Activity-based management definition
/What is Activity-Based Management?
Activity-based management (ABM) is used to determine the profitability of every aspect of a business, so that those areas can be upgraded or eliminated. The intent is to achieve a more fine-tuned organization with a higher level of profitability. The information used in an ABM analysis is derived from activity-based costing, where general overhead costs are assigned to cost objects based on their use of activity drivers. A cost object is anything about which a business wants to collect cost information, such as processes, customers, products, product lines, and geographic sales regions.
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Examples of Activity-Based Management
One way to use activity-based management is to determine the total profitability of a customer, based on its purchases, sales returns, and use of the time of the customer service department. Another possible use is to determine the total profitability of a new product, based on its sales, warranty claims, and repair time required for returned goods. A third option is to determine the total profitability of the R&D department, based on the funds invested and outcome of new products developed. A fourth possible use is to carry the information derived from an ABM analysis into a company's forecasting models and budgets, which gives management a better idea of the future prospects of the business.
Advantages of Activity-Based Management
There are a number of advantages associated with activity-based management, including the following:
Profitability insights. ABM provides management with a quantitative analysis of the profitability of every aspect of a business. This can be useful for tweaking the design of the business over time, resulting in better customer service and possibly higher profits.
Costing insights. ABM provides detailed insights into the costs associated with specific activities, allowing organizations to identify inefficiencies and eliminate non-value-adding activities.
Enhanced operational efficiency. By focusing on process improvement and eliminating waste, ABM can be used to enhance productivity and streamline operations.
Increased customer value. ABM emphasizes delivering value to customers by understanding which activities add value and which do not. This can result in happier customers.
Supports continuous improvement. ABM encourages a culture of continuous improvement if it is regularly used to evaluate activities and processes.
By adopting ABM, organizations can move from traditional cost management approaches to a more dynamic, activity-driven framework, leading to significant operational benefits.
Problems with Activity-Based Management
The trouble with ABM is its underlying assumption that all of the benefits and costs of a cost object can be translated into monetary terms. For example, the outcome of an ABM analysis might lead management to the conclusion that the workplace should be downgraded to a lower-grade property in order to save money; in reality, a fancier office space is useful for attracting recruits to the company.
For the same reason, it can be difficult to apply ABM to strategic thinking. The problem in this area is that a new strategic direction may be quite expensive in the short-term, but has prospects for a long-term payoff that are difficult to quantify under an ABM analysis.
For the two indicated reasons, the information generated by an ABM analysis cannot be used to drive all management decisions - it is simply information that can then be inserted into the general context of how an organization should be operated. Thus, it is one of several decision tools that management can use.