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Implementing ABM
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 ABCs objective of improving the
accuracy of costing assignments. If a company intends to use both ABC and process value
analysis (PVA), then its approach to implementation must be carefully conceived. For example,
if ABC creates aggregate cost pools based on homogeneity or approximating techniques, much
of the detailed activity information may not be needed. Yet, for PVA, this detail must be retained
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 organizations current and desired competitive position
3. The organizations 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
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 just-in-time (JIT) manufacturing, total quality
management, and total environmental quality cost management. For example, identifying
quality-related and environmental activities enables management to focus attention on the nonvalue-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.
Performance
Measurment
Are Establish
Performance
Is Measured
Individual
Rewarded
basis. As the models in Exhibits 5-1 and 5-3 illustrate, process value analysis is concerned with
(1) driver analysis, (2) activity
analysis, and (3) activity performance measurement.
Cost Flow
Cost flows under process costing are similar to those under job-order costing. Raw materials are
purchased and debited to the raw materials account. Direct materials used in production, direct
labor, and applied overhead are charged to the work-in-process account. In a production process
with several processes, there is a work-in-process account for each department or process. Goods
completed in one department are transferred out to the next department. When units are
completed in the final department or process,their cost is credited to Work in Process and debited
to Finished Goods.
Equivalent unit
Equivalent units of production are the complete units that could have been produced given the
total amount of manufacturing effort expended during the period. The number of physical units
is multiplied by the percentage of completion to calculate equivalent units. Two approaches have
evolved for dealing with beginning work-in-process inventory costs. The weighted average
costing method combines beginning inventory costs with current-period costs to compute
unit costs. The FIFO costing method separates units in beginning inventory from those produced
during the current period.