Activity-Based
Management
What is the difference between Activity-Based Costing
(ABC) and Activity-Based Management (ABM)?
• ABC has been around for some time. It has promised companies a new way to
understand costs and a new way to limit these costs to the products and
customers driving them. It has been heralded as the cost accounting model
that would help management improve profitability. And it is fair to say that it
does do that if:
• 1. management gains a thorough understanding of its business processes and
cost behavior during the ABC analysis process; and
• 2. management applies the insights gained during ABC fact gathering and
analysis to improve decision making at both operating and strategic levels.
This is the essence of ABM.
What are the outputs of an ABM
information system?
The cost of activities and
business processes
The cost of non-value-
added activities
Activity-based performance
measures
Accurate product/service
cost (cost objects);
Cost drivers.
www.yourwebsite.com
ABM Model
ABM and Responsibility Accounting
Responsibility Is
Defined
Performance Measures
Are Established
Performance Is
Measured
Individuals Are Rewarded
Based on Multidimensional
Performance
Financial-Based Vs. Activity-Based
(Responsibility)
Financial-Based Responsibility Activity-Based Responsibility
Organizational units Processes
Local operating efficiency Systemwide efficiency
Individual accountability Team accountability
Financial outcomes Financial outcomes
Financial-Based Vs. Activity-Based
(Measures)
Financial-Based Measures Activity-Based Measures
Organizational unit budgets Process-oriented standards
Standard costing Value-added standards
Static standards Dynamic standards
Currently attainable standards Optimal standards
Financial-Based Vs. Activity-Based
(Performance)
Financial-Based Performance Activity-Based Performance
Financial efficiency Time reduction
Controllable costs Quality improvements
Actual versus standard Cost reductions
Financial measures Trend measurement
Financial-Based Vs. Activity-Based (Rewards)
Financial-Based Rewards Activity-Based Rewards
Financial performance basis Multidimensional performance basis
Individual rewards Group rewards
Salary increases Salary increases
Promotions Promotions
Bonuses and profit sharing Bonuses, profit sharing, and gainsharing
Cost Reduction
01
01
Activity focuses on non-value-added
elimination activities
02 selection
Activity
02
Activity
03 reduction
involves choosing among different
Activity sets of activities that are caused by
04 sharing competing strategies
05 Option
03
decreases the time and resources
required by an activity
04
increases the efficiency of necessary
activities by using economies
of scale.
Measures of Activity Performance
Value added Vs. Non-Value added activities (1)
Value added activities Those activities necessary to remain in business
Non-value added activities All activities other than those that are absolutely
essential to remain in business, and therefore considered unnecessary.
• Example of Non-value added activities : Scheduling,
Moving, waiting, Inspecting, and storing
Formula
Value-added costs = SQ X SP
Non-value-added costs (AQ - SQ)SP
Where
SQ = The value-added output level for an activity
SP = The standard price per unit of activity output measure
AQ = The actual quantity used of flexible resources or the practical activity
capacity acquired for committed resources
Example
Activity Activity Driver SQ AQ SP
Welding Welding hours 10,000 12,000 $40
Rework Rework hours 0 10,000 9
Setups Setup hours 0 6,000 60
Inspection Number of 0 4,000 15
inspections
Activity Value-Added Cost ($) Non-Value-Added Cost ($) Actual Cost ($)
Welding 400,000 80,000 480,000
Rework 0 90,000 90,000
Setups 0 360,000 360,000
Inspection 0 60,000 60,000
Total 400,000 590,000 990,000
Apa yang dapat kita ketahui ?
Benchmarking (2)
Benchmarking uses best practices as the standard for evaluating activity
performance. Within an organization, different units (for example, different plant
sites) that perform the same activities are compared.
Strategic Benchmarking,
Process Benchmarking
Functional Benchmarking
Performance Benchmarking
Product Benchmarking
Financial Benchmarking
Drivers and Behavioural Effects (3)
Activity output measures are needed to
compute and track non-value-added costs.
Reducing a non-value-added activity should
Drivers produce a reduction in the demand for the
activity and, therefore, a reduction in the
Behaviora activity output measures.
l Effect
Activity Capacity Management (4)
• Activity capacity is the number of times an activity can be performed.
Activity drivers measure activity capacity.
• Focus on time labour & production capacity!.at the end, reduce
non-productive cost
