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 ABC’s objective of improving the accuracy of costing assign- ments. 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. Clearly, how to implement an ABM system is a major con- sideration. Exhibit 5-2 provides a representation of an ABM implementation model.
The model in Exhibit 5-2 shows that the overall objective of ABM is to improve a firm’s profitability, an objective achieved by identifying and selecting opportunities for improvement and using more accurate information to make better decisions. For example, root cause analysis (finding the real cause of the problems) reveals oppor- tunities for improvement. By identifying costs caused by waste—which is an out- come of assessing the value of each activity—priorities can be established based on the initiatives that offer the most cost reduction. Furthermore, the potential cost reduction itself is measured by ABC calculations.
Exhibit 5-2 also show that 10 steps define an ABM implementation: four that are associated with ABC, four that are associated with PVA, and two common steps.
The PVA steps will be discussed extensively in the next section of this chapter, whereas the ABC steps were discussed in Chapter 4 and should be quite familiar.
However, one very important extension of ABC will be described in this chapter: the application of ABC to cost objects other than products—specifically, customers and suppliers. Of the 10 steps described in Exhibit 5-2, the two steps common to ABC and PVA are (1) systems planning and (2) activity identification, definition, and classification.
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Performance Analysis Driver
Analysis Activities
Resources Cost Dimension
Process Dimension
Why? What? How Well?
Products and Customers
Exhibit 5-1
The Simple Two-Dimensional ABM ModelSystems 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 organization’s current and desired competitive position 3. The organization’s 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
To obtain buy-in by operating personnel, the objectives of an ABM system must be carefully identified and related to the firm’s desired competitive position, busi- ness processes, and product mix. The broad objectives have already been mentioned (improving accuracy and continuous improvement); however, it is also necessary to 168 P a r t 2 / A c t i v i t y - B a s e d A c c o u n t i n g
Search for Improvement Opportunities
Identify, Define, and Classify Activities
Increase Profitability Reduce
Costs
Assign Costs to Cost Objects ABM Model
Systems Planning
PVA
Assess Value Content of Activities
Define Root Causes of Each Activity
Establish Activity Performance Measures
ABC
Assign Resource Cost to Activities
Identify Cost Objects and Activity Drivers
Calculate Activity Rates Improve
Decisions
Exhibit 5-2
ABM Implementation Modeldevelop specific desired outcomes associated with each of these two objectives. For example, one specific outcome is that of changing the product mix based on more accurate costs (with the expectation that profits will increase). Another specific outcome is that of improving the firm’s competitive position by increasing process efficiency through elimination of non-value-added activities. Planning also entails establishing a timeline for the implementation project, assigning specific responsi- bilities to individuals or teams, and developing a detailed budget. Although all five issues listed are important, the information usage issue deserves special attention.
Successful implementation is strongly dependent on the organization’s ability to learn how to use the new information provided by ABM. Users must be convinced that this new information can solve specific problems. They also need to be trained to use activity-based costing information to produce better decisions, and they need to understand how ABM drives and supports continuous improvement.
Activity Identification, Definition, and Classification
Identifying, defin- ing, 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 non-value-added activities of the quality and environmental categories. ABC also provides a more complete under- standing 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. For example, one survey revealed that it takes an average of 3.1 years for nonaccounting personnel to grow accustomed to using ABC information.2Why ABM Implementations Fail
ABM can fail as a system for a variety of rea- sons. One of the major reasons is the lack of support of higher-level management.Not only must this support be obtained before undertaking an implementation project, but it must also be maintained. Loss of support can occur if the implemen- tation takes too long or the expected results do not materialize. Results may not occur as expected because operating and sales managers do not have the expertise to use the new activity information. Thus, significant efforts to train and educate need to be undertaken. Advantages of the new data need to be spelled out carefully, and managers must be taught how these data can be used to increase efficiency and pro- ductivity. Resistance to change should be expected; it is not unusual for managers to receive the new cost information with skepticism. Showing how this information can enable them to be better managers should help to overcome this resistance.
Involving nonfinancial managers in the planning and implementation stages may also reduce resistance and secure the required support.
Failure to integrate the new system is another major reason for an ABM system breakdown. The probability of success is increased if the ABM system is not in com- petition with other improvement programs or the official accounting system. It is important to communicate the concept that ABM complements and enhances other improvement programs. Moreover, it is important that ABM be integrated to the point that activity costing outcomes are not in direct competition with the tradi- tional accounting numbers. Managers may be tempted to continue using the tradi- tional accounting numbers in lieu of the new data.
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2 Kip R. Krumwiede, “ABC: Why It’s Tried and How It Succeeds,” Management Accounting(April 1998): 32–38.