Presentation of business performance

measurement

Topic : activity based management

Submitted by:
Gitika gambhir
7327
M.Com 3rd sem
Traditional costing
 This costing system is based on the
assumption that all overheads are
related basically to production volume.
 But there are a number of cost items
which are not related to physical
production such as performing set up,
material procurement.
 Suppose overhead cost Rs.60000
Products : A B C
(Units) 100 200 300
Per product cost Rs. 100
cost 10000 20000 30000

 does not build cause effect relationship.

 Results in under or over costing.
What is ABC ??
 Activity based costing is a costing
methodology that identifies activities in
an organisation and assigns the cost of
each activity (overhead cost) to all
products and services according to the
actual consumption.
 In ABC, a cause and effect relationship
is established.
 items soup dinner ice-cream
Total
friends

A 50 80 100 230

B 40 80 - 120

C 30 80 50 160

120 240 150

Total bill = 510

Per head = 510/3 = 170
 Advertisement (while IPL) 50 lakh (for 1000 sec)
( ACTIVITY ) ( COST POOL )

COST DRIVER : Seconds utilized

Per second rate : 50,00,000 / 1000

= 5000 per second

Cost
Titan Titan raga Titan edge Titan purple
object
original
Sec utilized - 500 200 300
cost nil 25 lakh 10 lakh 15 lakh
Activity based management
 it is a discipline that focuses on
managing activities to improve the value
of products or services to customers and
increase firm’s competitiveness and
profitability.
 ABM utilizes cost information gathered
through ABC.
 ABM applications can be classified as
 Operational ABM : in this case the use
of ABC information is for improving the
performance of various operations in the
organisation . it involves performing
activities more efficiently.
 Strategic ABM : ABC information is used
to take strategic decisions.
 ABM offers the organisation the
opportunity to improve the value of it’s
product and this can be possible only
with the help of continuous improvement
process.

Activity Cost driver Performance

analysis analysis analysis
 Activity analysis : activities can be value-
added or non value- added activities.
 Cost reduction through activity
management : by activity selection
 Activity reduction
 Activity elimination
 Activity sharing
 Cost driver analysis : helps to identify those
factors that are the root causes of activity
cost.
 Performance analysis : it is done to
assess how well an activity performs
and the results achieved.
ABM Tools
 Target costing
 Kaizen costing
 Value chain analysis
 Benchmarking
 Business process re-engineering
 Theory of constraints
 Just in time system
 Total quality management
conclusion
In today’s highly competitive trading
environment, ABM is an increasingly
important and valuable technique which
can provide management with full
visibility of the costs of doing business;
value added activities and areas for
potential growth.