Activity-Based Management

Cite this article as:"Activity-Based Management," in The Business Professor, updated April 11, 2020, last accessed September 30, 2020, https://thebusinessprofessor.com/lesson/activity-based-management/.

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Activity-Based Management

Activity-Based Management (ABM) is a management approach focusing on managing employee activities efficiently and effectively with the purpose of increasing productivity, profitability, and organizational competitiveness.

This approach focusses on planning, implementation, and measurement of business activities. Activity-based management employs principles from activity-based costing – which is an accounting method for attributing costs to specific activities at each level of the organization. It can also be used as a basis for management decision making.

Activity-Based Management Model

The activity-based management model begins by breaking down company operations into two views:

  • Process View – The process view consists of Cost Drivers, which are attributable to organizational Activities, which yield Performance Measures.
  • Cost Assignment View – This view identifies Resources necessary for Activity, to which costs are assigned as Cost Objects.

These two views of the organization are examined as part of a Continuous Improvement Process. The evaluation consists of:

  • Cost Driver Analysis – This analysis identifies where costs arise and the genesis of these costs in the organization.
  • Activity Analysis – The continuous review of organizational activities contributing to productivity but giving rise to organizational costs. These activities are divided into organizational activity centers. The activities are then sub-divided into:
    • Value-Added Activities – These are activities that are essential for operations.
    • Non-Value Added Activities – These are activities that do not contribute to increased productivity (speed, quality, etc.) and serve as costs to the organization.
  • Performance Analysis – Identifying the appropriate metrics or methods for measuring organizational performance.

Applications of Activity Based Management Model

The activity-based management model can be used as a method of managing individual and organizational performance at various levels of the organization. It can also be used in the following ways:

  • Cost Reduction – Matching costs with activities provides an efficient way to identify waste and eliminate unnecessary costs.
  • Activity-Based Budgeting – This is a framework that allows managers to forecast necessary resources and to compare those to the actual requirements of organizational activities.
  • Business Process Reengineering – Useful in examine and re-designing operational processes within the organization to gain efficiency and effectiveness while reducing waste.
  • Benchmarking – This is the process of comparing the company’s operations and value proposition with that of competitors or similar organizations.

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