Methodology:ActivityBasedCostManagementOverviewActivityBasedManagement(ABM)isthebroaddisciplinethatfocusesonachievingcustomervalueandcompanyprofitthroughthemanagementofactivities.Itdrawsonactivity-basedcosting(ABC)asamajorsourceofinformation.Activity-basedcosting(ABC)isamethodologythatmeasuresthecostofactivities,resources,andcostobjects.Resourcesareassignedtoactivities,thenactivitiesareassignedtocostobjectsbasedontheiruse.ActivityBasedBudgetingisthemethodologybywhichacompanyusesitsunderstandingofitsactivitiesanddriverrelationshipstosetbetterbudgets.Thisisachievedbydeterminingestimatesofvolumethatdriveactivities.ABBdeterminesactivitylevelsthatdriveactivitycosts,andgivesanentitygreaterabilitytopredictspending.ActivityBasedCostManagementistheoverallpracticeofABM,ABCandABB.Activity-basedsoftware(e.g.,HyperABC,Netprophet,andOROSormoduleswithinfinancialsystems)isusedtocalculateactivityinformationforABM,ABCandABB.TheuseofthissoftwareisdescribedintheActivityBasedModelingmethodology.TheusesofABCMinformationarenumerous.CompaniesareusingABCMtoreengineeroperations,improvebenchmarking,increaserevenues,simplifythebudgetprocess,andestablishperformancemeasures.Whetherimplementedaloneoraspartofalargerperformancemanagementsystem,ActivityBasedCostManagementprovidescompanieswithbetterinformationtomanagetheirbusiness.TheobjectivesoftheActivityBasedCostManagementare:-UnderstandtherelationshipsbetweenABC,ABMandABB-UnderstandthatActivityBasedModelingcanbeusedforanABCorABMinitiative-UnderstandthedifferencesinthemodelsthatarebuiltforprimarilyforABCorABMinitiatives-UnderstandhowActivityBasedCostManagementwouldbenefittheclient(wouldABC,ABMorABBhelptheclient’sbusinessobjective?)-Understandhowactivitybasedinformationcanbeusedtosupportavarietyofbusinessdecisions.Questions1.Whatisthebusinessobjective(orproblem)beingaddressed?2.Arecurrentproduct/servicecostsaccurate?3.Whatfactorscontributemosttocosts?Methodology:ActivityBasedCostManagement14.Whatprocessesshouldbeimproved?Why?How?5.Whichproducts/servicesaremostprofitable?6.Doyouknowwhichcustomersareprofitableandwhicharenot?7.Whichdistributionchannelsaremostprofitable?6.Whatdepartments’costsappeartobeout-of-line?Why?7.Whoaretheprojectstakeholders/customers?8.Whataretheirexpectations?Whatistheirdefinitionofsuccess?9.Whatobstaclestochangeexist?Howcantheybeovercome?Hints-ThereisnosingleformulaforimplementingActivityBasedCostManagementforallcompaniesandinallsituations-EachABCMprojectisuniqueandshouldbestructuredaroundtheclient’sbusinessobjectives-Decentralizedoperationstakemoreeffortthancentralized-Theclient’sbusinessobjectivemaybeservedbyasimpleratherthancomplexsystem-Prioritizeopportunitiesrecognizingthattheywillchangeovertime.Hints:BestPracticesinABCM:-HaveaPlan...MostABCMimplementationsreceive“lukewarm”managementsupportuntiltheresultsarein-UnderstandYourCustomers...Whichactivitiesinyourorganizationsatisfycustomerwants-UnderstandYourMarketChannels...Whichchannelsprovidesufficientreturnsandgrowthopportunities-UnderstandCustomerProfitability...Whichcustomersrecognizeyourvaluetothemandprovidesufficientreturns-UnderstandYourProductLines...Whichproductsdifferentiateyoufromyourcompetitionandprovide“leadershiplevel”returns-CommunicateInternallyAboutBusinessProcesses,NotFunctions...Processcostinformationissuperiortofunctionalcosting-MigrateTowardsCostPlan...
