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Managerial Accouting - Activity Based Management

Updated on May 1, 2012

Initially, Activity-Based-Costing (ABC) was used to work out true cost of various products in an organization. Soon the users realized that it could be extended further to improve the operations of an organization. To be short, ABM converts ABC into a system to manage a corporation. Not only it focuses on product, service and customer, it also finds out root cause of a problem, action plans for future development and evaluation of present performance managers or departments etc. Those who installed ABC/ABM system saw better pricing decisions and elimination of waste leading to sustainable profitability.  In fact, ABM is an organized common sense.

Peter Drucker states that "ABM will be the standard within the next ten years."

A formal definition

Activity-based management (ABM) is a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization. Activity-based costing establishes relationships between overhead costs and activities so that overhead costs can be more precisely allocated to products, services, or customer segments. Activity-based management focuses on managing activities to reduce costs and improve customer value.

Harvard Business School, Boston / Wikipedia.org

COMPUTER AIDED MANUFACTURE

ROLE OF ABM IN IMPROVED OPERATIONS

With the help of Advanced technology, ABM has facilitated identification of production bottlenecks and corrective action in real-time to carry on operations without much interruption. Further, work orders are tracked and assigned in a smooth way. This is widely used in industries like electronics, metal fabrication and machine tools factories. Brief features are given below:

FLEXIBLE MANUFACTURING SYSTEM (FMS)

A manufacturing system with some flexibility to react to any change. It main advantage is in managing resources like time and effort to modify an existing product or to manufacture a new one. This calls for a wide use of robotics, computer-aided engineering (CAE), electronic data interchange (EDI) and computer-integrated manufacturing (CIM) systems besides AMHS & CAD, explained  in the following paragraphs.

AUTOMATIC MATERIAL HANDLING SYSTEM (AMHS)

A number of material handling equipments are interlinked with computer such as (i) powered roller conveyors, (ii) belt conveyors and (iii) pallet handling conveyors.

Bar code are generated and pasted on the bins, boxes, crates and containers. Automatic scanners scan the bar code of the materials. These are automatically sorted and re-routed to their destination. In this way, not only material movements are speeded up, it helps tracking the lost materials, it retrieval and dispatch to a desired location.

Computer-aided design (CAD)

Use of a wide range of computer-based tools for assisting architect, engineers and other professional for designing parts or products in the field of automotive, aerospace and consumer goods. CAD is used throughout the engineering process from conceptual design and layout, through detailed engineering and analysis of components to definition of manufacturing methods.


VALUE ADDED ACTIVITIES & NON-VALUE ADDED ACTIVITIES

A major achievement of ABM is elimination of waste as far as possible. Waste is simply defined as anything that does not add value to a product. A cycle time in a business is time taken from raw materials receipt to ultimate sale of the goods. It involves processing, inspection, moving, queue and storage. Only process time adds value to the product. All other add costs but add no value and are thus deemed as non-value-activities. A manager should, therefore, try to reduce waste-time which in some cases is as high as 90% of total time. This can be achieved through changing the factory layout thus reducing internal movement and lesser time in re-tooling or setup besides good planning.

JUST IN TIME (JIT)

Normally used in connection with receipt of materials, JIT is a philosophy. It calls for producing the required items at the required quality and in the required quantities at the precise time they are required. It aims to reduce waste by minimizing or eliminating inventories besides reducing process time or throughput time. In order to implement JIT system, the companies are changing their layouts from traditional  to cellular flow. Finally, by arrangement with the suppliers, inventories can be eliminated that a lot of amount can be saved which otherwise was faced in inventory financing, obsolescence, waste and pilferage.


CONCLUSION

To compete in the market, many companies are investing heavily in new technology. The sole purpose is to control operations & time and, in the process, to reduce costs, Minimum process time, efficient operation, reducing non-value added activities would certainly lead to lean costs and improved profitability.

ABM utilizes true cost data generated through ABC for improvement in business profitability in the long run. This is done through some techniques and system discussed in the hub. In addition, there are many other techniques such as target costing which focuses on design phase and kaizen costing which looks for ways and means to reduce cost further during the actual processing. Other management tools, consistent with continuous improvement, include benchmarking and re-engineering

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    • hafeezrm profile image
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      hafeezrm 5 years ago from Pakistan

      Thanks Sunnie for your comments.

    • profile image

      Sunnie 5 years ago

      Thank you for sharing these knowledge about ABM.

      It's much clear to me now.

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      @Sherine. It is hard to find because it is insignificant. As I asked @Adam, I ask you to continue searching and you come across any difference kindly let me know.

    • profile image

      Sherine 5 years ago

      Mention about the differences..i also have question regarding what ADAM ask...your answer according to ADAM is about the product...How about in term of cost driver and value added. I also would like to know the different. Because it is hard to find any article related to the the different between ABM in manufacturing and ABM in services....

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      @Adam - To me the difference between manufacturing and service is reflected in ABM in manufacturing and Services. One has a physical product the other has just a service.

      If you come across, any such difference, kindly let me know.

    • profile image

      Adam 5 years ago

      I really love the article..But i have a question..what do you think the different between ABM in manufacturing and ABM in services....?

    • businessmanagemnt profile image

      businessmanagemnt 7 years ago

      Good article...informative and so many details covered. great...

    • profile image

      Accounting firm 7 years ago

      More good informations thanks for helping me out. Always a pleasure to see information that is useful, thanks again

      http://www.kpmgaccountingfirm.info

    • profile image

      sadiq mustafa 7 years ago

      good one

      helped me a lot

    • SHAHZAD,AHMED profile image

      SHAHZAD,AHMED 8 years ago

      Respected Sir,

      Infact, it is one of the comprehensive article regarding ABC.Thankyou very much Sir!

    • Rufi Shahzada profile image

      Rufi Shahzada 8 years ago from Karachi

      Dear Sir,

      This is such a great HUB with immense knowledge...

      Thanks a lot!

      RUFI SHAHZADA

    • profile image

      Komal Baig 8 years ago

      Dear Sir,

      i had some queries about some terms that i was unable to differentiate. Thankyou so much for providing such an explanatory hub that cleared my concepts.

    • hafeezrm profile image
      Author

      hafeezrm 8 years ago from Pakistan

      Thanks Amirah, Misbah and Teera for comments.

    • TEERATHMAHESHWARI profile image

      TEERATHMAHESHWARI 8 years ago from karachi

      Dear Sir,

      such a nice explanantion , it clears my concept.

    • profile image

      Misbah Mansoor 8 years ago

      This hub has cleared one wrong perception in my mind. I believed that benchmarking, kaizen and reengineering, are only to improve quality and nothing to do with the cost, even they increased cost for the company. But this hub has changed my mind and tell me that they are basically cost reducing techniques. Thankyou so much for sharing this hub with us.

    • profile image

      Amirah Sarwar 8 years ago

      Thank you Sir! for such a nice explanation, that now let me differentiate between all the different terms easily.