Operational Activity-Based

Management

Filinova Olga
Kostornov Ivan
Storozhenko Roman
Tcheshkova Nadezhda

Management Accounting for Multinational Companies

Associate Professor Igor N. Baranov
What is Activity-Based Management?

 Aim:
 improve the value of products or
services to customers;
 increase the firm’s competitiveness and
profitability;

 The main source of information:

 activity-based costing;
Operational Activity-Based Management

 Aim:
 increase operation efficiency;
 enhance asset utilization;
 lower costs;
 Focus on:
 doing things right;
 performing activities more efficiently;
 Benefits
 reduction costs;
 higher revenue;
 cost avoidance.
The key tools of operational ABM

 activity analysis;
 activity-based costing;
 business process reengineering;
 total quality management;
 performance management.
Activity classification

 Unit-level activities;
 Batch-level activities;
 Product-sustaining or service-
sustaining activities and customer-
sustaining activities;
 Facility-sustaining activities.
Conditions and organizational characteristics for which
operational ABM as a management system is
recommended:

 intensive competition;
 diversity of products;
 complex operations;
 production volumes vary significantly among the
products;
 different proportions in consuming resources
among the products;
 relatively high overhead costs and for some
products higher than the direct cost;
 the belief by the operating managers that the old
traditional system did not give meaningful
product costs.
Operational ABM and comparison
with TQM & BPR

VALUE
=
ABM Price/Quality TQM
ratio
Focus on creating Focus on creating
maximum value maximum value
for customers for customers
through business through quality
activities and cost management
optimization

BPR
ABM versus TQM and business
processes reengineering

 ABM motivates managers for launching TQM

and reengineering;
 ABM establishes where initiatives should be
launched;
 ABM provide cost justification for reengineering
and other improvement projects;
 ABM traces benefits from organizational
improvement;
 ABM through process drivers performance
measures.
Operational Activity-Based Management
and Strategy Implementation

TWO WAYS

 Shifting the mix of activities and

products away from less profitable to
more profitable applications
 Becoming a low-cost producer/seller
Steps for activity analysis

 chart the activities;

 classify activities;
 eliminate non-value-added activities;
 continuously improve the efficiency of
activities.
Difference in decision making between companies
adopted and not adopted operational ABM

- Companies not adopted operational ABM use traditional cost

management systems.
Some common problems, associated with such systems:

•Traditional systems look backward.

•Traditional cost accounting techniques for capturing cost are flawed.
•There is a lack of alignment, as reporting of costs does not reflect the
true flow of processes in the business.
•They encourage dysfunctional behavior by supporting the “ship at all
costs” mentality.
•In a traditional cost accounting system, there is a lack of customer
focus. There is no differentiation between activity costs and added value
to customers.
•Standard costing does not identify key cost drivers, specifically for
overhead costs. Therefore, the constant change and development of
organizations is not examined.
•Standard costing does not point out how to improve current processes.
 So, traditional financial managers focuse
on internal cost controls, things they can
see easily.
 They're disinclined to venture outside the
company to measure external customer
costs and customer profitability.
 Activity-based management focuses on
managing activities to reduce costs and
improve customer value, it means that
decisions are made on internal and external
costs.
ABM and Decision making

 Avoidance cross-subsidization;
 Less subjectivity;
 Optimum cost system
High

Total Cost

Expenses

Cost of Measurement
error cost

Low
Optimum cost system
Low High
Accuracy
Optimum cost system

 Costs of introducing ABM in

a company = expenses on cost of
error + expenses on receiving
accurate information about product
cost;
 Benefits:
 reduction costs;
 higher revenue;
 cost avoidance.
“Those who look deeply into the process of
activity-based management will find that it
is an area of management that will
empower them with the solid information
about their organization that enables them
to exercise leadership and wisdom in
decision making.”
By Stephen R. Covey, author of The Seven Habits
of Highly Effective People and Principle-Centered
Leadership