In this assignment I shall be discussing Activity-Based approaches, the essential intention of Activity-Based approaches is that they correspond to a return to reflecting reality in the way management information is assembled and reported. My focus shall remain on Activity-Based Management (ABM) and Activity-Based Costing (ABC), I shall summarise the theory and demonstrate how companies have put the theory into action. There are many definitions of ABM and this may be the reason for why there seems to be some confusion surrounding ABM.
ABM covers all aspects of the company and should be ongoing. ABM is the management and control of enterprise operation using Activity-Based information as the principal means of decision support. ABM requires participation from all members of the organisation, it entails the use of activities in planning, budgeting, costing, modelling and performance measurement and aids individuals to comprehend what resources are consumed and outputs produced by each activity and process within the business, which will enable enhancement in decision making.
Very few companies have embarked on the ABM process, as more often than not it is used as a unique performance improvement device. The most familiar approaches originate with activity analysis followed by ABC, which is then used to supply performance enhancement ideas. ABC is not ABM; ABC is the tracing of activity expenses onto overhead object, such as products, services, projects, customers etc. For that reason it is fundamentally important for the company to have a clear vision of how they want their ABM system to appear and to define the information that such a system should deliver.
The vision should be settled before applying such a system; the preparation may be the most challenging. Below is a possible ABM system: A Vision for ABM One of numerous organisations, which has hosted ABM is Lloyds TSB, I shall now provide an outline of the specific development of ABM in TSB. The development of ABM was a culmination of other programmes and schemes, such as total quality management that had produced an improvement culture and process structure determined on the external consumer.
TSB also recognised that existing ABC work needed to be adapted so that the developing approach supported the process management. This approach produced an increasing demand for cost and service to reflect the processes identified as critical in delivering requirements for the customer. ABM’s overall objective was to enable improvement within the business through improved understanding, information and management of bank’s activities and processes. This was seen as a key enabler in supporting Central Operations’ mission, which was to be the lowest cost provider whilst maintaining quality service.
The holistic overhead and service information supplied by ABM would support the drive to meet one of the key management challenges, which was to simultaneously slash costs and improve customer services. By providing both overheads and assistance information to support a variety of requirements, ABM was viewed as more than an extension to ABC. It was predominantly a process management tool that enabled improved covering, rather than a costing device that supported process management.
Essentially, inserting local activities within the wider business framework of the distinct end-to-end processes provides a stronger base for identifying and calculating the influence of probable improvement opportunities. The vision o ABM was to colonize activities with data from bottom up, in turn providing costs at activity level. Alternatively, Mercury believed ABM was a powerful tool, Mercury had enjoyed rapid growth since 1980’s, and it is a i?? 1 billion turnover organisation and a major part of Cable and Wireless Group.
However, numerous business dynamics in the market place have been rapidly changing and have increased pressure on product margins and major challenges. There is consequently a progressively powerful desire to comprehend and administer to improve the behaviour of costs within the organisation, not merely by process and performance, but also by the means in which they vary and support the different products and services provided to consumers in market sectors.
Kevin Hopps, controller of Mercury Group Finance, said ‘When we first started looking in some detail at the profitability of our services in response to increasing market pressures, we tried to apportion all our costs to them much more scientifically than ever before. However, we kept coming back to the same question: What activities are being performed in that area for that cot level? We therefore saw a natural link with Activity-Based Costing and started to explore how it might help us.