Activity-based Management / Activity-based Costing (ABM/ABC

By: Decimal  09-12-2011
Keywords: Cost Management, Activity-based Management

Activity-based Management Promotes Effective Decision-making

Increased competition and market globalization have significantly decreased the corporate margin of error. These days, good company planning relies on a strategic costing system to provide an accurate picture of their operational reality. The introduction of activity-based
accounting has led many companies to realize that they are selling some of their products at a loss.

Activity-based costing transforms certain indirect costs into direct ones that are precisely allocated to activities. This approach provides a much more accurate picture of production costs, since overhead costs are no longer allocated arbitrarily but on the basis of cause and effect. What really distinguishes this model from so-called conventional cost models is the new management methodology. Once it starts to identify costs by activity, an organization is on its way to adopting activitybased management (ABM) principles. Instead of focussing on
resources, ABM bases management decisions on activities, thereby providing a completely new perspective on company operations. Rather than arbitrarily assigning resources to activities, ABM provides managers with the crucial ability to question the relevance of activities and hence optimize the resources allocated to them.

ABM’s main advantage is that, by identifying company-specific performance measures, it focuses cost management activity where it will do the most good. These performance measures also improve planning techniques and the tracking of established goals.

Total Quality and Activity Based Management (ABM)

A growing number of companies are installing total quality programs but find their results too abstract. ABM’s ability to rapidly assess each production activity’s non quality costs facilitates total quality program installation. It enables managers to focus their quality improvement
initiatives on those areas where non quality costs are highest, in order to quickly derive the greatest return.

ABM allows those same managers to routinely track the progress of non-quality costs. ABM and the activity-based cost management approach are effective tools for strategic decision-making and improving company performance.

Keywords: Activity-based Management, Cost Management,

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