The business organizations at present are largely faced increasing difficulties for accurately measuring the product cost due to difficulties faced in the allocation of overheads. The businesses face difficulties in measuring the variable or overhead costs as it tends to fluctuate with the volume of production level and thus causes problem for allocation of general expenses. Besides this, the increasing operational expenses due to large number of production activities and waste generation tend to negatively impact the profitability level of business organizations.
The inaccurate allocation of overhead costs causes the business to face problems during taking significant decisions regarding price and development of future growth strategies. The use of Activity-Based Costing (ABC) is increasing among the organizations for measuring the cost and eliminating the occurrence of undesirable activities that tends to increase the operational costs. The introduction of activity based costing (ABC) systems by businesses aims to achieve a more accurate allocation of production costs and thus reducing the operational expenses for improving their profitability position (Jafari, 2012).
ABC is regarded as a costing system that determines the overall product costs on the basis of activities carried out for producing products. It relates costs, that is, the overall resource consumed in relation to the overall products manufactured and thus provides a better tool for resources allocation. The overall overhead costs are divided into different cost pools on the basis of the different business activities.
The measuring of product costs on the basis of resource consumed by each overhead activity facilitates in determining the overall production costs on the basis of output. Activity-based management can be defined as the process of managing the different processes involved in activity-based costing such as identifying activities, cost drivers, performance measures and activity costs for determination of accurate product costs. The major goal is to improve the value delivered to customers and improving the profitability position of a company (Pete, 2011).
In this context, the present research is undertaken for examining the significance of Activity-Based Management (ABC) for improving manager’s decision-making within business organizations. As such, the problem statement developed for the research proposal can be stated as ‘How does Activity-Based Management (ABM) approach facilitates improved decision-making of the management accountants?
The research topic selected holds high significance for providing an in-depth understanding to the management accountants for the potential benefits that they can derive with the use of activity-based costing system. It will be highly pertinent to the business managers for developing knowledge in relation to the strategies that can be adopted by them for maximizing the operational efficiency. It will help in accurately identifying the cost drivers for optimizing resources for business so that they can produce more accurate costing results.
The proposal developed presently as provided a brief overview in relation to the research topic by undertaking its theoretical analysis with the use of literature review section. The research in this context has examined the various issues related with the topic through presenting a critical analysis of some selected academic articles. This is carried out to provide a deep insight into the various topics related with activity-based management such as activity-based costing, activity-based budgeting and the implementation strategies that can be adopted by business managers for their integration to derive improved business results. It has also included a section of providing suggestions for the research that could be conducted on the basis of the proposal developed.
Literature Review
Overview of activity based management
In the views of Ansari & Bell (2008), the success factor of activity based management has attracted the interest of many researchers and scholars to conduct the research and provide their viewpoints on the same. Activity based management has been emerged from the activity based costing and they both interrelated to each other. Activity based costing has been developed to as an important management approach to solve the problems associated with the traditional cost management systems. The traditional costing management has many issues such as it has inability to accurately calculate the actual production, manufacturing cost and service cost.
Also, it was not able to provide the useful information that helps the managers to make the operating decisions. Due to all such deficiencies in the traditional cost management system, the managers faced problems in making the decisions and they have to be dependent on the inaccurate data for making the judgments. To overcome the deficiencies in the traditional cost management system, a new system known as activity based costing/management system has been introduced. This management system helps to solve the issues faced in older management system and provide very useful information that helps in making the decisions more accurately (Ansari & Bell, 2008).
Origin of Activity based management
In the views of Brierley (2008), activity based costing and activity based management has brought a major change in the cost management systems. It can be said that activity based management has grown mainly with efforts of the Texas based “Consortium for Advanced Manufacturing-International (CAM-I)”. CAM-I is an international based organization that helps manufacturing companies, government, service companies, professional bodies, and other entities in solving their management problems and provide resolutions based on critical business issues that are common for many organizations. The role of activity based management system is no longer limited to the manufacturing companies and can be applied equally to the service companies, government organizations and other form of organisations (Brierley, 2008).
Concept of activity based management
According to Brierley (2011), the concept of activity based management has been derived from the activity based costing. The activity based management has been defined as a set of actions that focuses on the management of various activities within the organization in order to improve the value received by the customer and profit earned through providing all such values.
The process of activity based management includes the analysis of cost drivers, analysis of all the management activities and measuring of performance. In short it can be said that activity based management is derived from the activity based costing. ABC tends to answer the question “What do activities cost?”, whereas, ABM as management process tends to answer the question “What factors causes the cost to occur?” Activity based management uses the information gathered from the activity based costing to improve and redirect the allocation and use of resources in order to increase the value created for the customers and all other stakeholders (Brierley, 2011).
Role of Activity based management in improving the organization decision making
Importance of Activity based management
As per the thoughts of DeFreitas, Gillett, Fink & Cox (2013), activity based management concerns mainly for the accountability for the activities rather than cost associated with the processes. It lay emphasis on the system wide performance and completely ignores the performance at individual end. According the ABM control, improving the performance of individual cannot always increases the efficiency of the system as a whole. Activity based management control assigns all the costs of each unit of organization and after that it is responsibility of unit manager to assign the costs to each process of that particular unit.
The actual outcomes from each activity are measured with the budgeted figures to measure the performance. Activity based management is mainly concerned for the financial performance but does not completely ignores the non financial performance. Activity based management promotes the use of reward system for unit managers and also for individual for managing the overall cost and increasing the operating efficiency of the organizational units. It means there is requirement to trace the cost incurred by the individual for deciding the basis of reward system. So both financial and non financial measures are applied to measure the performance of each individual in the activity based management system (DeFreitas, Gillett, Fink & Cox, 2013).
As per Euske & Vercio (2007), activity based management mainly improves the decision making power of the management and also provide a platform where they link the overall cost of the organization to each activity so that cost allocation can be done on optimum basis. The cost identification and allocation is two main processes that are carried out while implementing activity based costing. Activity based management is one step ahead as it links the cost with activity so that performance derived from each activity can be successfully measured and any discrepancies against the budgeted norms can be rectified with ease (Euske & Vercio, 2007).
Areas of Use in organization
Fetzer & Kren (2012), has defined various use of activity based management within the organization. Some of major uses of activity based management are as under:
Improving the operational and strategic decisions
The implementation of ABM helps to improve the operational and strategic decisions made by the managers at various levels. It can be better understood through evaluating the below
According to Maiga & Jacobs (2007), the decisions taken by the managers are mainly divided into two major parts: Operational and Strategic. There is very important role of ABM in both kind of decision making. The operational decision making aims to improve the efficiency, lower the cost and also makes sure for the asset utilization. Through use of ABM operation manager can formulate the functional budgets that help gaining an idea of futures operations cost in each activity and leads to create more accurate budgets as compare to traditional budgets. ABM helps to explore various ways through which company can create and retain the competitive advantage in the market place (Maiga & Jacobs, 2007).
Recommended Strategies for Improved Decision-Making within Organizations by use of ABM approach
Changing Role of Management Accountants
According to Scheumann (2010), the development of the concept of Activity-based Management (ABM) is causing major changes in the role of accountants in recent times. This is because there is major transition in the nature of accounting systems and processes used for identifying and determining the product costs. Activity-based management requires management accountants to determine costs on the basis of overall business activities and therefore requires transition in their role from maintaining the overall functioning of the accounting systems to more business-oriented role.
As such, the responsibility of management accountants has becoming increasing important in designing of an ABC system. ABC system has placed increased emphasis on managing costs and thus requires managers to identify and focus on the activities that give rise to the costs. The successful implementation of the ABC costing system requires the managers to accurately identify and distinguish between the value-added and non-value added costs. Value-added are the costs that are required to be incurred by businesses for improving the product value while non-value added are the costs that require to be eliminated as they do not contribute in improving the quality of products being manufactured (Scheumann, 2010).
As per the views of Abdallah & Li, 2008), the distinction between these activities requires the management accountants to closely monitor and control all these costs. This is essential for elimination of non-value added activities for improving the operational efficiency with the use of ABC system. This can be achieved by the management accountants by developing an information system that keeps track of the overall activities involved in production process to distinguish between the two types of activities. As such, management accountants need to have IT expertise and critical thinking skills to identify the wasteful activities that do not contribute any value to the product produced.
This requires the management accounts to improve their skills and competencies by undergoing relevant training and development sessions that helps them to work effectively under the ABC system of cost management. This will help them to identify the necessary activities in production and eliminate the wasteful activities for improving the product value and lowering the overall costs. The greater understanding of costing methods is required on the part of the management accountants for developing adequate methods to assign the costs to the activities and the cost objects (Abdallah & Li, 2008).
Changes in Information Technology (IT) Systems & Processes
As per Pete (2011), the improved decision-making of organizations with the use of the approach of ABM also requires larger changes to be implemented within their IT systems and processes. This is because IT systems can play an important role in planning, acquiring, implementing and monitoring of resources required for carrying out different production activities. The development of a successful IT system is required for promoting coordination among the different units of operational department of an organization.
It will promote effective communication across each of the department and thereby facilitating in accurate identifying the cost activities and the resources consumed by them. Thus, it will lead in appropriately establishing the relation between the cost drivers to the resources consumed. The accurate determination of costs with the establishment of IT system will help the management accounts to take accurate pricing decisions (Pete, 2011).
Changes in Organizational Structure
The adoption of ABC systems requires increased communication and participation among all the members of an organization. This is requires for communicating the problems present to the senior managers and gathering their support for their resolution. Also, it requires improved flow of information from one department to another for accurately allocating the costs on the basis of activities and this requires the present of a decentralized and less authoritative organizational structure.
This will enable the managers at all levels to share their slues and concern with top managers and developing of effective strategies for implementation of the ABC system. This is required for developing a coordinated approach and better problem-solving leading to realization of improved business results in relation to the cost management.
Suggested Study
The overall discussion held in the research proposal developed in the context of activity-based management has discussed the importance and significance of adopting the approach of activity-based management for adequate management of cost structure of business entities. In this context, it has been analyzed that activity-based management systems are developed for providing more accurate cost information about the business activities and the associated processes.
The use of activity-based costing system is enabling the management accountant to allocate cost directly on the basis of resources consumed and thus enhancing the operational efficiency by elimination of the unnecessary activities. As such, it has been implied from the research proposal developed that business should adopt the use of ABM as it is an effective management approach that helps in driving the overall cost system. In this context, it has provided a brief insight into the various topics related with ABM that can be explored in detail in the research that will be conducted on the basis of proposal developed.
The topics include activity-based costing, develop accurate budgets through the use of ABM approach and the adoption of ABM for developing accurate strategic decisions relation to the business overall growth. The study will be a fresh piece of work to add new dimensions into the field of activity based management. The issues identified will provide a new perspective to the managers in relation to the ABM and considering its importance for resolving their cost based problems. The overall research study that can be developed on its basis can be taken into account the specific cases of the organization that are adopting the use of ABM approaches for gaining an insight into the research topic.
References
Abdallah, A. A. & Li, W. (2008). Why did ABC fail at the Bank of China? Management Accounting Quarterly 2(1), pp. 7-14.
Ansari, S. & Bell, J. (2008). Activity-based management in Shell Gabon. IMA Educational Case Journal 1(4), pp. 1-7.
Brierley, J. A (2008). Toward an understanding of the sophistication of product costing systems. Journal of Management Accounting Research 20, pp. 61-87.
Brierley, J. A. (2011). Why the proper definition of the ABC matters: A note. Advances in Management Accounting 19, pp. 225-249.
DeFreitas, D. G., Gillett, J.W., Fink, R.L. & Cox, W. (2013). Getting lean and mean at Caterpillar with ABM. Strategic Finance 14, pp. 24-33.
Euske, K. J. & Vercio, A. (2007). Enhancing the ABC cross. Management Accounting Quarterly 47, pp. 48-61.
Fetzer, B. L. & Kren, L. (2012). More effective planning in a traditional two-stage cost system with activity-based management. Cost Management 6(5), pp. 6-11.
Jafari, F. (2012). The Role of ABC in Management Decision-Making. General Management 12(4), pp. 123-127.
Kocakulah, M. C. & David Austill, A. (2017). Measuring commercial loan profitability using activity-based costing at a regional bank. Cost Management 14, pp. 19-31.
Maiga, A. S. & Jacobs, F.A. (2007). Activity-based cost management and manufacturing, operational and financial performance: A structural equation modeling approach. Advances in Management Accounting (16), pp.217-260.
Pete, S. (2011). Activity-based Costing (ABC) and Activity based Management (ABM) Implementation – Is This the Solution for Organizations to Gain Profitability. Retrieved October 4, 2018,
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