Вы находитесь на странице: 1из 8

The activity-based Management can be useful also in SME

Cojocaru Cornelia Alexandra Mihalcea Margareta

Abstract
This study examines the activity based Management method (ABM), a procedure that originated in the 1980s for analyzing the processes of a business to identify strengths and weaknesses. Specifically, activity-based Management seeks out areas where a business is losing money so that those activities can be eliminated or improved to increase profitability. ABM analyzes the costs of employees, equipment, facilities, distribution, overhead and other factors in a business to determine and allocate activity costs. In this study we will analyze the steps which can be followed in order to implement it.

Key words: activity-based Management; overhead; activity; value-added or non-value-added; costs.

I.

Introduction

excellence model and shareholder value added, according to Plowman (2001; XVI).

In any organization, customers represent the force. In order to create and improve the processes to increase customer and shareholder value is the primary goal of managers in these new

The Activity-Based Management if is correctly applied, places the organization which uses it, in a more favorable position to achieve its objectives and goals and, it assures improved outputs, higher quality, improved cycle time, improved service and profitability. ABM identifies the key activities performed in an organization, providing a defensible and transparent measure of their associated costs and causes. ABM uses value analysis, cost driver assessment, and performance

organizations. To reach this goal, they need relevant, defensible and transparent information. So we can say that Activity-Based Management is a mean of providing useful information for Management decision-making and organizational advancement. Steel, there are many techniques and

measurement in order to initiate, drive, and support improvement efforts and to enhance decision making. Focused on shaping the future, not explaining the past, ABM incorporates opportunity cost analysis into the standard set of

methodologies used to measure and adjust organizational performance, such as: total quality Management, just in time, business process reengineering, balanced scorecard, business

estimating tools used by the finance professional. Lately the number of companies and organizations which have embraced has grown Activity-Based significantly.

processes and activities of an organization has falling behind the needs of its managers. The author states further that Activity-Based

Management

Management fills this information need by providing activity, cost and operating information. In addition to accurate information about activities and related costs, ABM also provides useful information about value analysis, cost drivers and performance measures to initiate, drive and support effective management decision-making and organizational improvement. The authors, Kaplan and Cooper (1998), organize ABM into operational and strategic: so the operational ABM is about doing things right, using ABC information to improve efficiency. Meaning those activities which add value to the product and that can be identified will be improved. And, on the other hand, activities that do not bring value are the ones that need to be reduced to cut costs without reducing product value. Further, we observe that strategic ABM is about doing the right things, using ABC information to decide which products to develop and which activities to use. This can also be used for customer profitability analysis, identifying which

Nevertheless, companies use this method with different results, suggesting the successful

application of ABM requires the mastery of new management tools and techniques as well as a management mind shift. Analysis, not control, must become the focus of managers using financial and non financial information in a process-driven, customer- centered organization. Defining, measuring, and improving the ability of an organization to create value has to become the stimulus shaping management information

systems, as well as the actions and decisions they support. Achieving this goal lies at the heart of ABM. The remainder of this paper is organized in five sections. The following section reviews related literature and develops our hypotheses. This is follow by a section that discuss the research method and presents results.Finally, a summary of our results and limitations to our study are discussed.

II.

Literature review and hypotheses

customers are the most profitable and focusing on them more. But, in spite of all the benefits brought by this method, a risk with ABM can be that some activities have an implicit value, not necessarily

There has been extensive literature proposing the importance of ABM, and according to Miller (1996:1), the purpose of Management information system to provide information about work

reflected in a financial value added to any product. For instance a particularly pleasant workplace can help attract and retain the best staff, but may not be identified as adding value in operational ABM. A customer that represents a loss based on committed activities, but that opens up leads in a new market, may be identified as a low value customer by a strategic ABM process. Managers should interpret these values and use ABM as a common, yet neutral, ground this provides the basis for negotiation (Kennedy, T., & Bull, R. (2000). The great debate. Management Accounting,78). ABM can give middle managers an understanding of costs to other teams to help them make decisions that benefit the whole organization, not just their activities' bottom line. In the next section, the details of the analysis of activities are discussed. The analyses of activities involve: (i) Identification of value-added and nonvalue-added activities; (ii) Analysis of critical activities; and (iii) Comparison of the performance of those activities with that of benchmarked.

defined as an activity that can be eliminated with no deterioration of product attributes (e.g.

performance, functionality, quality, perceived value) (Miller 1992). Making non-value-added cost visible is one of the major benefits of ABM, but also the most difficult to achieve (David and Robert 1995). Of course defining these topics in contrast can be very difficult. The definition value-added and non value-added activity can be often confused and misunderstood. To be more specific there are few examples of non-value-added activities in an organization. Equipment setup is a non-value-added activity (as the machine is not producing anything while being setup). The logistics in the organization is another non-value-added activity (moving a

product does not make it more valuable). Inspection is a non-value-added activity.

Making the same work again can be one of the non-value-added activities that can be found in any industry. Nevertheless, this activity is a valueadded activity for an operator who performs

III.

Identify value-added and non-valueadded activities

rework on a job because he/she increases the value of a product by rework. Therefore, all aspects of an organization should be considered while

From the moment the activities are specified and the cost of each activity is calculated, the next step is to identify value-added and non-value-added activities. A non-value-added activity is often

identifying value added and non-value-added activities.

Analysis of critical activities Generally speaking, in a small company, the number of activities may range from 10 to 200. It is not possible to analyze all of them at once due to limited time and resources. The key is then to focus on the most critical activities that will add value to customers or help the effective operation of the business. Moreover, these are the activities that provide the significant opportunities for improvement.

Information provided by an ABC system is used to find the opportunities of improvement in

organization at the activity level. The analysis of activities involves classification of activities into value added and non-value added, and then compare these with that of the world class company or the best practices. Benchmarking with the best practice offers avenues for improvement in value-added activities. This also explains how Management can use the cost drivers as the performance measures and control the volume of cost drivers. The ideal cost object is `products that are sold to customers. The cost of all activities is calculated in a similar way to that of parts. The total cost of a four-head foiler is shown in table 1. Marketing. The annual cost of marketing is 23 330 which is divided equally between four types of machines. Then, this amount is divided by eight because the annual sale of a four-head foiler is eight machines. Therefore, the marketing cost for this product is 729.06. Inventory carrying cost. The cost driver for inventory carrying is the stock value. The total stock value in PI is 20 000. For a four-head foiler, the stock value is 1600. Hence, the inventory carrying cost for this machine is 491.20. Engineering support. The cost driver for this activity is the time spent by the engineering support staff s for a particular

IV.

Activity-based management at Paideia Image - a case study

Paideia Image (PI) is a small company with 0.5 million euro annual turnover. It employs about 20 people and is located in India. The main products of PI are four types of machines (viz. sander, splitter, shaper and foliar) for the picture framing industry. The foliar and sander machines are produced in different numbers of heads varying from 1 to 6. They produce machines in standard specifications and according to customers requirements. The company manufactures only 22% of parts of the machine in-house and purchases 78% of parts from subcontractors and suppliers. The assembly of all these parts is the main activity of the company. The company works in a traditional way and all activities are performed manually.

product. For this machine, a total of 80 h is spent by the engineering staff and hence the cost of engineering support activity is 1480. Assembly. The assembly of the machine is performed manually. The cost driver for

assembly activity is the labor hours and the volume of the cost driver is 82 h. This leads to the total assembly cost as 886.42.

Table 1 The cost of a four-head foiler

Activity

Cost driver

Cost driver rate

Cost driver volume

Cost

Assembly Material handling Inspection Purchasing Marketing Inventory Engineering support Personnel Misc. overhead Manufactured parts Direct material

Labor hours

10.81

82 h 1020 movements

886.42 204

No. of movements 0.2

No. of inspection No. of orders No. of product Stock value Staff hours

0.41 20.65 729.06 0.307 18.5

450 inspection 16 orders 1 1600 80 h

184.5 330.4 729.06 491.2 1480

Labor hours Labor hours

0.64 1.6

470 h 520 h

300.8 832 1306.88

9773.0 Total cost 16518.3

Analysis of activities ABC provides detailed information about the company and its activities. This detailed

2. This shows that engineering support activities carry 22.21% of the total cost of all activities. Once the cost of each activity is calculated, the next step is to identify the value-added and nonvalue-added activities. According to the definition of a non-value added activity (an activity that can

information can be used by the Management to initiate improvements and decision- making. The percentage cost of all activities is shown in Figure

be eliminated with no deterioration of product attributes), all activities are non-value added except activities, e.g. assembly, machining and engineering support. Activities, e.g. marketing, personnel and purchasing do not add value to the product, but these are necessary and cannot be eliminated.
Figure 2 The percentage of cost activities from (Assembly to the last Direct material)

material handling and inventory-related activities can be eliminated using different methodologies and techniques, e.g. JIT. It may not be possible to eliminate or reduce all non value- adding activities at the same time. The key is then to focus on the critical activities which form a major portion of the total cost. The inventory carrying cost is 55.81% of the total cost of non value-added activities. Therefore, activities related to carrying inventory should be eliminated first.

The cost driver for inventory carrying activity is the value of stock. The company should not

maintain any stock in order to eliminate related activities. This could be possible by the

introduction of just-in-time purchasing. At the same time, the cost of purchasing should be

closely monitored. The purchasing department will place more purchasing orders to maintain the

minimum stock level. If the company eliminates inventory-related activities and increases the cost of purchasing activity, then there are no benefits in

Therefore,

there

are

three

non-value-added

eliminating non-value-added activities. Similarly, the cost of maintaining quality in processes should be considered in eliminating the inspection activity. Material handling activities cannot be eliminated at the cost that is difficult to justify. Sometime, non-value added activities can be clearly

activities, viz. inspection, material handling and inventory. If we compute the percentage of value-added and non value-added activities, it indicates that nonvalue-added activities are 16.18% of the total cost of activities. These activities can be eliminated without deterioration of product attributes, e.g. quality, performance and function. By using different quality assurance methods, e.g. TQM, ISO9000 and dynamic process control, quality can be maintained during production and hence there is no need for an inspection. Similarly,

identified, but difficult to eliminate completely. However, it is always possible to reduce the cost of these activities. Performance measurements In ABM, performance of PI should be measured at an activity level, and performance measures

include both financial and non-financial measures. The cost drivers are performance measures for all activities. The volume of the cost driver indicates the performance level of each activity. For example, the cost driver for an assembly activity is labor hours. If labor hours required to perform the assembly activity increases, then this indicates that the performance of the assembly activity is poor. If labor hours decrease, then the performance of the assembly activity improves which in turn leads to a reduction in the cost of the product and hence an increase in the profit level. Similarly, appropriate cost drivers are

V.

Conclusions Management practices and methods have been changed over the last decade, and organizations are moving from managing vertically to manage horizontally. Activity-based Management costing provide and cost activity-based and operating

information that mirror the horizontal view. ABC provides accurate cost information and ABM uses this information to initiate improvements. ABC systems produce a large amount of information that is used by the ABM. The costing at part level or subassembly level helps the Management in a make or buy decision. In this paper, an attempt has been made to study the application of ABM in a small company. Firstly, a conceptual model is developed to describe the major components of ABM.

performance measures for all identified activities in the company. From the analysis of activities, the value-added and non-value-added activities are clearly

identified. In PI, the inventory carrying activity is the major non value- added activity which should be eliminated. However, it is difficult because the purchasing cost of the present system will increase as the company places more purchased orders with the objective to reduce inventories. Therefore, it indicates that the purchasing activity should also improve. The comparison of this purchasing activity with the best practice indicates the scope for improvements. ABM uses ABC information to motivate the people in improving and monitoring the performance of their activities.

Secondly, a case study is presented to discuss the application of the model in a real-life small company. The benefits of ABC and ABM can only be achieved if it is applied for the whole organization. Therefore, PI should use activity-based analysis to identify non-value-added activities (e.g. inventory carrying, material handling and inspection), and then try to eliminate these activities by using the number of available Management methods and techniques. Also, there are possibilities to improve value-added activities. The cost driver of activities should be used to measure the performance of activities.

REFERENCES 2002. The costs of activity-based management.

1. Armstrong,

P.

Accounting,

Organizations and Society 27 (2002) 99 120. 2. Anderson, S. W. 1995. A framework for assessing cost Management system changes: the case of activity based costing implementation at general motors, 1986 - 1993. Journal of Management Accounting Research (Fall): 1-51. 3. Argyris,C., and R. S. Kaplan. 1994. Implementing new knowledge: The case of activity -based costing, Accounting Horizons (September): 83-105. 4. Gupta, M. and Galloway, K. Activity-based costing/management and its implications for operations management, Technovation 23 (2003) 131138. 5. Wegmann, G. 2011. Activity-based Management in France: A focus on the information systems department of a bank, International Conference on Economics, Business and Marketing Management, March 11-13, Shanghai, China, 2011.