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MS Activity Based Management System and Other Management Techniques

The document discusses Activity-Based Management (ABM) and its integration with activity-based costing (ABC) to enhance organizational profitability through efficient management of activities. It outlines the ABM process, including identifying activities, determining cost drivers, and evaluating performance, while also addressing challenges such as organizational culture and cost-benefit analysis. Additionally, it highlights the importance of benchmarking, business process re-engineering, and customer profitability analysis in implementing ABM.

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trinayuson41
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7 views

MS Activity Based Management System and Other Management Techniques

The document discusses Activity-Based Management (ABM) and its integration with activity-based costing (ABC) to enhance organizational profitability through efficient management of activities. It outlines the ABM process, including identifying activities, determining cost drivers, and evaluating performance, while also addressing challenges such as organizational culture and cost-benefit analysis. Additionally, it highlights the importance of benchmarking, business process re-engineering, and customer profitability analysis in implementing ABM.

Uploaded by

trinayuson41
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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ACTIVITY-BASED MANAGEMENT SYSTEM AND OTHER Second, determine the cost drivers.

MANAGEMENT TECHNIQUES
• Cost drivers are activities that trigger or drive the
Activity-Based Management incurrence or non-incurrence of costs.

• The application of activity-based costing (ABC) has • Cost drivers may be classified according to their
been driven by the activity-based management model. relationship to activities in the production process

• The term activity-based management and activity- 1. A production plant is to be provided.


based cost management are used to describe the cost
management of ABC. 2. A product is to be produced

• The cornerstone of the ABM system is the management 3. A production batch may be ordered.
of activities. 4. Machine, materials, men and other inputs of actual
• Activities comprise processes which are to be analyzed production process are needed.
and redefined in accordance with the objective of
greater customer satisfaction and delight.

• Kaplan, et. al., in Management Accounting defines ABM


as “ the management processes that use the
information provided by the activity-based cost analysis
to improve organizational profitability”.

• Activity-based management involves performing


activities more efficiently, eliminating the need to
perform certain activities that do not add value to
customers, improving the design of products, and
developing better relationships to customers and
suppliers.

ABM PROCESS

First, identify the activities.


Third, set the operational control environment.
• In activity-based management, processes are mapped
and analyzed. The activities comprising a process are • Managers should have a clear understanding of the
identified and classified as value-added or non-value- activities they handle, where the costs are incurred and
added. for what purpose.

• If customer are those willing to pay, then it is value- • Costs should then be accumulated not by functional
added, while if they are not willing to pay for an activity occurrences but by activity groupings and influences.
in the process of ordering and receiving the goods or
• Non-quantitative factors in line with efficiency and
services, then such activity is non-value-added.
productivity should be set, monitored, and reported for
An activity uses time and costs. The classification of business instant corrective actions to sustain a “no-error” and
activities as to time is categorized as follows: “no-delay” process environment

• Process time (i.e., production time, performance time) Fourth, set the evaluation platform.
in which the actual transformation of materials and
• Managers ought to be assessed as to how they use their
other production input are made to produce the ordered
authorities, do their assignments, deliver results and
goods or service.
perform their duties in accord with the overall goal of
• Inspection time – where errors, inefficiencies and enhancing shareholders’ value.
breakdowns are monitored, reported and remedied.
Fifth, set the culture for continues improvements.
• Wait time (i.e., idle time, storage time) where men,
• Once, the environment has been converted into the
machines, materials and money are held in inertia
ABM systems, people should be continuously
either in a stand still or waiting fashion without creating
encouraged to identify areas and suggest possible
value in the process of producing of goods and services.
mechanisms for improvements.
• Move time (i.e., transfer time) where men, materials
• Processes should be consciously analyzed and mapped
and other factors of production are moved from one
out, activities should be managed and controlled, and
place to another without necessarily contributing to the
chains and linkages should be improved.
quality of the goods and services to be delivered.
OTHER ISSUES IN ABM

• ABM also integrated into its systems the principles of


benchmarking, business process re-engineering,
customer profitability analysis, pricing and product mix
decisions using activity-based costing.

• Benchmarking- is a process where standards (i.e.,


marks) are set at the current level of the highest
performance, also known as “best-in-class practices”,
analyzing the strategies and techniques employed for
such performance, developing models for the adoption
or improvement of such benchmarked strategies, and Required:
executing plans to meet and beat the standards set.
1. Present a comparative tabulation of costs using the
• Business process re-engineering is a strategic model of traditional costing system and the activity-based
redefining the processes applied to shorten business costing system.
cycle time, improve the accuracy of meeting customer
orders and specifications, and create customer’s value. 2. Determine the new cost per activity driver and the new
product cost per unit after the non-value-added
• Customer profitability analysis is a technique of activities are eliminated.
understanding and analyzing the contribution of each
customer or group of customers to the overall Solutions/Discussions
profitability of an enterprise.
1. The financial data may be presented, with respect to
• Regular and special pricing decisions need accurate traditional costing and activity-based costing, as
costing system to set a competitive and strategic follows.
pricing.
2 & 3. the new activity cost per driver and the new product cost
• Product-mix decisions also need an accurate report as per unit are as follows:
to the profitability performance of each product.

CHALLENGES IN ABM

• Organizational fitness. Setting ABM in motion needs


the right organizational culture. The organization should
be prepared to the point where men are ready to accept
and adjust to the new way of doing things.

• Benefit over Costs. The installation of ABM entails


costs, a cash outlay. The benefits to be derived from the
new system should be clearly identified and measured.

• The benefits to be received from the ABM must


exceed the cost of system development,
installation, adjustment, operation, and
maintenance to firmly justify its use.

CUSTOMER ORDER PROCESSING ACTIVITY

DJ Company has been collecting and reporting data along the


functional lines of business activities. It is entertaining the
benefits of activity-based management and has started
accumulating data in this respect. The following data have been
provided with respect to the customer processing activities.

• Activities and identified activity drivers Thank you…

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