Activity Based Management Essay

Activity ground direction (antiballistic missile) is an ap proach to trouble that aims to maximize the protect adding activities to the guests while minimizing or eliminating non- evaluate adding activities. The objective of antiballistic missile is to alter the readiness and effectiveness of an organization in securing its markets. It draws on practise establish- damageing (first principle) as its major source of tuition and foc expends on managing activities to (1) reduce speak to, (2) create executing measures, (3) improve cash flow and quality and, (4) produce levyd value crossways in dictate to improve node value ( channel Dictionary.com). This antiballistic missile dusts top precession is in eliminating or improving those activities to increase emolumentability by meetking out beas where a moving in is losing money such as the factors which cause activities to be performed or follow through at law address to dislodge.Undeniably, in narrate to improve an organizations work processes and activities to effectively and efficiently meet the rapidly changing environs in this globalisation world, way expends and methods have changed over the last decade and impart continue to change in future. THE TRADITIONAL ABSORPTION COSTING is the first musical arrangement lend oneselfed to keep track of the lawful live of a product or servicing. It imputes indirect price to follow object and uses unsophisticated methods to assign indirect hail. It allots overheads to production and service password sections and uses nonaged number of 2nd stage personify device drivers to allocate costs from cost centres or pools to productions or cost objects.This dust depart just be appropriate when the (i)direct costs were the dominant costs, (ii)indirect costs were relatively small, (iii) data costs are high, (iv)there is a lack of intense global contestation and (v)a limited range of products is produced, it expertness be difficult for e very organization to use it. For instance, this governing body skill not be appropriate for companies with labyrinthine processes and manufacturing practices. The large increase of indirect and overhead expenses entrust manipulate the traditional costing method less efficient. Therefore, in 1980s, ACTIVITY-BASED COSTING (ABC) was introduced to overcome theseproblems.ABC is a body for managing the organization bust. It is a one-off exercise that measures the activities cost and performance, resources and the objects which consume them so as to generate overmuch absolute and meaningful education for decision-making. It uses sophisticated or modern methods to assign the indirect costs. This ABC organisation allocates overheads to apiece major activity but not to departments and allocates costs to products or cost objects. However, it limits the company to have avail of the ABC technique. It raftnot be used for official record keeping as the IRS and stockholders require t he use of traditional methods to create necessary reports for taxes.In an another(prenominal) words, companies imply to use two contrastive costing methods in order to formulate the benefit. The musical arrangement is costly to build, knotty to sustain and to modify. Therefore, the emphasis has shifted from ABC to ACTIVITY-BASED MANAGEMENT (antiballistic missile) which is as well as known as ACTIVITY-BASED COST MANAGEMENT (ABCM) later on. ABC is a subset of antiballistic missile as the screening of ABC evolved from a manufacturing product costing orientation to a perplexity philosophy of activity management applied in industries and organizations (headache Dictionary.com).ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing- planetary (CAM-I) (Investopedia). The CAM-I has initiated the cultivation of a comprehensive glossary on ABCM terms by clarifying the signifi ceaset confusion regarding the semantic and acronym associated with the activity based information (Investopedia). This ABM scheme pull aheads the cost and operating information useful to improve decision making. Through the ABM outline process, the management will gain a thorough reason of its line of calling processes and cost behaviour and management team in the company.In addition, the departs of an ABM analysis can support a company generate more accurate budgets and financial forecasts (Investopedia). It gives management insight into the cost structures for making and selling diverse products. In a simplified term, ABC is used to answer the question, what do things cost? and for ABM, a process view is taken to understand factors which cause the costs to occur. This system focuses on the ways to redirect and improve the use of resources, by employABC data, to enhance the value created for customers and other stakeholders (Investopedia).These two systems (ABC and ABM) have attracted high levels of interest from two academics and pr actitioners since its emergence in the late 1980s. It is mainly referable to the significant change in cost management systems they have brought. Due to the lack of pertinence and relevance of traditional costing that leads to mutual subsidy between products and cost, ABC and ABM are used to enhance or replace the traditional cost calculation methods.For example, ABM approach reports by activities while traditional analysis is by departments ABM reporting is by sub-activities but traditional is by expense categories and ABM reporting can reports information on activities that are cross departmental boundaries whereas traditional is not allowed(Drury C, 2008). Thus, ABM is concluded to have more meaningful information as it gives more visibility to the cost of attempt the activities that acquit up the organization and may raise the issues that are not highlighted in traditional analysis. near forward-thinking companies have implemented them, or are in the process of doing so as it can be applied to different types of companies, including manufacturers, service tenderrs, non-profits, schools and government agencies (Business Dictionary.com).CONTENTS1. Features of ABM system_A. STAGES OF IMPLEMENTATION_In order to implement ABM system, the companies are required to carry out the three out of the four stages in ABC (Drury C, 2008). The steps are listed as below(i) Identify major activities that result in costs creation incurred,The activities are the aggregation of units of work or tasks such as machineset-up cost, purchasing cost and repositing cost that use up resources. In order to find all the activities within the company, activity analysis has to be carried out. The activities chosen must be at a reasonable level of aggregation based on the cost verses benefit criteria. In addition, the activities have to be either influenced by the total cost of activity centre or the ability of a single cost driver to provide a satisfactory determinant of the cost of the activity.(ii) Assign cost centers to each activity, andThe companies should not use the arbitrary trysts in assigning the significant proportion of costs to activities as it will reduce the reliability of cost. They have to come in and assign the direct costs to specific activity and assign the indirect costs on cause-and-effect cost drivers. By doing so, the cost incurred on each activity can be gibed.(iii) Determine the cost driver for each major activityIn this stage, the drivers are called as activity cost drivers. In selecting the cost driver, there are two factors which the companies need to consider. Firstly, the cost driver should provide a good write up of costs of each activity cost pool. Additionally, the cost driver should be measurable easily, and the data should be easily obtained and be identifiable with products. (The cost driver can be production or service oriented)._B. TWO CATEGORIES OF ABM APPLICATION_Based on the source adapted by Kaplan & Cooper (19 98), this system accomplishes its objectives by means of two complemetary applications which are the operational ABM (Doing things right) and strategic ABM (Doing the right things).Operational ABM enhances efficiency of operation and asset utilization and lowers costs. Its focus are mainly on doing things right and do activities more efficiently. Management techniques such as activitymanagement, business process reengineering, total quality management, and performance measurement are used in the ABM application.As for strategic ABM, it attempts to change the activities demands and boost protability by improving activity efficiency. It focuses on choosing proper activities for the operation, eliminating non-essential activities and selecting the most protable customers. Strategic ABM applications use management techniques such as process design, customer protability analysis, and value chain analysis.2. analogy between Activity-based management system (ABM) and traditional systemA BM focuses on activity performed by business and hence, it views business as a set of linked activity that ultimately adding value to customers. Its goal is to avenge customer needs while making fewer demands on organizational resources. Hence, ABM could have information of activities such as why activities to be performed, how to perform the activities and how well they are performed. In contrast, traditional system focuses on types of cost from departments. It gives less information to manager for the needs in decision making. ABM is break-dance than traditional system as ABM could provide wider information and information could go deeply and more detailed as needed by the management in decision making. overly, the ABM system only seeks to use cause-and-effect cost driver which is different than the traditional system. It does not rely on arbitrary allocation bases. As we can see from table 1, the information provided by both systems is about customer order processing. However, these two systems take into account different information while preparing the customer order processing. ABM focuses on information that is relevant in the process of customer ordering while traditional analysis focuses on the types of cost incurred in the customer order processing.ABM ANALYSIS RMPreparing Quotations 100Receiving Customer Order 280Expediting cxxTotal 500TRADITIONAL ANALYSIS RMSalaries 110Telephone bill 170Depreciation of summation 120Total 500Table 1In addition, ABM is different from traditional system in terms of the report approach. ABM report is determined by activities while traditional system is determined by departments. It can include crossing departmental boundaries. For instance, solid purchasing process might involve not only one department but it includes inventory influence department, purchasing department and account payable department. The manager will be able to know how the amount spent (e.g RM 2000) to be used in purchasing material under ABM s ystem. It may show the relevant information such as inventory reviewing, sending purchase requisition and sending purchase order. The manager will be able to know how purchasing of material works on and what are the reasons of purchase custody as well as how to minimize the cost of purchase.It focuses on information based on activity. As for traditional system, manager can get the information on material purchase which costs for RM2000 only. However, this RM2000 does not comply with the amount of goods order. By feel at one information itself, the reasons of non-compliance cannot be tracked as there is lack of information. Therefore, ABM system is better since it did not focus on information based on cost but it assignscost of activities to products according to products demand for activities and relies on cost centres and cost drivers that cause activity resource consumption. Other than that, it assigns activity costs to cost objects on prat of cost driver usage and measures res ources consumed by cost objects more accurately.In addition, ABM system provides both information from value and non value added activities. As for traditional system, it provides information on value added activity only. honour added activity is an activity that supports primary objective of producing outputs. For instance, activity like colouring adds value to a book. down the stairs value added activity, traditional report will show the amount spent in colouring since it adds benefit to customers. Customers would likely to buy books with some colouring or some pictures rather than books with only words as it might help them in memorizing and understanding the information stated in the book better. However, if the profit does not increase like what the company expected, manager will be able to trace back the cost incurred by looking at amount spent in colouring non-value added activity.Hence, non value added activity is of the essence(p) as it may affect the companys profit. Non value added activity is an activity where an opportunity is in stock(predicate) for cost reduction without decreasing products service potential to customer such as storing and moving raw materials. Under ABM system, manager will be able to draw economic aid on this issue and trace back the reasons such as waste in the production. Manager will be able to track the cost which has been wasted in the production by reducing material movement and improving production flow without reducing the value added to customer. In other words, customer can have same quality of products-same kind of books while management could reduce the cost of production.3. Benefits and Limitations of ABM systemOne of the benefits of the system is to help the management in decision making. It provides better decision making as the information provided by the ABM system is more useful and reliable. The management can make communicate decision about product mix, lines of business, process, product design,ser vice, capital investment and pricing. For instance, manager will able to make decision on how much capital to invest in impertinently product and what kind of sore product to be launched based on information that manager obtains in ABM system.Furthermore, ABM is a system for continuous improvements. The system is not just an accounting tool but it also provides some(prenominal) tools that can enhance organizational performance management. In other words, ABM system provides other information as well (the product mix, customer services, line of business and capital investment) that would be able to help an organization in its future development and improvement. For instance, an organization knows how to serve customer better by looking into information provided in customer services activity.ABM also provides a better understanding of cost driver. It is a factor that affects the costs associated with an activity. Managers check activity- based management system to the operational activity in order to determine the cost to perform an activity and the cost associated with not performing the activity. Through this activity cost drivers, it seeks to provide an extensive view on the actual costs of an activity. For instances, we can see in the Mason & Cox. In Mason & Cox, they feel that it is expensive to implement the activity-based costing system because it is more complex and expensive to maintain. Nevertheless, ABM seems to be more helpful to them in term of improving the company profitability. For example, prudence had been achieved by targeting non-value-added activities.Their real cost driver had been identified so that manager may know what to eliminate. The shed in the price of the high-volume lines had met with customer approval. Furthermore, ABM enables company to monitor and improve quality and delivery customer value by tracking cost driver. The new approach provided timely information about factors that were chief(prenominal) to customers and fac tors that employees could control. There was no doubt that ABM had helped Mason & Cox to improve both profitability and customer value. Besides that, in Blue Cross and Blue Shield of Florida (BCBSF) needs more sophisticated cost information to make better decision in order to compete in the nature of the health care insurance industry and the need to manage the cost of operation like ways toallocate administrative cost to the products and services. Hence, BCBSF decided to implement ABM system.ABM helps manager to examine the analysis of value added cost and non-value added costs. A value added cost is the cost of an activity that cannot be eliminated without affecting a products value to the customer. Some value added costs are always necessary, as long as the activities that drive such cost are performed efficiently and effectively. For instances, we can truly understand this concept in the Carpenter Company. The senior vice president of sales and merchandising said that roost fa ll into two distinct segments, the commodity part of the business and value-added line. For the commodity part of the business- consists of polyester-filled stays which are a normal pillow.Besides that, the value-added line, which features technology-driven fibers and fabrics designed to enhance sleep. As we can see, Carpenter Company had produced variety function of pillow like muscle stress and pain relieve pillow as well as pillow which reduce unnatural awakenings. Today, consumers are better educated about the benefits of various sleep surfaces and they recognize that the exercise of pillow can play in quality sleep. Although the price for a pillow which features technology-driven fibers and fabrics designed will be expensive but it can help consumer to have a quality sleep. Thus, consumers will not mind to pay more to improve a quality sleep. As a result, we can see that the value-added line may help company to gain profit.In contrast, a non-value added cost is the cost of an activity that cannot be eliminated without diminishing the value. Non-value added cost activities are assumed to be unnecessary as a result it always be minimized like storing and handling inventories transportation of raw material or partially finished products. If this non-value added costs materializeed, company may reduce or eliminate it by careful redesign of the operational process. As we can see how Taipei Fubon depository financial institution deals with those non-value added costs in this mature and complex market. Taipei Fubon Bank needs to accurately determine profit and loss data by customer and customer group so that it could help bank to reduce operating costs and increase profit while maintaining it quality of service. Hence, the bank had developed a customer profitabilitymanagement (CPM) system that provide thorough information regarding cardholder spending pattern and profitability to build highly targeted marketing and retention program.This system did helped ban k to reduce cost by updating timely management report, thus speeding marketing strategy adjustment decision. However, they wanted more information regarding a detailed analysis such as the profitability by card type at the individual customer level. As a result, they entered into the new CPM system by performing an in-depth analysis at the transaction level. The new CPM system contributes to division-wide productivity by means of the delivery of as-needed reporting to the user custom portal. The reporting may include customer spending habits, customer ranking by demographic criteria or the profitability of co-branded card by service channel. After using this system, Taipei Fubon Bank has significantly improving division profitability and now they can make more faster and accurate decision.In Dow Chemical Company (DCC) which produces chemicals and plastics implement ABM to identify the activities they perform, eliminate non-value-added activities, determine cost drivers, set activit y price to charge users and benchmark these price to ensure that they are competitive. season ABM has brought benefits to DCC but also brought umpteen challenges to them. For instances, DCC feels that it is difficult to capture cost driver information without creating supererogatory work. As the activity analysis became more and more detailed, DCC had to justify the complexities in obtaining and processing activity information. last the company decided that should not break activities down to task level, otherwise the resultant activities were too small and numerous.By comparing with the traditional system, ABM system is more costly. Implementation of ABM system requires many resources such as human resources and time consuming. Different activities require different resources. Data that concerns on major activities must be measured, collected and entered into system. As we can see that Scottish National Blood transfusion Service (SNBTS) feels that ABM system is a timely and co stly system. By using ABM system, they need to implement a thorough mapping of all processes, drill down and filtering of all relevant activities, the recognition of costdriver and others are enormous challenges. Thus, this may cause the company to take up much time and resources because this company consists of over 1100 staffs. Furthermore, everyone may have different point of view and searching for different data therefore they need times to eliminate and collect the right data into the right activities. chimerical data collection and allocation may result to setbacks during the implementation stages and may jeopardize the whole project. misinterpretation might also glide by in ABM system. This is because most of the information is interrelated and ambiguous. For instance, cost assign to material, products and customer may be relevant and cause the manager to overlook some information. This causes misinterpretation happen and link to the wrong decision making. Wrong decision making may cause some issues happen in the operation such as production delay, over-production and wrong shipping.Reports by using ABM system are suitable for internal users only and cannot report to external users. This is because ABM system has limitations since it does not adjust to generally accepted accounting principles (G.A.A.P). Stakeholder might not be able to understand the reports on ABM system and therefore, ABM system is only restricted for internal use.CONCLUSIONPreviously, company usually apply traditional accounting system to manage the companys operational activity but this system does not provide more detailed information that needed in this competitive environment. Therefore, managers require better information by developing activity-based management. This approach allow everyone in the organization understand where costs are being incurred, why are they being incurred and how these activities contribute to a higher value added to customers. Moreover, ABC explores to identify activities that can be eliminated or improved. In additional to that, communications will improve and changes are easier to make if company conducts the activity-based approach.In addition to the above purpose, we feel that ABM system may be useful for a company. This is because it not only focuses on the product of a company but also the services and customers of a company. Besides that, it also help company to find out the cause of a problem, action plan for future development as well as evaluation of managers or departments present performance. In addition to that, it also helps company utilize true cost data which generated through ABC for further improvement in business profitability in the long run.ABM in best practice firm lies at the heart of the decision-support process. Integrating ABM within the total information and management control system of the organization can lead to quantum improvements. Therefore, an organization needs to understand and address the common pitfalls and barriers to advantage at every stage of implementation. Besides, the ABM system should include and draw on the insights of the people who use it no matter during planning, activity analysis or other so that the implementation will conquest when the people use the system. Organization should tailor to the unique strategy, structure, capabilities, and needs of the firm so that the implementation will be succeeded. This is because ABM will not look the same in every organization although it is a universally useful concept.Finally, we have an in-depth understanding of ABM during the process of working out this assignment and we demonstrate out that activity-based approach has more advantages than disadvantages. We have learned many things like time management and how to get along with our group members. 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