Managerial Accouting - Activity Based Management

Initially, Activity-Based-Costing (ABC) was used to work out true cost of various products in an organization. Soon the users realized that it could be extended further to improve the operations of an organization. To be short, ABM converts ABC into a system to manage a corporation. Not only it focuses on product, service and customer, it also finds out root cause of a problem, action plans for future development and evaluation of present performance managers or departments etc. Those who installed ABC/ABM system saw better pricing decisions and elimination of waste leading to sustainable profitability.  In fact, ABM is an organized common sense.

Peter Drucker states that "ABM will be the standard within the next ten years."

Activity-based management (ABM) is a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization. Activity-based costing establishes relationships between overhead costs and activities so that overhead costs can be more precisely allocated to products, services, or customer segments. Activity-based management focuses on managing activities to reduce costs and improve customer value.

Harvard Business School, Boston / Wikipedia.org

With the help of Advanced technology, ABM has facilitated identification of production bottlenecks and corrective action in real-time to carry on operations without much interruption. Further, work orders are tracked and assigned in a smooth way. This is widely used in industries like electronics, metal fabrication and machine tools factories. Brief features are given below:

FLEXIBLE MANUFACTURING SYSTEM (FMS)

A manufacturing system with some flexibility to react to any change. It main advantage is in managing resources like time and effort to modify an existing product or to manufacture a new one. This calls for a wide use of robotics, computer-aided engineering (CAE), electronic data interchange (EDI) and computer-integrated manufacturing (CIM) systems besides AMHS & CAD, explained  in the following paragraphs.

AUTOMATIC MATERIAL HANDLING SYSTEM (AMHS)

A number of material handling equipments are interlinked with computer such as (i) powered roller conveyors, (ii) belt conveyors and (iii) pallet handling conveyors.

Bar code are generated and pasted on the bins, boxes, crates and containers. Automatic scanners scan the bar code of the materials. These are automatically sorted and re-routed to their destination. In this way, not only material movements are speeded up, it helps tracking the lost materials, it retrieval and dispatch to a desired location.

Computer-aided design (CAD)

Use of a wide range of computer-based tools for assisting architect, engineers and other professional for designing parts or products in the field of automotive, aerospace and consumer goods. CAD is used throughout the engineering process from conceptual design and layout, through detailed engineering and analysis of components to definition of manufacturing methods.

A major achievement of ABM is elimination of waste as far as possible. Waste is simply defined as anything that does not add value to a product. A cycle time in a business is time taken from raw materials receipt to ultimate sale of the goods. It involves processing, inspection, moving, queue and storage. Only process time adds value to the product. All other add costs but add no value and are thus deemed as non-value-activities. A manager should, therefore, try to reduce waste-time which in some cases is as high as 90% of total time. This can be achieved through changing the factory layout thus reducing internal movement and lesser time in re-tooling or setup besides good planning.

Normally used in connection with receipt of materials, JIT is a philosophy. It calls for producing the required items at the required quality and in the required quantities at the precise time they are required. It aims to reduce waste by minimizing or eliminating inventories besides reducing process time or throughput time. In order to implement JIT system, the companies are changing their layouts from traditional  to cellular flow. Finally, by arrangement with the suppliers, inventories can be eliminated that a lot of amount can be saved which otherwise was faced in inventory financing, obsolescence, waste and pilferage.

To compete in the market, many companies are investing heavily in new technology. The sole purpose is to control operations & time and, in the process, to reduce costs, Minimum process time, efficient operation, reducing non-value added activities would certainly lead to lean costs and improved profitability.

ABM utilizes true cost data generated through ABC for improvement in business profitability in the long run. This is done through some techniques and system discussed in the hub. In addition, there are many other techniques such as target costing which focuses on design phase and kaizen costing which looks for ways and means to reduce cost further during the actual processing. Other management tools, consistent with continuous improvement, include benchmarking and re-engineering