Using Activity Based Management in the Twenty-First Century

Running Head: USING ACTIVITY BASED MANAGEMENT IN THE TWENTY-FIRST CENTURY

Research Paper

LeTourneau University

In partial fulfillment of the requirements for MBAC5213: Managerial Accounting

Dr. Fredric Carlson

August 26, 2012

Abstract

ABC has become a widely used system of cost management. It has helped companies to increase profitability in determining what sources were the result of losses. Products have proven to be more profitable if redesigned or reducing non-value added activities. Change is inevitable in today’s fast moving industries. The movement to ABM was a slow, unpublicized process, but has proven to be beneficial for many companies. ABM has proven to be at a maturity level that all can benefit from without the hesitations from the past. The acceptance of the marketplace from ABM for its ideas and methods has demonstrated this to be true.

ACTIVITY BASED MANAGEMENT

In today’s world, simply knowing the average of products consumed or purchased is not enough for most managers and business owners. So, knowing the exact cost of these products is vital in a successful business. A cost management system (CMS) is a variety of methods and tools that determine how costs are affected by management’s decision making process. There are two systems in assigning costs of goods and services, functional based and activity based management. The more traditional approach is functional based, but activity based is gaining momentum as time progresses.

Activity Based Management (ABM) is a relatively new principle of management accounting that is taking over the way business, both big and small, is being operated. ABM started being implemented into business and industry a little over 25 years ago. ABM reduces the amount of waste and cost, while improving employees’ skills to improve their efficiency. This management style cuts down on overhead expense and increases profitability. An activity-based costing system (ABC) is a two stage process that involves overhead costs to be assigned to an organizational department and is then assigned to cost objects (Mowen. 2012, p. 272). This management style focuses on both operating and strategic levels of the business. According to Cornerstones of Managerial Accounting, “activity-based management is a system-wide integrated approach that focuses management’s attention on activates with the objective of improving