

Activity analysis

Activity analysis is useful to decide:

1. which activity is necessary and which is not

2. which activity is value-added and which not

Does the activity add value?

Two questions are important here. If both answers are YES then the activity is value-added.

1. Does the activity help the organisation to achieve its goals?

2. Does external customer encourage the organisation to do more of the activities?

Management must concentrate on eliminating non-value-added activities.
BUT:
Non-value-added activities are often caused by inadequacies within the existing processes and cannot be eliminated unless the inadequacy is addressed. For example, dealing with customer complaints is a diversionary activity, but it cannot be eliminated unless the source of the complaints is eliminated.

Using ABC for cost reduction, process improvement or activity analysis is however limited by ability to identify main activities and to associate costs to the cost drivers.