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(MAF651)
ACTIVITY-BASED MANAGEMENT
CLASS AC2208H
GROUP 4
We accept this as a challenge because it shows our passion and ability to do so. For the
prospect of accounting, hopefully this project can be as a way for us, to practice our ability and
interest in different ways, to be a guideline to encourage our effort in becoming an educated and
successful accountant.
Secondly, we would like to thank our beloved lecturer, Assoc. Prof. Dr. Norziaton Ismail
Khan for giving us moral support and being so helpful in completing this assignment and being
so pleasant towards us.
Thirdly, we would like to thank our parents for being very supportive in various ways. We
would also like to thank our classmates from AC2208H for being cooperative and honest, giving
and sharing ideas among classmates which lead us to a better friendship and become an
excellent class among all. Not to forget, thanks to our roommates for being very helpful, kind
and, supportive whenever we feel down and blue.
Last but not least, we would like to thank the group members which are, Nurfatihah binti
Za’bah, Siti Amal Nooraina Binti Abdul Manaf, Nur Haziqah Binti Samsul Anuar, and Siti Hajar
Binti Mohd Azman for being so tough and tolerant until we could overcome every hurdles that
come towards us in any way.
Thank you.
TABLE OF CONTENT
No Content Pages
1. Acknowledgement i
2. 1.0 Introduction 1
In traditional cost price system, the costs are not allocated to the cost drivers and this
makes it hard to determine the costs of productions factors. Therefore, Robert Kaplan and
Robin Cooper introduced activity-based management (ABM) in order to solve the problem
on the traditional cost price calculation in the manufacturing industry. ABM makes the cost
of activities and operational information useful by providing a value analysis, cost
drivers and performance measures to initiate, drive or support improvement efforts,
and this will eventually improve the decision-making processes.
The three main objectives of ABM include to identify and enhance the value-added
activities, to identify and reduce the non-value-added activities, and redesign processes to
improve efficiency and profitability. ABM is described in a conceptual model developed and
this framework explains the different stages of ABM in managing and improving activities.
The two types of ABM are operational and strategic ABM. Even though ABM has its
advantages, it also has its disadvantages. It has its way of implementation as well.
Everything that has been mentioned about activity-based management above will be
discussed in this report.
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2.0 DEFINITION
It was first developed in the 1980s by Robert Kaplan and Robin Cooper, which seeks to
highlight the areas where businesses are losing money. Those activities can be eliminated
or improved to increase profitability by applying ABM. ABM can analyze the cost of
employees, equipment, facilities, distribution, overhead, and other factors in business to
determine and allocate activity costs.
Activity-based management (ABM) has three main objectives. The first objective is to
identify and enhance value-added activities that provide essential value to the
customer or functioning business such as basic production activities that contribute
to the final product.
Lastly, after those two objectives have been achieved, it means that the management
can proceed with the third objective, which is to redesign processes to improve efficiency
and profitability. These objectives show how ABM aims to achieve the same level of output
with lower costs.
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4.0 RELATIONSHIP BETWEEN ACTIVITY-BASED MANAGEMENT AND ACTIVITY–BASED
COSTING
Activity-based costing (ABC) is a methodology that can be used to measure both the
cost of cost object and the performance of activities.
The relationship between ABM and ABC is they are inter-related methodologies. ABM
can be influenced by the information received from ABC process.
As we know, the ABC can have two dimensions which are costing and activity
management. The costing dimension is used to calculate the cost of product, while the
activity management dimension is a dynamic view that reports what is happening in the
business. This two-dimensional ABC is providing information about activities, cost drivers
and performance, as well as cost of cost object.
From that, the ABM will refer to the process of using information from ABC to analyse
activities, cost drivers and performance so that the customers value and profitability are
improved.
Lastly, this figure 1.6 shows that the horizontal axis represents the business process
view. The vertical dimension (Resources, Activities and Cost Objects) represents ABC.
When the second dimension is added (made up of Cost Drivers and Performance
Measurement), the result is ABM.
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5.0 TYPES OF ACTIVITY-BASED MANAGEMENT
There are two types of activity-based management (ABM) which are operational ABM
and strategic ABM.
Firstly, the operational ABM is about doing things right. ABM will use the information
from ABC to make and improve the organization to be more efficient by reducing the
cost of the activities and eliminating those activities that do not add value. Which
means ABM process will identify those added-value activities first before they make any
improvement, and those non-value-added activities can be reduced or eliminated without
reducing the product values. So, it states that even though they eliminate or reduce some
non-value-added activities, the quality of the product will remain the same as before or after
improvement. Thus, the customer does not have to wait so long to get their product.
Secondly, the strategic ABM is about doing the right things, which is essentially
involved in deciding which product to make and which customers to sell to, based on
the more accurate analysis of product and customer profitability that ABC allows.
ABM focuses on accountability for activities rather than costs and emphasizes the
maximization of system. ABM control recognizes that maximizing the efficiency of individual
subunits does not necessarily lead to maximum efficiency for the system.
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It shortens the lead time
Implementing ABM will help company to shorten the lead time in the production
process. Thus, company will be able to produce products faster and able to
introduce new products faster as well.
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7.0 STEPS TO IMPLEMENT ACTIVITY-BASED MANAGEMENT
There are a few steps that a company needs to consider in implementing ABM.
ABM provides three steps for managers to use that can lead to improved efficiency and
profitability of operations. Below are the steps:
The first step to implement ABM is by identifying the activities performed by the
company. Organizations perform hundreds, if not thousands, of different
activities. It would not be feasible, or even beneficial, to identify each activity that
the organization performs, therefore, judgment will need to be used to identify the
significant activities based on the amount of time that is spent performing them or
based on the expected cost. The company needs to identify all the significant
activities that take place to see the overall views of the operation and the people
involved in the operations.
The next step to implement ABM is by classifying the activities as either value-
added or non-value added. Once the activities are specified and the cost of each
activities is calculated, the company needs to identify whether the activities
performed will add value to the product or service and whether it can satisfy the
consumer.
The last step is to enhance value-added activities and eliminate or reduce non-
value activities. The company needs to focus on the activities that will add value
to customers or help the effective operation of the business. Continuously
improving the service and the product provided is one of the keys to maintain the
value-added activities. Non-value-added activities can be eliminated and also
can be reduced. For example, in manufacturing sector, machine setup is a non-
value-added activity as the machine is not producing anything while being setup
but the time to set up a machine can be reduced by improving the training,
eliminate conflicts in employee assignments, placing tools and dies in convenient
location, and changes in the product design.
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8.0 APPLICATION OF ACTIVITY-BASED MANAGEMENT IN THE INDUSTRY
Most of the companies use ABM in conducting their business. This is important because
it shows the direction of the business and how it can be well managed by using this method.
Some of the companies use ABC together with ABM. But it doesn’t mean that ABM can be
only used with ABC. It can also be used with other method such as Just in Time (JIT)
method.
Coca-Cola is one of the companies that uses ABC for the production in their business.
Coca-Cola has used ABC to evaluate the differences between its bigger, world-wide
products and its specialty, regionalized products that may not be offered on the global
market. This understanding on how production costs are different between established,
familiar types and specialized types has enabled them to set price points in each market that
ensure them significant profit.
Other than that, Transeuro Energy Corporation applies ABM in running their business.
Transeuro Energy Corporation is an oil exploration and production company. The company's
properties are in Canada, Armenia, Ukraine, and Papua New Guinea. They faced with profit
problems and they needed development funds which required severe budget cuts. A team
was established to tackle cost improvements by using ABM to determine what departments
were doing and the costs involved. There are a few steps in how they implement this
method, which consist of by identifying the resources consumed by the business
management, charged each activity for its use of resources, identifying resource drivers for
each resource shared among activities and lastly, developing the cost budget for the
business management department based on the information generated by using ABM.
9.0 CONCLUSION
In conclusion, ABM is a tool to help manager manage the business effectively and
efficiently. It helps managers to improve the skills and management of the company by
evaluating the value-added and non-value-added activities. The activities that are value-
added will be improved and improvised by the management to meet customer satisfaction.
Whereas, non-value-added activities will be eliminated to reduce the cost of management.
Besides, ABM can also be used not only with ABC but there are other tools such as just in
time (JIT). Even though there are also some drawbacks in using ABM, majority of
companies that use ABM managed to save their cost in production and increase the future
economic benefit in their company.
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10.0 REFERENCES
6. Bragg, S. (2018, September 16). Non value added activity. Retrieved from
https://www.accountingtools.com/articles/2017/5/12/non-value-added-activity