Activity Based Management (ABM) Essay

Activity based management (ABM) is a method of identifying and evaluating activities that a business performs using activity based costing (ABC) to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization. ABM can be divided into operational and strategic. Operational ABM is about â€Å"doing thing right†, using ABC information to improve efficiency. Those activities which add value to remain in business can be identified and improved. Activities that don’t add value such as scheduling, moving, waiting, inspecting and storing are the ones that need to be reduced to cut costs without reducing product value. Strategic ABM is about â€Å"doing the right things†, using ABC information, to decide which products to develop and which activities to be used. This also can be used for customer profitability analysis, identifying which customer are the most profitable and focusing on them more. Activity based costing (ABC) is a costing methodology that identifies activities in an organizations and assign the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect cost which is overhead into direct cost compared to conventional costing. ABM is also a process of using information from activity-based costing to analyse activities, cost drivers and performance so that customer value and profitability are improved. The aim of ABC models is to estimate the cost elements of entire product activities and services. It may help to inform a company’s decision either identify and eliminate those product and services that are unprofitable and lower the prices of those that are overpriced or identify, eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield which customer valued. Customer value is the value a customer places on particular features of a product. It also addresses the vertical view on the activity-based costing model. 2. 0 USES AND BENEFITS of ABM 2. 1 The Uses of ABM Accounting Based management (ABM) refers to the entire set of actions that can be take on a better information basis with activity-based cost information. Organizations implement ABM for different reasons. They believe that ABM can help them make a better decision, improve performance, and earn money on asset deployed. Some of specific uses of ABM in organization today include attribute analysis, strategic decision makings, benchmarking, operations analysis, and profitability/pricing analysis and process improvements. Attributes analysis classifies and combines cost and performance data into manageable, controllable clusters. ABC/ABM system cause many different attributes for a specific cost. Data attributes allow a company to perform analysis on many different dimensions of a management problem using the same basic warehouse of data. Some common forms of attributes analysis are value analysis, which utilizes information collected about business processes and examines various attributes of the process. For example are diversity, capacity, and complexity. This is to identify candidates for improvement efforts, time variability analysis, which seeks to understand variances in the time needed to complete an activity or provide a service and to develop ways to reduce these variances. Cost of quality, which is a management reporting technique that identifies and measures quality costs within an organization using four basic categories: prevention, detection, internal failure, and external failure. Strategic analysis explores various ways a company can create and sustain a competitive advantage in the marketplace. Emphasizing long long-term objectives and challenges, strategic analysis seeks to impact future costs and improve future profitability by clarifying the cost of various cost objects such as products, customers, and channels. Strategic analysis emphasizes future opportunities and challenges, using a combination of both physical and financial measures to explore the impact of alternative strategic positions. Ways in which ABM supports strategic analysis include strategic planning, consolidation of operations analysis, acquisition analysis; and analysis of revenue and profitability growth potential. Benchmarking is a methodology that identifies an activity as the standard, or benchmark, by which a similar activity will be judged. It is used to assist managers in identifying a process or technique to increase the effectiveness or efficiency of an activity. ABM supports different types of benchmarking, including internal benchmarking, industry/competitive benchmarking; and best-in-class benchmarking. Operations analysis seeks to identify, measure, and improve current performance of key processes and operations within a firm. Areas where ABM is useful include â€Å"what-if† analysis, project management, creation and use of activity-based performance Measures, capacity management, constraint analysis; and process-based costing. Profitability/pricing analysis is a key area for any company. ABM assists a company in analysing the costs and benefits of products and processes in both the â€Å"as is† and post improvement â€Å"to be† scenarios. ABM also supports prelaunch analysis and improvement of product profitability. Areas in which ABM has proven useful in adopting organizations include product/service profitability analysis, business process reengineering, distribution channel profitability analysis, market segment profitability analysis; and target and life-cycle costing. Process improvement lies at the heart of modern management techniques. Focused on identifying the causes of variation, waste, and inefficiency, process improvement includes both incremental and quantum change efforts that seek to increase the value created per resources consumed by an organization. Uses being made of ABM for process improvement include business process modelling, total quality initiatives, business process reengineering; and analysis of outsourcing and shared service. The Pennzoil Production and Exploration Company (PEPCO) used ABM as a key measurement tool to identify costs by process and to support its reengineering efforts. To keep pace with lower crude and natural gas prices and slowing North American operation, PEPCO needed to find ways to reengineer existing processes to streamline and improve efficiency. ABM provided the data for PEPCO to change the cost structure of its exploration and production efforts. It achieved this by determining what resources were actually required to support its properties based on current operation. In addition, the reengineering link enabled the company to consider those same properties and determine how it could best meet its economic objectives with fewer resources through a variety of operations improvement analyses. 2. 2 BENEFIT OF ACCOUNTING BASED MANAGEMENT (ABM) ABM is used to support a broad array of management initiatives to help organizations create more value for their customers while reducing the cost of operations. Benefits derived from ABM’s use include identification of redundant costs, analysis of value-added and non-value-added costs, quantification of the costs of quality by element; and identification of customer-focused activities. Other benefits include analysis of the cost of complexity; identification of process costs and support of process analysis, measurement of the impact of reengineering efforts, better understanding of cost drivers, evaluation of manufacturing flexibility investments; and activity-based budgeting. 3. 0 ABM IMPLEMENTATION PHASES A holistic approach to ABM implementation is important to ensure that all benefit derive from the use of ABM is sustained. The implementation of Activity Based Management (ABM) consist of seven (7) step that is planning, activity analysis, activity/ product costing, documenting results, data gathering and analysis, developing a data collection and reporting system, and achieving full integration. The first step is planning. The planning phase focuses on identifying the purpose, objective, and expectations for each specific elements of the ABM total implementation. The detailed project plan should be develop which include a time line with assign responsibilities for task completion, clear definition of resources required to complete each stage of the implementation, the selection of specific individual to complete the work, and a precise denotation of the data collection methods to be employed. The second step is analyzing activities. Analysis activities include several key steps which is catalogue of specific activities and business processes, definition of outputs and output measures, value-added analysis, identification of cost drivers, and detailed specification of activity performance. The third is costing activities, product and services. Activity analysis provides basic information for constructing the ABC cost system. Developing the ABC estimates is the most mechanical part of any ABM implementation. This phase focus on identify and documenting cost tracing methodologies and core assumptions, the costing phase ties the financial reporting system to the newly developed activity and process structures of the ABM system. The development or choice of a specific software system to export, import, and accept the data used to generate the activity-based estimates is important to ensure that work can be completed at time. The other step is documenting result. The work completed, significant results, recommendations, and conclusions should all be included in the documented records of the project. This documentation serves as a crucial bridge between planning and operating an ABM system. The time spent recording past result and detailed requiring future actions serve to reinforce the learning process, communicate and access progress, and adjust the detailed implementation plans to accommodate unforeseen problems and concerns. Next is gathering and analysing data. During the planning stages of the implementations, emphasis is placed on gathering information and data to document the purpose, expectations and objective of the initiatives. Data gathering takes on more importance as the key to understanding the existing knowledge based in the organizations. To complete the activities/ product costing step, information about the consumption of resources by activities needs to be collected and analyzed. The next step is developing an on-going data collection and reporting system. The development of a cost-effective, efficient data collection and reporting system is the final aspect of a holistic ABM implementation. The information gathered during implementation provides a static snapshot of the activities, and their resource usage, at one particular point in time. There are two major stages in implementing the ongoing ABM information and reporting system that is establishing the basic data collection and analysis procedures and ongoing system maintenance. The last stage is achieving full integration. Integrating ABM with existing management practices is necessary in order to achieve its full benefits. The full integration of ABM within the fabric of the organization’s other information and management systems is complete when people in the organization embrace activity management, take ownership, and internalize it as a better way of doing business and making decisions. 4. 0 COMMON ABM PITFALLS AND SOLUTIONS Many problems may occur during the life of the project and beyond. Knowledge of these pitfalls helps an implementation team develop methods to avoid them and to deal effectively with problems as they occur. Each stage of the implementation process brings with it its own unique challenges as the following discussion suggests. Firstly is the problem during planning. During the planning phases a number of distinctive pitfalls and problem can plague the implementation efforts, including the lack of senior management responsibilities and commitment, failure to gain complete agreement on implementation objectives and lack of understanding on the kinds of financial, operational, and strategic information the organization expects. However this problem can be resolve through some ways. Among the solutions that can be applied to deal with the common pitfalls of the planning phases is by expose through senior management the potential benefits of ABM Implementation that can be done through acknowledgement of the company who already experiencing in dealing with ABM. Second is by link the initiative to key business objectives and clearly articulate how the ABM project will deliver improvement in that area. Next is during the analyzing activities. While analyzing activities, the structure of the project and the implication of its scope begin to be felt. Among the common pitfalls in this phases is the number of activities for which detail information must be gathered seems overwhelming, appear to be no significant activities, and lastly the failure to communicate to employees behind the project and its question leads to the potential for negative feelings and defense behaviors. Among the specific ways the pitfalls of the activity analysis phases can be addressed include information on how activities interrelated instead of detail data on individual task, involved employees in the selection of activities and cost drivers. Costing activities/ product and services is also one of the common pitfalls. The costing activities/ product and service phases on ABM implementation may be mechanism but it do have it own unique challenges and potential pitfalls such as activity drivers does not adequately reflect the consumption rate and pattern of their respected activities, capacity, or potential of the resources in the worksite supports work, is not defined and responsibilities and controllability of the costs is not clearly identified. Some approach that have been used in successfully ABM implementation include reconciling ABM data to the financial accounting system, avoiding allocating cost when they cannot be assigns accurately; using total cost in decision-making and process improvements efforts; and using practices capacity to assign costs to cost objects. Next is analysing data and documenting results. At this point in the ABM implementation, new information becomes available to managers at all levels of the organization. It consists of the actual information that brings with it its own unique challenges and pitfalls including managers do not take any action on the ABM information. For example, some parties are adversely affected by the ABM information and a high degree of disbelief in the new number develops. Some ways these pitfalls can be manage and require managers to justify inaction as well as actions on ABM information. This is to ensure that a large number of people are receiving and using the information, and holdings feedback sessions to gather criticisms, concepts and problems with the ABM system from affected managers. Developing ongoing data collections and reporting system is also one of the problem. While the need to create effectiveness, efficient data collection and reporting systems is essential to any ABM report. It is also a stage that having its own potential pitfalls, including no provision is made for the results updating of the ABM information, reports do not continued the information managers need or want, and unnecessary accounting terminology is used in the reports. Some ways in which an ABM implementation can plan for and overcome these data and reporting pitfalls are minimize the efforts required to reconcile data and balance report, as well as to update and maintain the system, develop and written plan for how the system will affect decision makings. Moreover, what the decisions are, how the system will help in making them, whose responsibilities they are and when they will be made will use graphic and summary future as the ordinary report, providing detailed information in an appendix or query format, and use innovative data display and users interfaces. Report that are difficult to understand are not going to be used but somehow the report that is easily readable and understand. If the report arrives not at the right time also having a little value. Furthermore is achieving full integrations. Full integration of ABM information with the existing data and reporting structure of the organization signal a mature implementation. Somehow it still having a unique challenges which can lead to the disaster in order to achieve the objectives in ABM which consist of no formal system exists for documenting suggestion for improvement in the ABM system and no one has taken ownership for the system in decision makings. Among the approach that can be used when pitfalls are plaguing a company seeking full integration. This is to ensure that system design specifications take into account technique such as benchmarking and target costing, and also transferring ownership of the system to line management. 5. 0 Conclusion After many years of experiments, successes, failures, and learning, ABM systems are proving they are here to stay. Much more than another form of accounting, ABM in best-practice firms 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 as vital links between operations and strategy, processes and customers, value and cost are defined, measured, and understood. Achieving the results requires an organization to understand and address the common pitfalls and barriers in order to success at every stage of implementation. Whether during planning, activity analysis, costing, documentation, data gathering and analysis, development of the data collection and reporting system, or achieving full integration, the ABM system must include and draw on the insights of the people who will use it. When the people using the system take ownership, the implementation is a success. Successful implementation of ABM will not look the same in every organization or follow the same path. Tailored to the unique strategy, structure, capabilities, and needs of the firm, ABM is a universally useful concept and system that can take on a multitude of shapes and uses. ABM data should meet the needs of the company’s decision makers and support their efforts to create value for all stakeholders. REFERENCES 1. Kim Langfield Smith, Helen Thorne, Ronald W. Hilton (2012), Management Accounting, 6th Edition, Mc Graw Hill. 2. CIMA July 2002, Technical Briefing – Latest Trend in Corporate Performance Measurement. 3. Drury, C. 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