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.