Activity Based Management: A Brief Introduction

[pic 1][pic 2][pic 3][pic 4]

Activity Based Management: A Brief Introduction

Activity based management is a technique of management accounting which identifies, measures and evaluates activities that an organization performs with the help of Activity Based Costing (ABC) in order to re-engineer strategic managerial and operational decisions in the business.

Abbreviated as ABM, the concept was introduced in the early 1980s. ABM carefully analyses the various costs such as the employees, facilities, equipment, distribution, equipment etc. in the organization so as to allocate costs to the various functional units on the basis of the activities performed and the cost drivers decided. Activity Based Management seeks out those areas/activities where the organization is incurring excessive costs or losing money so as to prevent this from happening in order to improve the overall profitability. ABM, most importantly, assists the management in taking tough financial decisions for the benefit of the organization.

To better understand Activity Based Management, we must understand the concept of Activity Based Costing first. Activity Based Costing refers to an accounting method that identifies activities a firm would adopt to assign indirect costs to products.

Activity Based Management is closely related to Activity Based Costing. Also known as ABC, Activity Based Accounting is that part of ABM which provides the crucial knowledge needed to take informed managerial decisions. While ABC provides the information to take decisions, ABM carefully monitors the various activities undertaken to make sure that the managerial decisions taken materialize and take the organization into a favorable financial position in the foreseeable position.

This is because the management would gain a thorough understanding of its business processes and cost behavior with the help of ABC, and then would apply these newly gained knowledge and insights to improve decision making at all levels.

Thus, it can be said that Activity Based Management is a natural extension of Activity Based Costing. In simple words, ABM is ABC in action.

Monitoring System

• The first applications of ABC were in product costing and profit measurement of products and customers.
• ABC could become an important tool in other areas such as process control or ABM.
• Process control is related to manufacturing but Activity Based Management (ABM) is the process beyond manufacturing.

Process Control:

Process Control is the short-term control of operational processes within an organization. It refers to the physical manufacturing process.

Its function is to measure processes’ outcomes and take corrective action when the measured outcomes deviate from these desired.

Process Control in a broader sense is known as Activity Based Management to manage activities of white collar department such as:

Design engineering, Personnel admin, Purchasing, Promotion, Process planning, Repairs and maintenance, Production Planning, Legal affairs, Accounting, Costing

Key Performance Variables:

In an Activity Based Management System, performance variables include both financial and non-financial measures and these are designed to influence the cost management behavior. The basic issue is that a single performance measure will not reflect all the aspects of a company. Managers may require multiple performance measures even from individuals. Generally, activities involve groups of employees, and the performance measures therefore usually relate to the group rather than the individual and to the process as well as the output or result. The ABM framework utilizes cost drivers of an organization's activities as a reason for changing the performance estimation framework. Specifically, a few organizations are focused on non-money related operational performance measures to screen the enhancements in their business forms. It is vital to value those performance measures which endeavor to quantify the performance, as well as control and assess the performance, and spur the general population. The behavioral effect of performance measures is a standout amongst the most noteworthy parts of ABM. Cost drivers, e.g. the quantity of procurement orders or the quantity of designing changes, are utilized as a piece of the performance estimation framework. A few organizations utilize physical measures, however others screen the unit cost per driver, e.g. the cost of a buy arrange. Performance measures ought to be chosen deliberately and custom-made to the individual procedures or association. Each organization must consider the activities which are basic to its business achievement.