Activity Based Management (Costing)

*Activity Based Management (ABM) involves intensive analyses of activities that are involved in producing products or services.  The goal is to identify each activity as value-added (VA) or non-value-added (NVA).  Once this is accomplished the NVA activities are eliminated, to the extent possible, and the VA activities are emphasized with the intent of continuous improvement.

* Activity Based Costing (ABC) is a method of accumulating costs, first to activities and then to cost objects based upon the respective cost object's usage of the various activities.

* ABC differs from traditional cost allocation, which normally assigns costs directly to cost objects sometimes using arbitrary cost allocation methods.

* ABC is a more costly and more sophisticated costing system to set up and implement.  Therefore, it behooves management to study its existing plant environment before adopting and implementing ABC.

* ABC is useful in determining specific product or service type costs and consequently the margin earned by each type.  ABC is helpful when an organization produces multiple products or services and each product or service utilizes resources at non-uniform rates;  for example, a standard high-volume product and a specialty low-volume product.

* The starting point for the implementation of an ABC system is a study of all activities and related costs involved in producing and distribution of the product or service.  From this study, cost pools are established and a cost driver is selected for each cost pool.  A side benefit of all of this is the intense analysis of activities and ideas of how to make the activities more efficient (Activity Based Management).
Activities are also categorized into value-added and non-value-added activities from the customers' perspective.  Cost savings are then made by eliminating, or at least, minimizing the non-value-added activities.

* Click  here for an example of ABC costing.