What is Activity-Based Management?
Activity-Based Management (ABM) is a system for determining the profitability of various aspects of an enterprise in order to enhance its strengths and improve or eliminate its weaknesses.
Developed in the 1980s, Activity-Based Management aims to highlight the areas of an enterprise that are losing money so that these activities can be eliminated or improved to increase profitability. ABM analyzes costs associated with employees, equipment, facilities, distribution, administrative expenses, and other business factors to identify and allocate activity costs. (Hint: It is a procedure used by companies to analyze the profitability of each department, enabling them to identify areas of concern and particular strengths.)
Key Points
- ABM is a method for analyzing the profitability of a company by studying the strengths and weaknesses of each aspect of the enterprise.
- ABM is used to help management identify loss-making areas in the business for improvement or complete elimination.
- ABM often utilizes information gathered from Activity-Based Costing to better allocate resources and identify cost drivers for reduction.
Understanding Activity-Based Management
ABM can be applied to different types of companies and can provide cost information for any operational area of a business, including manufacturers, service providers, non-profit organizations, schools, and government agencies.
In addition to improving profitability and the overall financial strength of a company, the results of ABM analysis can also help companies create more accurate budgets and long-term financial forecasts.
Examples of Activity-Based Management
- ABM can analyze the profitability of new products offered by a company by examining marketing and production costs, sales performance, warranty claims, and any costs or repair times needed for returns or replacements. If a company relies on its R&D department, ABM can be used to review the costs of operating that department, testing new products, and whether the products developed are profitable.
- When a company opens an office in a new location, ABM can help management evaluate the operational costs of that location, including employee, facility, and administrative expenses, and then determine whether any subsequent profits justify these costs.
Special Considerations When Using Activity-Based Management
- Many of the sources of information collected in ABM stem from another management tool—Activity-Based Costing (ABC). ABM focuses on the business processes and management activities that drive the organization's objectives, while ABC aims to identify and reduce cost drivers by optimizing resources.
- Both ABM and ABC are management tools that can help manage operational activities to improve the performance of a business entity or the organization as a whole.
- ABC can be considered a subset of ABM. By matching supply, payroll, and leasing activities with business processes, products, customers, and distribution activities, overall management effectiveness and transparency are enhanced.
