## Activity Based Management (ABM)
### Meaning
| Term | Meaning |
|---|---|
| ABM | The cost management application of ABC; manages costs at the activity level |
| Focus | Improve efficiency and enhance customer value by managing activities |
| Use of ABC | ABM uses ABC cost data to optimise processes and cut unnecessary costs |
### Types of analysis in ABM
| Type | Description | Example |
|---|---|---|
| Cost Driver Analysis | Identifies factors causing activities, to manage activity costs | Causal factors influencing costs |
| Activity Analysis | Examines activities to assess value contribution | VA (Value-Added): essential, customer willing to pay — e.g. polishing furniture. NVA (Non-Value-Added): add no value, may raise cost — e.g. material movement, machine set-up |
| Performance Analysis | Measures activity-centre performance against organisational goals | Reports on efficiency/effectiveness |
### ABM applications in business
| Application | Description |
|---|---|
| Cost reduction | Finds cost per activity; reduces/eliminates non-value-adding activities |
| Business process re-engineering (BPR) | Redesigns processes for efficiency; ABM measures performance and cost |
| Benchmarking | Compares ABC-derived activity costs across segments; needs uniform activity definitions |
| Performance measurement | Focuses on activity performance to enhance competitiveness |
### Performance measures in ABM
| Area | Measure |
|---|---|
| Quality of purchased component | Zero defects |
| Quality of output | % Yield |
| Customer awareness | Orders; Number of complaints |
### Key takeaway
ABC calculates activity costs; ABM uses those costs to act — eliminating NVA activities, re-engineering processes and benchmarking performance.