What is activity based management?

Activity based management (ABM) uses activity-based costing to identify and evaluate activities that a business performs. The activity-based costing will provide a value chain analysis to improve the strategic and operational decisions that are made in an organization. ABM focuses on reducing costs, improving customer value, and managing activities such as overhead costs, product, or service costs.

Managers have the large responsibility of focusing on lowering costs and recording the activity of those costs. The ABM method specializes in the customer value and improving the profits. You need to distinguish all the costs, those with value and those without value. The costs with value are the costs of activities that cannot be eliminated without affecting the value of a product in relation to the customer.

The non value costs are the activities that can be eliminated without hurting the value of a product. Keep in mind that some value added costs will always be necessary. Those activities that drive the costs up should be evaluated and performed efficiently. Your non value costs should be minimized as much as possible because they are usually unnecessary.

Non value added activities include: inventory, transportation of raw materials, work in-process products, and redundant activities. ABM can help reduce or eliminate the non-value activities by careful redesign of the production process.

There are 2 different ABM approaches:
Operational ABM - This approach is geared toward "doing things right". The overall goal is to improve efficiency. The activities that do not add value to the product can be improved and identified. Operational ABM will find the activities that need to be cut because they have no value.

Strategic ABM - This approach is used for customer profitability analysis. It will identify which customers are the most profitable and help you find ways to focus on targeting these customers more.

Like any process, there are risks involved. The common risk with ABM is that some of the activities have an implicit value, and do not add any financial value to the product. A good example of this is retaining excellent staff members. These staff members are not accounted toward the financial value of the ABM, but they do provide a certain level of service to the organization.

ABM processes should be used by managers to help them gain a better understanding of all the costs associated with their department or team. This will help your company save money overall as the manager will be able to make decisions that help benefit your company as you look for ways to save costs.

ABM allows you to have flexibility to provide several types of reports. You are able to focus on specific activities within your company and ABM provides you with reporting procedures to assist traditional cost accounting procedures.

To implement ABM, you will need to follow the 6 following steps:

1. Identify and define activities and activity pools


2. Directly trace costs to activities (to the extent feasible)


3. Assign costs to activity cost pools


4. Calculate activity rates


5. Assign costs to cost objects using the activity rates and activity measures previously determined


6. Prepare and distribute management reports

If your company is like other organizations, you already have traditional direct cost procedures. Most companies have an accounting method for everything that comes in and out of the organization such as material and labor. ABM can help with the indirect costs such as the material and labor costs. Because of this ABM allows you to reclassify your costs (direct and indirect) and test the accuracy of these costs. This will provide your company with a greater understanding of how to reduce costs, improve your customer service, and achieve success.