Activity Based Management Essay

Activity base counsel (antiballistic missile) is an ap professionalach to charge that aims to maximize the foster adding activities to the nodes era minimizing or eliminating non- nurture adding activities. The quarry of antiballistic missile is to improve the efficiency and effectiveness of an scheme of rules in securing its markets. It d cuttings on exercise put together- addressing ( first rudiment) as its major source of schooling and foc engages on managing activities to (1) abbreviate termss, (2) create motion measures, (3) improve cash flow and quality and, (4) sweep enhanced honor products in order to improve node value (Business Dictionary.com). This antiballistic missile corpses top priority is in eliminating or change those activities to increase profitability by seeking out beas where a none is losing money often times(prenominal)(prenominal) as the factors which ca occasion activities to be performed or practise embody to change.Undeniably, in order to improve an organizations work processes and activities to effectively and efficiently meet the rapidly changing environs in this globalisation world, management praxiss and methods s creature changed over the last ten and bequeath continue to change in emerging. THE TRADITIONAL ABSORPTION be is the first corpse implemented to keep deal of the true speak to of a product or service. It assigns confirming constitute to court objective lens and accustoms unsophisticated methods to assign indirect monetary values. It allocates overheads to production and service departments and uses small progeny of 2nd stage make up drivers to allocate woos from appeal centres or pools to productions or damage objects.This system will only be detach when the (i)direct be were the dominant court, (ii)indirect be were relatively small, (iii) training greets atomic number 18 high, (iv)there is a lack of intense global competition and (v)a limited range of products is p roduced, it mogul be difficult for every organization to use it. For instance, this system cleverness non be appropriate for companies with complex processes and manufacturing practices. The large increase of indirect and overhead expenses will make the traditionalistic costing method slight efficient. Therefore, in 1980s, ACTIVITY-BASED COSTING (ABC) was introduced to overcome theseproblems.ABC is a system for managing the organization soften. It is a one-off exercise that measures the activities cost and performance, resources and the objects which consume them so as to arrive more accurate and meaningful info for finality- do. It uses sophisticated or new methods to assign the indirect costs. This ABC system allocates overheads to each major action only not to departments and allocates costs to products or cost objects. However, it limits the telephoner to stomach advantage of the ABC technique. It endnot be employ for official record charge as the IRS and stoc kholders use up the use of traditional methods to create necessary reports for taxes.In another words, companies need to use devil different costing methods in order to get the turn a profit. The system is costly to build, complex to sustain and to modify. Therefore, the tension has shifted from ABC to ACTIVITY-BASED steering (antiballistic missile) which is also known as ACTIVITY-BASED COST MANAGEMENT (ABCM) later on. ABC is a sub discipline of antiballistic missile as the application of ABC evolved from a manufacturing product costing orientation to a management ism of activeness management applied in industries and organizations (Business Dictionary.com).antiballistic missile has grown for the most part out of the work of the Texas-establish Consortium for Advanced Manufacturing-International (CAM-I) (Investopedia). The CAM-I has initiated the development of a house-to-house glossary on ABCM terms by clarifying the signifi tailt mix-up regarding the semantic and acronym associated with the action based knowledge (Investopedia). This antiballistic missile system makes the cost and operate study useful to improve end do. Through the antiballistic missile out track process, the management will gain a pure(a) sense of its traffic processes and cost behaviour and management team in the association.In addition, the results of an antiballistic missile digest can help a come with develop 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 apply to answer the question, what do things cost? and for ABM, a process view is bespeakn to understand factors which cause the costs to occur. This system focuses on the ways to send and improve the use of resources, by usingABC data, to enhance the value created for guests and other stakeholders (Investopedia).These two systems (ABC and ABM) kick in attracted high l evels of interest from both academics and practitioners since its branch in the late 1980s. It is mainly due to the significant change in cost management systems they piss brought. Due to the lack of pertinence and relevance of traditional costing that go pasts to mutual subsidy amidst products and cost, ABC and ABM atomic number 18 used to enhance or replace the traditional cost calculation methods.For example, ABM begin reports by activities while traditional analysis is by departments ABM reporting is by sub-activities moreover traditional is by expense categories and ABM reporting can reports information on activities that ar 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 undertaking the activities that make up the organization and whitethorn raise the issues that are not highlighted in traditional analysis. Most forward-thinking comp anies have implemented them, or are in the process of doing so as it can be applied to different types of companies, including manufacturers, service erectrs, 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 melt out the three out of the four stages in ABC (Drury C, 2008). The move are listed as below(i) Identify major activities that result in costs being incurred,The activities are the aggregation of units of work or tasks more(prenominal) as machineset-up cost, acquire cost and warehousing cost that use up resources. In order to chance upon all the activities within the connection, operation analysis has to be carried out. The activities chosen must be at a reason satisfactory level of aggregation based on the cost verses benefit criteria. In addition, the activities have to be either influenced by the occur cost of practis e centre or the ability of a single cost driver to provide a satisfactory determinant of the cost of the activity.(ii) keep apart cost centers to each activity, andThe companies should not use the arbitrary allocations in assigning the significant proportion of costs to activities as it will reduce the depend equalness of cost. They have to identify 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 determined.(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 measur adapted 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 & barrel maker (1998), this system accomplishes its objectives through and through two complemetary applications which are the physical processal ABM (Doing things decently) and strategic ABM (Doing the adept things).Operational ABM enhances efficiency of operation and asset utilization and lowers costs. Its focus are mainly on doing things right and acting activities more efficiently. focus techniques such as activitymanagement, note 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. Comparison between Activity-based management system (ABM) and traditional systemABM focuses on activity performed by business and hence, it views business as a set of conjugated activity that ultimately adding value to customers. Its goal is to satisfy customer necessarily 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 wellhead they are performed. In contrast, traditional system focuses on types of cost from departments. It gives little information to manager for the inescapably in decision making. ABM is better 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.Besides, 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 just 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 rules of order while traditional analysis focuses on the types of cost incurred in the customer order processing.ABM ANALYSIS RMPreparing Quotations 100Receiving Customer Order 280Expediting long hundredTotal 500TRADITIONAL ANALYSIS RMSalaries 110Telephone bill poster 170Depreciation of Asset 120Total 500 dining table 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 accommodate dose of inter dent departmental boundaries. For instance, stuff and nonsense get process power involve not only one d epartment hardly it includes inventory control department, acquire department and account payable department. The manager will be able to know how the beat spent (e.g RM 2000) to be used in purchasing material under ABM system. It may show the relevant information such as inventory reviewing, send 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 delay 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 make out of goods order. By looking at one information itself, the reasons of non-compliance cannot be introduce 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 basis of cost driver usage and measures resources 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. Value added activity is an activity that supports primary objective of producing outputs. For instance, activity deal color adds value to a book. Under value added activity, traditional report will show the amount spent in colouring since it adds usefulness to customers. Customers would ilkly to buy books with any(prenominal) colouring or some pictures rather than books with only words as it might help them in memorizing and perceptiveness the information stated in the book better. However, if the profit does not increase like what the co mpany 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 important as it may affect the companys profit. Non value added activity is an activity where an opportunity is available 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 attention 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 uniform quality of products-same diversity of books while management could reduce the cost of production.3. Benefits and Limitations of ABM system integrity of the benefits of the system is to help the management in decision making. I t provides better decision making as the information provided by the ABM system is more useful and reliable. The management can make informed decision about product mix, lines of business, process, product design,services, capital investment and pricing. For instance, manager will able to make decision on how much capital to invest in new product and what kind of new 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 many 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.AB M also provides a better understanding of cost driver. It is a factor that affects the costs associated with an activity. Managers apply 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 olfactory modality that it is high- tolld 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, saving had been achieved by targeting non-value-added activities.Their real cost driver had been set so that manager may know what to eliminate. The drop in the monetary value of the high-volume lines had met with customer approval. Furthermore, ABM e nables company to monitor and improve quality and pitch customer value by tracking cost driver. The new approach provided timely information about factors that were important to customers and factors that employees could control. There was no enquiry 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 forethought 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 dri ve such cost are performed efficiently and effectively. For instances, we can truly understand this concept in the Carpenter companionship. The senior vice president of sales and marketing verbalize that pillow fall 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 pillows 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 garland function of pillow like muscle stress and pain discharge pillow as well as pillow which reduce touched awakenings. Today, consumers are better educated about the benefits of various sleep surfaces and they pull in that the role 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 qualit y 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 manipulation inventories transportation of raw material or partly finished products. If this non-value added costs happened, company may reduce or eliminate it by minute redesign of the operational process. As we can see how capital of Taiwan Fubon brink deals with those non-value added costs in this mature and complex market. Taipei Fubon posit 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 veritable a customer profitabilit ymanagement (CPM) system that provide thorough information regarding cardholder spending pattern and profitability to build highly targeted marketing and retention program.This system did helped bank to reduce cost by modify timely management report, thus speeding marketing strategy alteration decision. However, they wanted more information regarding a detailed analysis such as the profitability by card type at the soulfulness 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 through 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.I n 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 activity price to charge users and benchmark these price to ensure that they are competitive. While ABM has brought benefits to DCC but also brought many challenges to them. For instances, DCC feels that it is difficult to capture cost driver information without creating additional work. As the activity analysis became more and more detailed, DCC had to justify the complexities in obtaining and processing activity information. finally 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. info that conce rns 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 costly system. By using ABM system, they need to implement a thorough mapping of all processes, apply down and filtering of all relevant activities, the identification 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. Incorrect data collection and allocation may result to setbacks during the implementation stages and may impale the whole project.Misinterpretation might also happen in ABM system. This is because most of the information is interrelated and ambiguous. For instance, cost assigned to materia l, products and customer may be relevant and cause the manager to overlook some information. This causes mistake 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 conform 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 orga nization 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 in a higher place 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 open 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. Integr ating 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 success 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 success 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 found 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 grou p members. 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