Activity-Based Management and
management approach that associates the
activities executed by an organization with
the value customers derive from products.
Efficiency and effectiveness are achieved
by reducing the level of activities that do
not create value for the customer and by
improving execution of activities that do
create customer value.
Specific tools beneath the ABM umbrella
include activity analysis, cost driver
control, performance evaluation, and
business process reengineering.
Value-added activities are viewed from the
customer's perspective because it is the
customer who is the end evaluator of the
“worth” of a product or service and,
therefore, the activities involved in creating
that product or service.
In a televised football game, the value-
added activities are the actual game plays.
Non-value-added activities consist of
commercials and the time between plays.
Activities such as “moving the chains,”
measuring to determine if a first down was
made, moving the ball from the end of one
play to the point where it will be put in play
next are all non-value-added activities.
People who believe that the commercials
are informative and interesting and that
the time between plays allows them an
opportunity to examine the strategies of
the teams and project what each team is
likely to do play may disagree with this
Yes, cost drivers exist in traditional
accounting systems although they are
called "bases for allocation."
In traditional systems, a single cost driver
such as direct labor hours or machine
hours is commonly used rather than
multiple cost drivers.
Also in traditional
systems, volume-based cost drivers are
more the norm than non-volume-based
(e.g., square footage) cost drivers.
Finally, traditional accounting stresses
demonstrates strong statistical correlation
to the cost, but ABC emphasizes
searching for multiple cost drivers that
bear cause-and-effect relationships to the
Activity analysis is used to separate
activities into two groups:
those that add
value to the product or service and those
that do not add value.
Once the non-
value-adding activities are identified,
managers seek to reduce or eliminate the
level of the drivers of those activities.
such efforts are successful, non-value-
adding costs will be reduced without
impairing the value of products or services
to the consumer.
The result should be an
increase in profits.
By using a single cost pool and a single
cost driver to allocate overhead, the more
assignment ignore the influence on cost of
the different activities that occur to make a
product. In this manner, low-volume
disproportionate amount of overhead, are
only assigned an average charge for
overhead, thereby shifting costs to the