Activity based management and costing

Activity based management and costing

Introduction

Activity based management is about bringing a radical change in the performance management and measurement systems and traditional costing systems of an organization. It is based on the principle that activities drive the resource consumption in an organization and therefore, controlling these activities can result in efficient resource allocation and consumption.

It enables management in efficient and effective decision making by bringing continuous improvements in each segment of business including the design and manufacturing of a product and in setting its prices eventually leading to enhanced overall organizational performance (Turney et al, 1992).

The key advantages of implementing activity based management techniques in an organization is that it involves a top down approach adopted by management in order to reduce the overall cost by specifically targeting the activities. It also enables management to respond in an efficient manner to the competitive pressures exerted by the industry. Similarly, the use of benchmarking of activities against future or industrial standards, implemented through the activity based management implements an organizational wide programmed which results in effective appraisal of management. It also identifies areas, where cost can be managed in an efficient manner (Marrow, 1992).

In order to successfully implement activity based management, organizations should consider that there is limitation in successfully implementing activity based management in an organization, even if all the effective market and product factors are considered during the planning and implementation of activity based management. Secondly there is a cost of implementation, and it can be difficult in applying a particularly cost to particular activity. And there is possibility that this cost might be absorbed to a different activity as different areas of business can overlap the business activities and it can be difficult to separate them.

Activity based management and Activity based costing are interrelated to each other. Activity based management is application of data acquired through activity based costing in order to mange business activities and business processes in an efficient manner.

Activity based costing is a special strategic costing model which identifies key activities of an organization and then allocate each activity's cost by keeping in mind the services and products and the actual usage of each.(Bocij et al., 2008). By adopting this approach, a firm effectively estimates the cost of the products and services involved in the business. Activity based management has the ability to measure the cost of each and every product or service. The cost analysis helps to establish the output metrics of an organization. It improves the costing method of an organization by absorbing expenses to business activities and then, absorbing cost of these activities to individual business processes of an organization (Innes et al, 1994).

Approach to activity based costing

Activity based costing adopts a management analysis approach in order to successfully implement activity based management in an organization. The implementation of activity based costing will involve the following steps,

Analysis of activities

This step will involve the identification of business activities according to particular ...