Activity
Based Management

• Activity-Based Costing (ABC)
• Customer Profitability Analysis
• Product Line Profitability

Activity-Based Management (ABM)

Activity-Based Management (ABM) uses detailed economic analyses of important business activities to improve strategic and operational decisions. Activity-Based Management increases the accuracy of cost information by more precisely linking overhead and other indirect costs to products or customer segments. Traditional accounting systems distribute indirect costs using bases such as direct labor hours, machine hours or material dollars. ABM tracks overhead and other indirect costs by activity, which can then be traced to products or customers.

Methodology

ABM systems can replace traditional accounting systems or operate as stand-alone supplements. They require a strong commitment from both top management and line employees in order to succeed. To build a system that will support ABM, companies should:

• Determine key activities performed;
• Determine cost drivers by activity;
• Group overhead and other indirect costs by activity using clearly identified cost drivers;
• Collect data on activity demands (by product and customer);
• Assign costs to products and customers (based on activity usage).