## Activity Based Management (ABM)

ABM is the cost management application of ABC — it uses ABC information to manage and reduce costs, not just measure them.

### Three Core Analyses in ABM

Analysis	Purpose
Cost Driver Analysis	Identify root causes of activities to manage costs at source
Activity Analysis	Classify activities as Value-Added (VA) or Non-Value-Added (NVA)
Performance Analysis	Measure activity centre performance against strategic goals

### Value-Added vs Non-Value-Added Activities

Value-Added (VA): Essential; customers value them and are willing to pay
Non-Value-Added (NVA): Add no customer value; increase cost → target for elimination or reduction

### ABM Applications in Business

1. Cost Reduction — streamline or eliminate NVA activities

2. Business Process Re-engineering — identify processes needing efficiency improvements

3. Benchmarking — compare activity costs across segments to find improvement opportunities

4. Performance Measurement — monitor efficiency and effectiveness of each activity

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## Activity Based Budgeting (ABB)

ABB applies ABC principles in reverse — instead of calculating what activities cost, it asks: what resources are needed to achieve the planned activity level?

### Key Elements of ABB

1. Type of work to be done

2. Quantity of work to be done

3. Cost of work to be done

### How ABB Works

Estimate projected activity levels for the budget period
Determine resource inputs (costs) required to support those activity levels
Build cost-effective budget aligned with workload and strategic objectives
Compare actual results with budgeted amounts (financial and non-financial)
Identify activities requiring resource reallocation

### Benefits of ABB

Benefit	Detail
Accuracy	Enhances financial forecast accuracy and management understanding
Speed (automated)	Rapidly produces plans under varying volume assumptions
Eliminates waste	Removes needless rework from traditional incremental budgeting

> Relationship: ABC measures past costs → ABM manages current costs → ABB plans future costs. All three are interconnected.

Worked example

### Example 1

VA vs NVA classification:

A manufacturer's activities include:

Machining a component → VA (directly adds form/value the customer pays for)
Moving WIP between storage locations → NVA (internal movement; customer doesn't value it)
Reworking defective units → NVA (caused by internal failure; customer expects zero defects)
Quality inspection of finished goods → Debatable — could be VA if customers demand certified quality, NVA if better process design eliminates defects

ABM action: eliminate/reduce NVA activities; invest in process improvement to prevent defects rather than inspect for them.

⚠️ Common exam mistakes

Confusing ABM with ABC — ABC measures costs; ABM acts on that information to change costs.
Treating all inspection activities as value-added — only inspection that the customer explicitly values or requires counts as VA.
In ABB, using traditional incremental approach on top of ABB labels — true ABB starts from planned activity levels, not last year's budget plus a percentage.

Reference:

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Activity Based Management (ABM) and Activity Based Budgeting (ABB)

Worked example

⚠️ Common exam mistakes