Definition:

Activity-based Management (ABM)

is a syste Matic, integrated approach
that describes Management
decisions that use activity-based
COsting information to satisfy
custoMers and improve profitability.
ABM broadly includes aspects like
pricing Gnd product Mix decisions,
cost reduction and process
iMproveMent decisions and product
design decisions.

Activity-based manageMent follow

this preMise: products consUMe
activitiesS; Gctivities consuMe
resources. If Managers want their
products to be coMpetitive, they
MUSt kn0W both (i) the activities
that go into making the goods or
providing the services and (i) the
Cost of those activities. To reduce a
product's cost, Managers will likely
have to change the activities the
product consUMes. 9:16 AM v
IMportance of ABM:
ABM tocUses on aCCountability
for activities rather than costs and
CMphasises the Maximis ation of
systeM Wide perforMance instead of
individual performance. ABM control
recognizes that MaxiMizing the
efficiency of individual subunits does
not necessarily lead to MaxiMUM
efficiency for the systeM as a whole.

The functional-based ManageMent

Control aSsigns costs to
organisational units and then holds
the organizational unit Manager
responsible for controlling the
assigned costs. Performance is
Measured by coMparing actual
outcoMes with standards or
budgets. The emphasis is on
financial Measures of performance;
non-financial Measures are usually
ignored.
The functional based Management
traces costs to individuals who are
responsible for incurring costs.
The rewGrd systeM is used to
MOtivate Managers to Manage
COsts by increasing the operating
efficiency of their organisational
units. This approach assUMes that
MGxiMIsing the pertorMance of
overall organis ation is
achieved
by MaxiMising the performance of
individual organisational subunits.
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() Developing Corporate Strategy:
ADVERTISEMENTS:

ABM can help the firMS to develop

appropriate coMpany strategy.
long-terM plans and coMpetitive
advantaGe by focusing on and
MGnGging activities. SoMe firMs
have coMpetitive advantage by
providinga low-cost product or
Manage activities to reduce costs.
TO reduce costs generally requires
changes in activities. Anyone can
GUt costs-if the operation is closed,
Costs will be reduced. However.
ABM has the objective of cutting
COsts while Maintaining quality and
quantity of output.

(2) Making Activity Analys is:

ABM aiMs to achieve continuoUs
iMproveMent by Making activity
analysis i.e. by classifying each
activity as value-added or non-value
added. A value-added activity is an
activity that adds value to a product
Or service froM the view point of the
CUstoMer. A non-value-added activity
is an activity that does not add value
to a product or service tro M the
viewpoint of the customer.

The value-added activities Make up

value-chain. The value chain is a
linked set of value-cre ating activities
leading froM raW Material sources
to the ultimate end use of the goods
or services produced. Value chain
analysis is an ongoing process in
which activities are constantly being
classified, eliminated and iMproved.
Non-value added activities Merely
add to costs which can be eliMinated
without re ducing product quality.
performance or value.
In a Manufacturing firm, the following
are exaMples of no- value added
activities:

(i) MoveMent:

TiMe spent for transfer around the

factory floor where value-added
GCtivities are perforMed.
(i) Waiting:
Idie time does not add value too
products. Reducing the time spent
between value-added activities
reduces cost of idle time.

(ii) Set up:

TiMe spent preparing to perforM G

value-added activity.

(iv) Inspection:
TiMe spent verifying that a
value-added activity was done
Correctly.
(v) Storage:
Storage of materials.
work-in-process, or finished goods
inventory is a non- value added
activity.
The above non-value added
activities are found in Manufacturing
organisations.In other organis ations
SUch Gs governMent departMents,
hospitals, universities, colleges,
fast-food restaurants, utilities one
May find a large nuMber of non-value
added activities.

(3) Reducing CustoMer Response

TiMe
ABM helps to reduce customer
response time by identifying
Gctivitie s that the MOst
consUMe
resources in value and tiMe. AB M
also helps in reducing custoMer
response tiMe by identifying
and eliminating non-value added
Gctivities. This way the custoMer
response tiMe and cost will decline.
CustoMers also aPpreciate a quick
response time to their orders which
is facilitated through activity-based
Manage Ment.
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