Activity Based Management

Activity based management is best viewed within a wider discussion of different approaches to budgeting - in particular activity based budgeting.

Definition

 Activity based management (ABM) is the use of Activity Based Costing (ABC) information for management purposes to improve operational and strategic decisions.

Uses of ABM

By identifying the underlying drivers of activities, ABM provides an understanding of the resource implications of various courses of action and therefore ensures that unfeasible courses of action are not taken.

ABM can help middle managers to make decisions that benefit the whole organisation, not just their activities' bottom line.

Companies use ABM to

• Re-price products and optimise new product design. Managers can more accurately analyse product profitability by combining activity-based cost data with price information. This can result in the re-pricing or elimination of unprofitable products. This information also is used to accurately estimate new product costs. By understanding cost drivers managers can design new products more efficiently.
• Reduce costs. ABC identifies the components of overhead costs and the drivers of cost variability. Managers can reduce costs by decreasing the cost of an activity or the number of activities per unit.
• Influence strategic and operational planning. Implications for action from an ABM study include target costing, performance measurement for continuous improvement, and resource allocation based on projected demand by product, customer, and facility. ABM can also assist a company in considering a new business opportunity or venture.

 Illustration - The application of ABM

DHL

In the 1990s, DHL saw its margins decreasing and used ABM to reverse this trend.

• Falling margins were mainly due to changes in product, destination and customer mixes.
• DHL concluded that they did not have sufficient visibility of margins to enable better pricing policies (and had different policies in different countries) so implemented ABC.
• A greater understanding of margins allowed DHL to design and implement a new pricing structure that was adopted worldwide.

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Tags:	activity based management;ABM;ABB