Activity-based management

Activity-based Management is the process of using activities to improve process efficiency. Activity-based Management therefore provides managers with goals and targets in areas such as eliminating or reducing non-value added activities, increasing throughput and process efficiency. These goals and objectives are important aspects of management performance. Activity-based Management goals and objectives measure the quality of management decisions (embedded in some ABM activities) to achieve desired results. Activity-based Management's goals and targets are not limited to production managers. Nearly every strategic business unit manager in the organization contributes to Activity-based Management's goals. Activity-based Management is seen as an extension of Activity-based Costing.

Traditional Cost Management

Financial accounting information continues to be the primary source of management information in many organizations. However, as Johnson and Kaplan have pointed out, current management accounting information is too slow, too aggregated, and too biased to be relevant to managers' planning and management decisions. This is because Tradtional Cost Management systems focus on cost control through cost-based budgets, standards, and deviations established at the departmental or unit level. In such systems, many volume-sensitive cost factors are added to overheads to ensure proper matching between income and expenses. This approach tends to overestimate or underestimate the cost of products/services due to misleading measurements that lead to erroneous judgments. Modern organizations must focus not only on performance measurements of quality attributes such as customer satisfaction, reliability, cycle time, flexibility and productivity, but also on process and activity costs. A key success factor for any organization is ongoing involvement in the management of all activities to ensure that quality services are delivered in the most efficient and effective manner. This means that it is useless to apply generally accepted accounting principles when planning, managing, controlling and directing activities.

Activity-based Costing

A growing body of literature claims that Activity-based Costing offers significant advantages to organizations compared to Traditional Cost Management. Although adoption has been slow, ABC is now accepted as part of the accounting and control systems of industrial and service companies. Essentially, ABC provides managers with more accurate product/service costs, clearer insight into cost causes and cost drivers, and more relevant information for strategic decision-making. It is a method developed in In other words, ABC focuses on activities invisible to traditional accounting. With this information, managers can make better decisions about “what happens in the business?,” “who does what in thebusiness?,” and “what do activities cost?”. Activity-based Management, on the other hand, refers to using Activity-based Costing information to understand and make beneficial changes to how institutions do business in an environment of limited resources and growing demand. It is a strategic tool that enables managers to: Use a common language for benchmarking. View the activity in process view. Choose a course of action based on Activity-based Costing information. Additionally, other management initiatives such as Balance Scorecard and Performance Management leverage the knowledge produced by Activity-based Costing.

References

• Cooper, R. (1988). The rise of activity-based costing – part one: what is an activity-based costing system?, Journal of Cost Management, Vol. 2, pp. 51-72.
• Garrison, R.H., Noreen, E.W. (2000). Managerial Accounting. 9th ed., McGraw-Hill, New York, NY.
• Ismail, N. A. (2010). Activity-based management system implementation in higher education institution: Benefits and challenges. Campus-Wide Information Systems. 27. 40-52.
• Johnson, H.T., Kaplan, R.S. (1987). The Rise and Fall of Managerial Accounting. Harvard Business School Press, Boston, MA.
• Kren, L. (2018). Activity Based Management (ABM) and Control System design. Accounting and Finance Research.
• Mahoney, R.J. (1997), Reinventing the university: object lessons from big business, The Chronicle of Higher Education, Vol. 44, p. B4.
• Qayoumi, M.H. (2008), Enhancing effectiveness with the use of activity-based management at University of Missouri-Rolla

Author: Sven Korten