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.
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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