ACTIVITY BASED MANAGEMENT & ACTIVITY BASED COSTING
Activity- based Management is implemented through Activity- based Costing. Thus Activity- based Costing is a subset of Activity- based management.
Cooper and Kaplan developed Activity- based Costing in 1988. The limitations of traditional cost systems led to the emergence of Activity- based Costing.
Stages in Activity Based Costing
Identification of the activities that may take place in an org.
Higher no of cost centers
No must not be too high for practical applic
.:. More accurate than traditional system.
Assigning costs to cost pool for each activity
Using resource cost drivers
Support activities spread across primary activities
Determine the cost driver for each activity
Relate o/h collected in the cost pools to cost objects / products
What causes the activity to incur costs?
Assigning the costs of activities to products according to product demand for activities
Activity cost driver rate = Total cost of activity / Activity driver
It can be used to cost products, customers, customer segments, distribution
channels.
Activity Based Cost Management ABM
The Use of ABC as a costing tool to manage costs at the activity level.
ABM utilizes cost information gathered by ABC
ABC has greater benefit if applied to Cost Management
Activity Based Management Model
Def ABM:- “adds a dynamic, continuous improvement dimension to the more static ABC model.
Cost Driver Analysis
Activity Analysis
Performance analysis
Activity-Based Management (ABM)
Activity-based management (ABM) is a systemwide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the profit achieved by providing this value.
Activity-based management encompasses both product costing and process
value analysis.
Process Value Analysis
Process value analysis is fundamental to activity-based responsibility accounting, focuses on accountability for activities rather than costs, and emphasizes the maximization of systemwide performance instead of individual performance.
Process value analysis is concerned with:
Driver analysis
Activity analysis
Performance measurement
Activity Analysis
Activity analysis should produce four outcomes:
What activities are done?
How many people perform the activities?
The time and resources required to perform the activities.
An assessment of the value of the activities to the organization, including a
recommendation to select and keep only those that add value.
Value-Added Activities
A discretionary activity is classified as value-added if it simultaneously satisfies three conditions:
The activity produces a change of state.
The change of state was not achievable by preceding activities.
The activity enables other activities to be performed.
Activity based management:
Reprice products.
Substitute products.
Redesign products.
Improve processes and operations strategy.
Technology investment.
Eliminate products.
Activity- based Management is implemented through Activity- based Costing. Thus Activity- based Costing is a subset of Activity- based management.
Cooper and Kaplan developed Activity- based Costing in 1988. The limitations of traditional cost systems led to the emergence of Activity- based Costing.
Stages in Activity Based Costing
Identification of the activities that may take place in an org.
Higher no of cost centers
No must not be too high for practical applic
.:. More accurate than traditional system.
Assigning costs to cost pool for each activity
Using resource cost drivers
Support activities spread across primary activities
Determine the cost driver for each activity
Relate o/h collected in the cost pools to cost objects / products
What causes the activity to incur costs?
Assigning the costs of activities to products according to product demand for activities
Activity cost driver rate = Total cost of activity / Activity driver
It can be used to cost products, customers, customer segments, distribution
channels.
Activity Based Cost Management ABM
The Use of ABC as a costing tool to manage costs at the activity level.
ABM utilizes cost information gathered by ABC
ABC has greater benefit if applied to Cost Management
Activity Based Management Model
Def ABM:- “adds a dynamic, continuous improvement dimension to the more static ABC model.
Cost Driver Analysis
Activity Analysis
Performance analysis
Activity-Based Management (ABM)
Activity-based management (ABM) is a systemwide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the profit achieved by providing this value.
Activity-based management encompasses both product costing and process
value analysis.
Process Value Analysis
Process value analysis is fundamental to activity-based responsibility accounting, focuses on accountability for activities rather than costs, and emphasizes the maximization of systemwide performance instead of individual performance.
Process value analysis is concerned with:
Driver analysis
Activity analysis
Performance measurement
Activity Analysis
Activity analysis should produce four outcomes:
What activities are done?
How many people perform the activities?
The time and resources required to perform the activities.
An assessment of the value of the activities to the organization, including a
recommendation to select and keep only those that add value.
Value-Added Activities
A discretionary activity is classified as value-added if it simultaneously satisfies three conditions:
The activity produces a change of state.
The change of state was not achievable by preceding activities.
The activity enables other activities to be performed.
Activity based management:
Reprice products.
Substitute products.
Redesign products.
Improve processes and operations strategy.
Technology investment.
Eliminate products.