Commonly Used Terms
Activity Based Management (ABM)
What is activity-based management?
Activity-based management is an approach that identifies and evaluates activities carried out by a business and uses activity-based costing to achieve a value chain analysis or take up a re-engineering initiative in order to improve strategic and operational decisions. It is a system that analyses and determines the profitability of every aspect of a business to highlight its losses and gains in such a way that the efficiency of an organization can be improved by focusing on the profitable aspects.
How does it function?
Activity-based management is used to analyze the cost of an activity in comparison to the value-added by the activity with the goal of strategic improvement.
It can be done in the following ways
- Identification and Analysis: In activity-based management, it is important to identify the activities that have a significant impact on the finances of a business. It refers to listing out a company’s business activities in order to find the ones that have the most effect.
The next step is identifying the cost that drives each activity based on the cost incurred. Cost drivers are the reason why the cost of activity varies.
- Evaluation and Value-Chain Analysis: In order to analyze further, the manager needs to analyze the cost of every activity by appropriating all direct and indirect costs related to the activity.
For example, if a tailor runs sewing machines all day, that will be considered an important activity, the cost analysis will include the cost of labor and electricity.
This is known as activity-based costing, where a method is used to assign the costs of every activity according to actual consumption, based on overhead expenses incurred during the activity.
Additionally, the value generated by every activity should be quantified in relation to the cost incurred to analyze its impact. This is called value chain analysis, where value is added by a particular activity.
- Identifying Opportunities to Improve
The information gathered from the aforementioned processes can be used to further identify and implement processes in the following ways
- Operational ABM
Operational ABM allows managers to recognize any irregularities in the costing process and examine accordingly. Operational ABM requires the scrutinization of every activity and increased operational efficiency by enhanced value-generating
- Strategic ABM
Strategic ABM involves the use of ABM to recognize their profitable products and target audience. It involves strategic management to understand the genre of a product, the channels through which it should be advertised, and targeting a certain demographic group of customers.