Activity Based Management Essay

Activity based direction ( ABM ) is an attack to direction that aims to maximise the value adding activities to the clients while minimising or extinguishing non-value adding activities. The aim of ABM is to better the efficiency and effectivity of an organisation in procuring its markets. It draws on activity based-costing ( ABC ) as its major beginning of information and focuses on pull offing activities to ( 1 ) cut down costs. ( 2 ) create public presentation steps. ( 3 ) better hard currency flow and quality and. ( 4 ) green goods enhanced value merchandises in order to better client value ( Business Dictionary. com ) . This ABM system’s top precedence is in extinguishing or bettering those activities to increase profitableness by seeking out countries where a concern is losing money such as the factors which cause activities to be performed or activity cost to alter.

Undeniably. in order to better an organization’s work procedures and activities to efficaciously and expeditiously run into the quickly altering environment in this globalization universe. direction patterns and methods have changed over the last decennary and will go on to alter in future. THE TRADITIONAL ABSORPTION COSTING is the first system implemented to maintain path of the true cost of a merchandise or service. It assigns indirect cost to be object and uses unworldly methods to delegate indirect costs. It allocates operating expenses to production and service sections and uses little figure of 2nd phase cost drivers to apportion costs from cost Centres or pools to productions or cost objects.

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This system will merely be appropriate when the ( I ) direct costs were the dominant costs. ( two ) indirect costs were comparatively little. ( three ) information costs are high. ( four ) there is a deficiency of intense planetary competition and ( V ) a limited scope of merchandises is produced. it might be hard for every organisation to utilize it. For case. this system might non be appropriate for companies with complex procedures and fabrication patterns. The big addition of indirect and overhead disbursals will do the traditional costing method less efficient. Therefore. in 1980s. ACTIVITY-BASED COSTING ( ABC ) was introduced to get the better of these jobs.

ABC is a system for pull offing the organisation better. It is a one-off exercising that measures the activities’ cost and public presentation. resources and the objects which consume them so as to bring forth more accurate and meaningful information for decision-making. It uses sophisticated or modern methods to delegate the indirect costs. This ABC system allocates operating expenses to each major activity but non to sections and allocates costs to merchandises or cost objects. However. it limits the company to hold advantage of the ABC technique. It can non be used for official record maintaining as the IRS and shareholders require the usage of traditional methods to make necessary studies for revenue enhancements.

In another words. companies need to utilize two different bing methods in order to acquire the benefit. The system is dearly-won to construct. complex to prolong and to modify. Therefore. the accent has shifted from ABC to ACTIVITY-BASED MANAGEMENT ( ABM ) which is besides known as ACTIVITY-BASED COST MANAGEMENT ( ABCM ) subsequently on. ABC is a subset of ABM as the application of ABC evolved from a fabricating merchandise bing orientation to a direction doctrine of activity direction applied in industries and organisations ( Business Dictionary. com ) .

ABM has grown mostly out of the work of the Texas-based Consortium for Advanced Manufacturing-International ( CAM-I ) ( Investopedia ) . The CAM-I has initiated the development of a comprehensive glossary on ABCM footings by clear uping the important confusion sing the semantic and acronym associated with the activity based information ( Investopedia ) . This ABM system makes the cost and runing information utile to better determination devising. Through the ABM analysis procedure. the direction will derive a thorough apprehension of its concern procedures and be behavior and direction squad in the company.

In add-on. the consequences of an ABM analysis can assist a company generate more accurate budgets and fiscal prognosiss ( Investopedia ) . It gives direction penetration into the cost constructions for doing and selling diverse merchandises. In a simplified term. ABC is used to reply the inquiry. “what do things be? ” and for ABM. a procedure position is taken to understand factors which cause the costs to happen. This system focuses on the ways to airt and better the usage of resources. by utilizing ABC information. to heighten the value created for clients and other stakeholders ( Investopedia ) .

These two systems ( ABC and ABM ) have attracted high degrees of involvement from both faculty members and practicians since its outgrowth in the late 1980’s. It is chiefly due to the important alteration in cost direction systems they have brought. Due to the deficiency of applicability and relevance of traditional costing that leads to common subsidy between merchandises and cost. ABC and ABM are used to heighten or replace the traditional cost computation methods.

For illustration. ABM attack studies by activities while traditional analysis is by sections ; ABM coverage is by sub-activities but traditional is by expense classs and ABM coverage can describe information on activities that are transverse departmental boundaries whereas traditional is non allowed ( Drury C. 2008 ) . Therefore. ABM is concluded to hold more meaningful information as it gives more visibleness to the cost of set abouting the activities that make up the organisation and may raise the issues that are non highlighted in traditional analysis. Most forward-thinking companies have implemented them. or are in the procedure of making so as it can be applied to different types of companies. including makers. service suppliers. non-profits. schools and authorities bureaus ( Business Dictionary. com ) .

Contentss

1. Features of ABM system

_A. STAGES OF IMPLEMENTATION_

In order to implement ABM system. the companies are required to transport out the three out of the four phases in ABC ( Drury C. 2008 ) . The stairss are listed as below:

( I ) Identify major activities that result in costs being incurred.

The activities are the collection of units of work or undertakings such as machine set-up cost. buying cost and warehousing cost that use up resources. In order to place all the activities within the company. activity analysis has to be carried out. The activities chosen must be at a sensible degree of collection based on the cost poetries benefit standards. In add-on. the activities have to be either influenced by the entire cost of activity Centre or the ability of a individual cost driver to supply a satisfactory determiner of the cost of the activity.

( two ) Assign cost centres to each activity. and

The companies should non utilize the arbitrary allotments in delegating the important proportion of costs to activities as it will cut down the dependability of cost. They have to place and delegate the direct costs to specific activity and delegate the indirect costs on cause-and-effect cost drivers. By making so. the cost incurred on each activity can be determined.

( three ) Determine the cost driver for each major activity

In this phase. the drivers are called as activity cost drivers. In choosing the cost driver. there are two factors which the companies need to see. First. the cost driver should supply a good account of costs of each activity cost pool. Additionally. the cost driver should be mensurable easy. and the informations should be easy obtained and be identifiable with merchandises. ( The cost driver can be production or service oriented ) .

_B. TWO CATEGORIES OF ABM APPLICATION_

Based on the beginning adapted by Kaplan & A ; Cooper ( 1998 ) . this system accomplishes its aims through two complemetary applications which are the operational ABM ( “Doing things right” ) and strategic ABM ( “Doing the right things” ) .

Operational ABM enhances efficiency of operation and plus use and lowers costs. Its focal point are chiefly on making things right and executing activities more expeditiously. Management techniques such as activity direction. concern procedure reengineering. entire quality direction. and public presentation measuring are used in the ABM application.

As for strategic ABM. it attempts to alter the activities demands and hike pro?tability by bettering activity efficiency. It focuses on taking proper activities for the operation. extinguishing non-essential activities and choosing the most pro?table clients. Strategic ABM applications use direction techniques such as procedure design. client pro?tability analysis. and value concatenation analysis.

2. Comparison between Activity-based direction system ( ABM ) and traditional system

ABM focuses on activity performed by concern and hence. it views concern as a set of coupled activity that finally adding value to clients. Its end is to fulfill client demands while doing fewer demands on organisational resources. Hence. ABM could hold information of activities such as why activities to be performed. how to execute the activities and how good they are performed. In contrast. traditional system focuses on types of cost from sections. It gives less information to director for the demands in determination devising. ABM is better than traditional system as ABM could supply wider information and information could travel profoundly and more elaborate as needed by the direction in determination devising.

Besides. the ABM system merely seeks to utilize cause-and-effect cost driver which is different than the traditional system. It does non trust on arbitrary allotment bases. As we can see from table 1. the information provided by both systems is about client order processing. However. these two systems take into history different information while fixing the client order processing. ABM focuses on information that is relevant in the procedure of client telling while traditional analysis focuses on the types of cost incurred in the client order processing.

ABM ANALYSIS RM

Fixing Citations 100

Receiving Customer Order 280

Expediting 120

Entire 500

Traditional ANALYSIS RM

Wages 110

Telephone measure 170

Depreciation of Asset 120

Entire 500

Table 1

In add-on. ABM is different from traditional system in footings of the study attack. ABM study is determined by activities while traditional system is determined by sections. It can include traversing departmental boundaries. For case. material buying procedure might affect non merely one section but it includes stock list control section. buying section and history collectible section. The director will be able to cognize how the sum spent ( e. g: RM 2000 ) to be used in buying stuff under ABM system. It may demo the relevant information such as stock list reviewing. directing purchase requisition and directing purchase order. The director will be able to cognize how buying of stuff plants on and what are the grounds of purchase hold every bit good as how to minimise the cost of purchase.

It focuses on information based on activity. As for traditional system. director can acquire the information on stuff purchase which costs for RM2000 merely. However. this RM2000 does non follow with the sum of goods order. By looking at one information itself. the grounds of non-compliance can non be tracked as there is deficiency of information. Therefore. ABM system is better since it did non concentrate on information based on cost but it assigns cost of activities to merchandises harmonizing to product’s demand for activities and relies on cost Centres and cost drivers that cause activity resource ingestion. Other than that. it assigns activity costs to be objects on footing of cost driver use and steps resources consumed by cost objects more accurately.

In add-on. ABM system provides both information from value and non value added activities. As for traditional system. it provides information on value added activity merely. Value added activity is an activity that supports primary aim of bring forthing end products. For case. activity like coloring adds value to a book. Under value added activity. traditional study will demo the sum spent in coloring since it adds usefulness to clients. Customers would probably to purchase books with some coloring or some images instead than books with merely words as it might assist them in memorising and understanding the information stated in the book better. However. if the net income does non increase like what the company expected. director will be able to follow back the cost incurred by looking at sum spent in coloring – non-value added activity.

Hence. non value added activity is of import as it may impact the company’s net income. Non value added activity is an activity where an chance is available for cost decrease without diminishing product’s service potency to client such as storing and traveling natural stuffs. Under ABM system. director will be able to pull attending on this issue and hint back the grounds such as waste in the production. Manager will be able to track the cost which has been wasted in the production by cut downing material motion and bettering production flow without cut downing the value added to client. In other words. client can hold same quality of products-same sort of books while direction could cut down the cost of production.

3. Benefits and Restrictions of ABM system

One of the benefits of the system is to assist the direction in determination devising. It provides better determination devising as the information provided by the ABM system is more utile and dependable. The direction can do informed determination about merchandise mix. lines of concern. procedure. merchandise design. services. capital investing and pricing. For case. director will able to do determination on how much capital to put in new merchandise and what sort of new merchandise to be launched based on information that director obtains in ABM system.

Furthermore. ABM is a system for uninterrupted betterments. The system is non merely an accounting tool but it besides provides many tools that can heighten organisational public presentation direction. In other words. ABM system provides other information as good ( the merchandise mix. client services. line of concern and capital investing ) that would be able to assist an organisation in its hereafter development and betterment. For case. an organisation knows how to function client better by looking into information provided in client services activity.

ABM besides provides a better apprehension of cost driver. It is a factor that affects the costs associated with an activity. Directors apply activity- based direction system to the operational activity in order to find the cost to execute an activity and the cost associated with non executing the activity. Through this activity cost drivers. it seeks to supply an extended position on the existent costs of an activity. For cases. we can see in the Mason & A ; Cox. In Mason & A ; Cox. they feel that it is expensive to implement the activity-based costing system because it is more complex and expensive to keep. Nevertheless. ABM seems to be more helpful to them in term of bettering the company profitableness. For illustration. economy had been achieved by aiming non-value-added activities.

Their existent cost driver had been identified so that director may cognize what to extinguish. The bead in the monetary value of the high-volume lines had met with client blessing. Furthermore. ABM enables company to proctor and better quality and bringing client value by tracking cost driver. The new attack provided timely information about factors that were of import to clients and factors that employees could command. There was no uncertainty that ABM had helped Mason & A ; Cox to better both profitableness and client value. Besides that. in Blue Cross and Blue Shield of Florida ( BCBSF ) needs more sophisticated cost information to do better determination in order to vie in the nature of the wellness attention insurance industry and the demand to pull off the cost of operation like ways to apportion administrative cost to the merchandises and services. Hence. BCBSF decided to implement ABM system.

ABM helps director to analyze the analysis of value added cost and non-value added costs. A value added cost is the cost of an activity that can non be eliminated without impacting a product’s value to the client. Some value added costs are ever necessary. every bit long as the activities that drive such cost are performed expeditiously and efficaciously. For cases. we can genuinely understand this construct in the Carpenter Company. The senior frailty president of gross revenues and selling said that pillow autumn into two distinguishable sections. the “commodity” portion of the concern and value-added line. For the “commodity” portion of the business- consists of polyester-filled pillows which are a normal pillow.

Besides that. the “value-added line” . which features technology-driven fibres and cloths designed to heighten slumber. As we can see. Carpenter Company had produced assortment map of pillow like musculus emphasis and hurting relieve pillow every bit good as pillow which cut down unnatural waking ups. Today. consumers are better educated about the benefits of assorted sleep surfaces and they recognize that the function of pillow can play in quality slumber. Although the monetary value for a pillow which features technology-driven fibres and cloths designed will be expensive but it can assist consumer to hold a quality slumber. Therefore. consumers will non mind to pay more to better a quality slumber. As a consequence. we can see that the “value-added line” may assist company to derive net income.

In contrast. a non-value added cost is the cost of an activity that can non be eliminated without decreasing the value. Non-value added cost activities are assumed to be unneeded as a consequence it ever be minimized like hive awaying and managing stock lists ; transit of natural stuff or partially finished merchandises. If this non-value added costs happened. company may cut down or extinguish it by careful redesign of the operational procedure. As we can see how Taipei Fubon Bank trades with those non-value added costs in this mature and complex market. Taipei Fubon Bank needs to accurately find net income and loss informations by client and client group so that it could assist bank to cut down operating costs and increase net income while keeping it quality of service. Hence. the bank had developed a client profitableness direction ( CPM ) system that provide thorough information sing cardholder disbursement form and profitableness to construct extremely targeted selling and keeping plan.

This system did helped bank to cut down cost by updating timely direction study. therefore rushing selling scheme accommodation determination. However. they wanted more information sing a elaborate analysis such as the profitableness by card type at the single client degree. As a consequence. they entered into the new CPM system by executing an in-depth analysis at the dealing degree. The new CPM system contributes to division-wide productiveness through the bringing of as-needed coverage to the user usage portal. The coverage may include client disbursement wonts. client ranking by demographic standards or the profitableness of co-branded card by service channel. After utilizing this system. Taipei Fubon Bank has significantly bettering division profitableness and now they can do more faster and accurate determination.

In Dow Chemical Company ( DCC ) which produces chemicals and plastics implement ABM to place the activities they perform. extinguish non-value-added activities. determine cost drivers. set activity monetary value to bear down users and benchmark these monetary value to guarantee that they are competitory. While ABM has brought benefits to DCC but besides brought many challenges to them. For cases. DCC feels that it is hard to capture cost driver information without making extra work. As the activity analysis became more and more elaborate. DCC had to warrant the complexnesss in obtaining and treating activity information. Ultimately the company decided that should non interrupt activities down to task degree. otherwise the end point activities were excessively little and legion.

By comparing with the traditional system. ABM system is more dearly-won. Execution of ABM system requires many resources such as human resources and clip consuming. Different activities require different resources. Datas that concerns on major activities must be measured. collected and entered into system. As we can see that Scots National Blood Transfusion Service ( SNBTS ) feels that ABM system is a timely and dearly-won system. By utilizing ABM system. they need to implement a thorough function of all procedures. bore down and filtering of all “relevant” activities. the designation of cost driver and others are tremendous challenges. Therefore. this may do the company to take up much clip and resources because this company consists of over 1100 staffs. Furthermore. everyone may hold different point of position and seeking for different informations therefore they need times to extinguish and roll up the right informations into the right activities. Incorrect data aggregation and allotment may ensue to reverses during the execution phases and may endanger the whole undertaking.

Misinterpretation might besides go on in ABM system. This is because most of the information is interrelated and equivocal. For case. cost assigned to material. merchandises and client may be relevant and do the director to overlook some information. This causes misunderstanding happen and nexus to the incorrect determination devising. Incorrect determination devising may do some issues go on in the operation such as production hold. over-production and incorrect transportation.

Reports by utilizing ABM system are suited for internal users merely and can non describe to external users. This is because ABM system has restrictions since it does non conform to by and large recognized accounting rules ( G. A. A. P ) . Stakeholder might non be able to understand the studies on ABM system and hence. ABM system is merely restricted for internal usage.

Decision

Previously. company normally apply traditional accounting system to pull off the company’s operational activity but this system does non supply more elaborate information that needed in this competitory environment. Therefore. directors require better information by developing activity-based direction. This attack let everyone in the organisation understand where costs are being incurred. why are they being incurred and how these activities contribute to a higher value added to clients. Furthermore. ABC explores to place activities that can be eliminated or improved. In extra to that. communications will better and alterations are easier to do if company conducts the activity-based attack.

In add-on to the above intent. we feel that ABM system may be utile for a company. This is because it non merely focuses on the merchandise of a company but besides the services and clients of a company. Besides that. it besides help company to happen out the cause of a job. action program for future development every bit good as rating of managers’ or departments’ present public presentation. In add-on to that. it besides helps company use true cost informations which generated through ABC for farther betterment in concern profitableness in the long tally.

ABM in best pattern house lies at the bosom of the decision-support procedure. Integrating ABM within the entire information and direction control system of the organisation can take to quantum betterments. Therefore. an organisation needs to understand and turn to the common booby traps and barriers to success at every phase of execution. Besides. the ABM system should include and pull on the penetrations of the people who use it no affair during be aftering. activity analysis or other so that the execution will success when the people use the system. Organization should orient to the alone scheme. construction. capablenesss. and demands of the house so that the execution will be succeeded. This is because ABM will non look the same in every organisation although it is a universally utile construct.

Finally. we have an in-depth apprehension of ABM during the procedure of working out this assignment and we found out that activity-based attack has more advantages than disadvantages. We have learned many things like clip direction and how to acquire along with our group members. Although we spent much clip for discoursing the lessons and recommendations. we didn’t have any statement during our treatment and everything went on smoothly.

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