...underestimates costs for low-volume products or services and over-estimates costs of high-volume products or services. To avoid such situations Activity Based Costing (ABC) system was developed. ABC system main principle is to identify main activities of the company, group costs of these activities, identify how these activities can be measured and assign costs to products or services though these measures. ABC system helps managers to allocate costs more accurate to final products or services. However, ABC system has some limitations. For ABC implementation company needs a lot of resources (trained personnel, additional IT and information resources). Some of the potential users are often change their mind of ABC implementation after expenses for system implementation and maintenance are calculated. Other disadvantage is the complexity of the system. Implementation of ABC system could be highly complex if company has a lot of products and need to allocate its costs to a number of activities. Support and maintenance of such systems is complicated and time consuming process. ABC system gathers and provides valuable information for decision making. This approach is called Activity Based Management and could be used to improve efficiency of the company. Notwithstanding its limitations, recent surveys confirm that ABC system is useful and used in a number of small and big companies around the world. Introduction In highly competitive world where information about products and prices...
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...Activity Based Management A Summary Managerial Accounting Abstract Activity-based management (ABM) is an approach to management that directs the focus of cost managers towards activities analysis. Theoretically by concentrating on activities, this will increase the ability of management to control costs be improving efficiencies. Activity-based management (ABM) uses activity-based costing (ABC) information. ABM/ABC has been around for over 25 years and has gone through its peaks and valleys. This paper will give a short overview of ABM/ABC as well as discussing the main points of ABM including its goals, merits and drawbacks. Activity-Based Costing (ABC) “Where It Begins” for ABM Activity-based costing (ABC) is a costing method that assigns resource costs to products or services based on activities performed. The whole idea of this costing approach is that an organization’s products or services are produced or performed as a result of activities and activities use resources which incur costs. The costs of resources are assigned to activities based on the activities that use or consume resources and costs of activities are assigned to products or services based on activities performed. It is imperative in using ABC to identify the relationships between resource costs, cost drivers, activities, and products/services in assigning costs to activities and then from...
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...allocationmethodologies in firms can provide misleading information about the profitability of products, product lines, customers, and markets. Activity Based Costing (ABC) attempts to create the big picture, crystal-clear, full, and accurate information in a firm. The following are some of best practices of ABC for a multinational firm: Phase One includes assessment phase that included project planning, team training, development of resource matrices, and coordination with MIS and quality assurance organizations within the company. Phase Two, an analysis phase, includes functional area interviews, identification of the scope of the detailed information needed, identification of activities and activity drivers, and establishment of a timetable for identifying data collection needs. Phase Three, the design phase, involves model building for resources, activities, and cost objects as well as confirming the results. Phase Four includes the implementation of the ABC methodology into the various operations and plants around the world. This included verification and validation of the model results, interfacing with the local MIS system, and institutionalizing a lessons learned approach for correcting and improving the ABC system. ABC is also a tool in the Activity Based Management (ABM) effort of the complete manufacturing process. ABM not only determines product costs more accurately but also determines capital/resource expenditure prioritization, allows better organization redesign...
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...questions to be answered in this chapter. 1. Is activity-based costing (ABC) enough by itself to improve efficiency? Can cost managers ensure that an organization will meet its efficiency goals merely by measuring costs more accurately by using ABC? 2. Does the cost manager’s responsibility end with making recommendations for improvements? Are the numbers generated by ABC, by themselves, enough to guide managers to correct decisions regarding resource use? 3. How does one know that activity-based methods of cost management are worthwhile? B. Learning Objectives — This chapter has six learning objectives. 1. The key steps of an activity-based management system are presented. 2. How to use activity-based costing for target costing. 3. Ways to identify and measure the costs of activities that do or do not add value in organizations. 4. How the elements of an ABM system can help to identify opportunities for process improvements. 5. Evaluate capacity utilization by identifying resources supplied and resources used. 6. Understand the methods and the problems of implementing ABC and ABM. C. Activities-based Management (ABM) allows managers to evaluate costs and values of process activities to identify opportunities for improved efficiency. 1. Activity-based costing (ABC) focuses on (1) understanding how resources are used in current processes and (2)...
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...Overview IN THIS BRIEFING… ctivity-based management and activity-based costing (ABM/ABC) have brought about radical change in cost management systems. ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing-International (CAM-I). No longer is ABM’s applicability limited to manufacturing organisations. The principles and philosophies of activity-based thinking apply equally to service companies, government agencies and process industries. The acronym itself has evolved from ABC to ABCM (activity-based cost management) to ABM, and the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organisations other than manufacturing. A Part 1 General FAQs Part 2 Practical guidance on implementing ABM ctivity-based costing and activity-based management have been around for more than fifteen years. Most forward-thinking companies have implemented them, or are in the process of doing so. A A A Part 3 Checklist Part 4 Further reading and bibliography BC is not a method of costing, but a technique for managing the organisation better. It is a one-off exercise which measures the cost and performance of activities, resources and the objects which consume them in order to generate more accurate and meaningful information for decision-making. ABM draws on ABC to provide management reporting and decision making. BM supports business excellence...
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...KASIM TABLE OF CONTENTS No. | Content | Page | 1.0 | Acknowledgement | 1 | 2.0 | Introduction | 2 | 3.0 | Differences between ABM and ABC | 3 | 4.0 | Type of ABM | 4 | 5.0 | Output of ABM | 5-7 | 6.0 | Summary | 8 | 7.0 | References | 9 | 8.0 | Appendix | | 1.0 ACKNOWLEDGEMENT We have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals. We would like to extend our sincere thanks to all of them. We are highly indebted to PuanEleySuzanaKasim our MAF635’s lecturer for her guidance and constant supervision as well as for providing necessary information regarding this project & also for her support in completing this project. We also would like to express our gratitude towards our parents & also our classmates for their kind co-operation and encouragement which help us in completing this project. Our thanks and appreciations also go to the group members in developing this project and people who have willingly helped us out with their abilities. 2.0 INTRODUCTION The Chartered Institute of Management Accountants (CIMA) has stated that an activity-based management (ABM) is a process of using information from activity-based costing to analyze activities, cost drivers and performance so that customer value and profitability are improved. ABM also subsequently defined by CAM-I(Consortium for Advanced Manufacturing-International) as a discipline that focuses on the management...
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...CASE STUDIES IN PERFORMANCE MANAGEMENT A Guide from the Experts TONY ADKINS John Wiley & Sons, Inc. CASE STUDIES IN PERFORMANCE MANAGEMENT CASE STUDIES IN PERFORMANCE MANAGEMENT A Guide from the Experts TONY ADKINS John Wiley & Sons, Inc. This book is printed on acid-free paper. Copyright © 2006 by SAS Institute. All rights reserved. SAS and all other SAS Institute Inc. product or service names are registered trademarks or trademarks of SAS Institute Inc. in the USA and other countries. ® indicates USA registration. Other brand and product names are trademarks of their respective companies. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions...
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...Source: http://www.allbusiness.com/accounting-reporting/methods-standards-cost-accounting/498244-1.html#ixzz1nMWBS5qI By Juras, Paul E. ABSTRACT Descriptions of activity-based-costing (ABC) systems have become a standard part of managerial accounting texts. While ABC implementation issues are the focus of a number of articles, these issues are often not addressed in a typical textbook. This case is designed to familiarize you with the behavioral and technical variables that can aid or impede successful ABC implementation. Anderson's (1995) factor-stage model provides a template to organize the discussion of ABC success factors. In this case, you will be cast in the role of a business consultant. You are asked to synthesize the case study's key "change management" insights into a report that could be shared with co-workers in an intranet-based knowledge management system. In addition, you may be expected to prepare a formal presentation of the report for your peers. Implementing change in an organization is about ninety percent cultural and ten percent technical. This is because the organization dynamics, politics, and search for a champion that go on are the real issues that make or break the project. One of the reasons we were able to implement ABC successfully was because the right people became champions. Chris Richards, Director of MIS, Global Electronics, Inc. BACKGROUND Global Electronics, Inc. (GEI), headquartered in Sarasota, Florida, designs, manufactures...
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...Class, Welcome all to WK 2 of this course on Managerial Accounting! I hope everyone is doing well as we dive into the topic of Activity Based Management (ABM). Here are my thoughts: What are ABM and ABC, and how can both be used by management? ABM is a business process model focusing on the control of production or performance activities so that they improve customer value and enhance profitability. Basically, ABM helps companies and mangers to produce more efficiently, determine product or service costs more accurately and control and evaluate performance more effectively. On the other hand, Activity Based Costing (ABC) is a cost accounting system that focuses on an organization’s activities, collects costs on the basis of the underlying nature and extent of those activities, and uses the gathered information to determine product/service cost accumulation and assess the appropriateness of activity elimination. ABC focuses on attaching costs to products and services based on the activities conducted to produce, perform, distribute, and support those products and services. Under ABC, managers can recognize that costs are incurred at different organizational levels, accumulate related costs into individual cost pools, and use multiple cost drivers to assign costs to products and services. In summary, ABC and ABM are effective in supporting continuous improvement, short lead times, and flexible manufacturing by helping managers to identify and monitor significant technology...
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...providing information about the horizontal aspects of business and Activity based costing /Activity based management mirrors this horizontal view. The focus of ABC is to provide accurate information about true costs of products, services, processes, activities etc. Activity based management makes this cost and operating information useful by providing value analysis ,cost drivers and performance measures to initiate, drive and support improvement efforts and to improve decision making abilities. This report deals with the application of ABM in American Seating company. Company was faced with increasing competition and it wanted to become a cost leader. The company lacked the information about true product and services cost to decide on which business areas to pursue. Company implemented ABM to conduct a detailed analysis of its activities and more accurately mirror resource consumption by process, product and customer. Company successfully identified customer profitability differences and achieved 40 % reduction in order processing costs. ABM was later incorporated into continuous improvement efforts, planning sessions and budgeting process. Table of contents Sr no | Topic | Page no | 1 | Introduction | 3 | 2 | Literature review | 4 | 3 | Basics of ABC | 5 | 4 | ABM implementation steps | 6 | 5 | Understanding ABM through a case study | 6 | | 5.1 | Company overview | 6 | | 5.2 | Business Issue | 7 |...
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...MBA (2011-13) – Semester IV – ACTIVITY BASED COSTING ASSIGNMENT - LEARNING EXERCISE Students will select a company or firm or business unit in any one of the following industries: 1) Manufacturing 2) Insurance 3) Bank 4) Health care 5) Hospitality 6) Government 7) Service Each student should explore the internet for an example of a company that had implemented Activity Based Costing (ABC) and Activity Based Management (ABM) with a focus on determining customer profitability. Prepare a report (suggested length – not more than 10 pages) covering the following and give a briefing in the class: 1) Describe, in brief, the company and its business. 2) What was the problem faced by the business or company? 3) What was the scope of ABC / ABM project? 4) What were the goals for the ABC / ABM project? 5) How ABC/ABM was implemented? 6) Summarize the results achieved after implementation of the project. Financial evaluation of results by quantification expected. 7) Your observations, comments, criticism and suggestions, if any. 8) Legend, bibliography, references etc. Submit assignment to Exam Section. Print-out of PPTs (handout mode – 4 or 6 slides per page) can be submitted later, but before presentation in the class. Important: This is an individual assignment and each student should select different company from the sector selected for study and complete the...
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...management From Wikipedia, the free encyclopedia Activity-based management (ABM) is a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization. Activity-based costing establishes relationships between overhead costs and activities so that overhead costs can be more precisely allocated to products, services, or customer segments. Activity-based management focuses on managing activities to reduce costs and improve customer value. Kaplan and Cooper (in Kaplan, R. S., & Cooper, R. (1998). Cost and effect: Using integrated cost systems to drive profitability and performance. Boston: Harvard Business School Press.) divide ABM into operational and strategic: Operational ABM is about “doing things right”, using ABC information to improve efficiency. Those activities which add value to the product can be identified and improved. Activities that don’t add value are the ones that need to be reduced to cut costs without reducing product value. Strategic ABM is about “doing the right things”, using ABC information to decide which products to develop and which activities to use. This can also be used for customer profitability analysis, identifying which customers are the most profitable and focusing on them more. A risk with ABM is that some activities have an implicit value, not necessarily reflected...
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...inaccurate and misleading. As a result new techniques for overhead recovery were needed. In order to produce a more accurate costing system, cooper and Kaplan in 1987 developed a more refined approach for assigning overhead to products and computing product costs and called this approach Activity Based Costing (ABC). It was first clearly defined as a chapter in their book Accounting and Management: A field study perspective. (Kaplan, Roberts 1987). While mainly used for private businesses, ABC has recently been used in public forums, such as those that measure government efficiency Features of the ABC and Traditional costing system Activity Based Costing can be defined as an accounting methodology that assigns costs to activities based on their use of resources, rather than products or services. This enables resources and other associated costs to be more accurately attributed to the products and the services which they use. It doesn’t change or eliminate any costs; it provides detailed information about how costs are consumed. (Online manager-net.com). Traditional cost accounting looks at what is spent, while ABC methods look at what is done in terms of activities. In ABC it is much easier to identify opportunities to reduce costs and improve performance, while maintaining the quality of care provided. Traditional Cost Systems use cost allocation methods, do not focus on where or why costs occur,...
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...traditional costing systems tend to spread these costs evenly over all products and services offered. Assignment of overhead costs based on direct labor hours or square footage occupied by facility do not always serve as accurate means of allocation. Costing accuracy enables decision-making that is less likely to result in poor performance, and provide organizations with competitive advantages. Activity-based cost management is a means to solve this problem. In its early years, Activity-based cost management (ABC/M) gained popularity rapidly in the management consulting community. It was oversold as the “magic pill” to solve almost every problem within an organization, and the expectations of management were raised too high. As a result, many early implementations of ABC/M were viewed as failures. Some of these perceived failures were resultant from design misunderstandings and others from an inability to interpret the data produced. Management didn’t understand that ABC/M is meant to act as an enabler to for better decision-making, and can enhance popular performance improvement programs such as Total Quality Management. Activity-based cost management has been faced with numerous difficulties as being accepted as a worthwhile change. Poor implementations created organizational shock, and adoption throughout did not occur overnight. Users had tendencies to misuse the system as a policing...
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...business area, and c) Allocate the resulting (revised) production costs to various products, services, or customers. Costs hence derived using traditional allocation approach suffers from some defects that can result in incorrect costs for decision-making purposes. For example, the traditional approach attributes the cost of idle position to systems. Accordingly, such costs are recharged to entities that did not use it. In order to find solution to such anomalies, many organisations have adopted a separate cost-allocation methodology called Activity Based Costing (ABC). WHAT IS ACTIVITY BASED COSTING? In contrast to traditional cost-accounting framework, ABC framework first accumulate overhead costs for each organizational activity, and then assign the costs of the activities to the products, services, or customers (cost objects) causing that activity. As we can imagine, the most critical aspect of ABC is activity analysis. Activity analysis is the processes of discovering appropriate measures and resources (cost drivers) and their influence on the costs of creating a product or providing a service. Activity analysis...
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