Why adopt and implement ABC & ABM?

Adherents of ABC/ABM systems claimed traditional management accounting systems generated misleading costs in a contemporary, tumultuous, often changing business environment and implementing ABC/ABM would remedy this. ABC/ABM systems are very effective means for improving company performance and competitive advantage on many fronts. An organization can realize the power of ABC and ABM when the right individuals access the right information in the best format for improving performance.
That is why Activity-Based Costing (ABC) and Activity-Based Management (ABM) represent the symbol of improved competitiveness, competitive advantage and efficiency in every organization. ABC systems provide more useful information for cost management purposes than traditional systems do. These differences are significant for companies with large amounts of overhead, multiple products, and high product diversity. In today’s competitive environment organizations require a reliable cost system and relevant cost information to survive. By implementing an ABC system managers will obtain accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts, and projects. If many costs are caused by non-volume- based cost drivers, Activity-Based Costing (ABC) should be adopted and implemented. The primary emphasis of a business’s cost system should be to provide relevant and reliable information for management decision making rather than focusing only on financial reporting requirements. Operational ABC & ABM – works to enhance efficiency, lower costs and asset utilization. It can increase the capacity of resources by reducing downtime, improving or eliminating entirely faulty activities and processes and increasing the efficiency of the organization’s resources. The benefits from operational ABC & ABM can be measured by reduced costs, higher revenues through better resource utilization and cost avoidance. Strategic ABC & ABM – explores various ways a company can create and sustain a competitive advantage in the marketplace. ABC & ABM attempts to alter the demand for activities to increase profitability, encompasses decisions about product/services design and development where the biggest opportunity for cost reduction exists, improves relationships with suppliers and customers. Some of the specific uses of ABC & ABM in organizations today include attribute analysis, strategic decision making, benchmarking, operations analysis, profitability/pricing analysis, and process improvement. Organizations that are designing and implementing ABC & ABM will find there are five basic information outputs:-

• relevant information about the cost of activities and business processes

• the cost of non-value-added activities – in order to identify activities that do not contribute to customer value or the organization’s need and make improvement efforts

• activity-based performance measures – to provide scorecards, to report how well improvement efforts are working

• accurate product/service cost (cost objects) information – this is vital for selecting the segmented markets where an organization competes

• cost drivers – in order to identify factors that can cause changes in the cost of an activity.

In summary and briefly, ABC and ABM promotes and enhances better understanding of cost behaviour and calculating costs more accurately, improving product, service and customer profitability, helps to identify inefficient products, departments and activities, evaluating budget performance measurement and improving competitive advantage.