Introduction plan: Impact of activity-based costs on the project Activity-Based Management in Practice

2.Activity-Based Management in Practice

Modern manufacturing is machine-based, automated, and intensive; which means the overheads costs form a significant portion of the cost per unit. Machines can be efficiently utilized by both modernization and skilled enhancement of the laborers.

ABM focuses on continuous process improvements from input resource acquisition through to the production and sales. The whole process of Activity-Based management is linked and adapts a total quality management approach in each business process. The ABM is an approach, which started mainly with manufacturing companies; however, it can be implemented for any business including the service businesses.

Activities mean the business processes that affect the product price or quality in any way. These activities involve the procurement of input materials, tools and machinery, human resources, sales and marketing, and after-sales activities. The aim at this stage is to identify the activities that affect the product or service design feature meeting customer expectations.

Each activity requires resources i.e. human and financial, meaning each activity drives costs. The initial stage requires the identification of these activities and cost drives that affect the product’s total cost and pricing decisions. At this stage, the aim of the ABM process is to clearly identify the business activities that incur costs related to product manufacturing and affecting product costs i.e. overhead costs.

The second stage of ABM implementation is to assign the costs to each cost-driver. These costs include direct costs of manufacturing and indirect costs or overheads. The ABM approach stresses that overhead costs with modern manufacturing form an integral part of total product costs. The overhead absorption of costs is assigned to each activity, in contrast to the traditional costing methods.

The ABM approach differs from the traditional costing methods in a way that it absorbs all product overhead costs. For example, it includes direct material costs, indirect labor, and quality control measures as overhead expenses. All of these costs are absorbed per activity-based. For instance, the operational supervisor’s inventory control and quality assurance manager’s trips are included as activities and the cost is spread over each trip. The ABM approach includes each activity that adds value to the product or business process or provides valuable information for decision making.

The first aim of performance monitoring is the identification or non-value activities driving costs. In other words, it includes the elimination of waste e.g. idle labor hours or idle machine hours.