Implementing activity based management

Activity-based management (ABM) is a more comprehensive system than an ABC system. ABM adds a process view to the cost view of ABC. ABM encompasses ABC and uses it as a major source of information. ABM can be viewed as an information system that has the broad objectives of (1) improving decision making by providing accurate cost information and (2) reducing costs by encouraging and supporting continuous improvement efforts. The first objective is the domain of ABC, while the second objective belongs to process value analysis. The second objective requires more detailed data than ABC’s objective of improving the accuracy of costing assignments. If a company intends to use both ABC and PVA, then its approach to implementation must be carefully conceived. For example, if ABC creates aggregate cost pools based on homogeneity, much of the detailed activity information may not be needed. Yet, for PVA, this detail must be retained. Clearly, how to implement an ABM system is a major consideration. Exhibit 12-10 provides a representation of an ABM implementation model.

Discussion of the ABM Implementation Model
The model in Exhibit 12-10 shows that the overall objective of ABM is to improve a firm’s profitability, an objective achieved by identifying and selecting opportunities for

improvement and using more accurate information to make better decisions. Root cause analysis, for example, reveals opportunities for improvement. By identifying non-valueadded costs, priorities can be established based on the initiatives that offer the most cost reduction. Furthermore, the potential cost reduction itself is measured by ABC calculations.  Exhibit 12-10 also reveals that 10 steps define an ABM implementation: two common steps and four that are associated with either ABC or PVA.

Systems Planning
Systems planning provides the justification for implementing ABM and addresses the following issues:
1. The purpose and objectives of the ABM system
2. The organization’s current and desired competitive position
3. The organization’s business processes and product mix
4. The timeline, assigned responsibilities, and resources required for implementation
5. The ability of the organization to implement, learn, and use new information

To obtain buy-in by operating personnel, the objectives of an ABM system must be carefully identified and related to the firm’s desired competitive position, business processes, and product mix. The broad objectives have already been mentioned (improving accuracy and continuous improvement); however, it is also necessary to develop specific desired outcomes associated with each of these two objectives. For example, one specific outcome is that of changing the product mix based on more accurate costs (with the expectation that profits will increase). Another specific outcome is that of improving the firm’s competitive position by increasing process efficiency through elimination of non-value-added activities. Planning also entails establishing a timeline for the implementation project, assigning specific responsibilities to individuals or teams, and developing a detailed budget. Although all five issues listed are important, the information usage issue deserves special attention. Successful implementation is strongly dependent on the organization’s ability to learn how to use the new information provided by ABM. Users must be convinced that this new information can solve specific problems. They also need to be trained to use activity-based costing information to produce better decisions, and they need to understand how ABM drives and supports continuous improvement.

Activity Identification, Definition, and Classification
Identifying, defining, and classifying activities requires more attention for ABM than for ABC. The activity dictionary should include a detailed listing of the tasks that define each activity. Knowing the tasks that define an activity can be very helpful for improving the efficiency of value-added activities. Classification of activities also allows ABM to connect with other continuous improvement initiatives such as JIT, total quality management, and total environmental quality cost management. For example, identifying quality-related and environmental activities enables management to focus attention on the non-value-added activities of the quality and environmental categories. ABC also provides a more complete understanding of the effect that quality and environmental costs have on products, processes, and customers. It is important to realize that successful implementation requires time and patience. This is especially true when it comes to using the new information provided by an ABM system. For example, one survey revealed that it takes an average of 3.1 years for nonaccounting personnel to grow accustomed to using ABC information.

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