Prepared by

Anis Shahireen Mohd Buhairi

Fatinah Husna Hamid
Prepared for
Miss Aieshah Abdullah Sani
 Learning Outcome

Define the Activity Based Management
Differences and similarities between ABC and
ABM
Explain the Relationship of ABC and ABM
Activity in ABM
Reducing Cost using ABM
Step in ABM
Advantages and Disadvantage of ABM
Impact of ABM
Activity Based Management
Process of using information from activity-
Based Costing (ABC) to analyse activities, cost
drivers and performance

Mainly focuses on the management activities as
a method for improving:
Customer value
The profit achieved by providing this value
 Differences
ABC
Narrower Scope
Casual relationship of cost
drivers to activities
The measurements of the cost
and the performance of the
various activities, cost objects
and resources
Services, business processes,
products, customers and
distribution
The cost and the performance
ABM
Wider Scope
processes and managing
activities aimed at deriving
organisational objectives
reducing cost drivers and
transfers the resources.
It is considered to be a basis
Business Process Redesign
Value obtained by customer
and profit got by giving this
value
 Similarities

Management tools that helps in managing
business activities
Improving the performance of a business
firm in an organisation
to estimate the costs of cost
object by using two ways
which are resource drivers
and activity drivers

identification and
analysis of key
characteristics of the
activities

Activity-Based Costing Model

The Relationship of ABC and ABM
 Cost driver
a factor or activities that causes a cost to be
incurred. It can be used in three different ways
which are resource drivers, activity drivers and root
cause cost drivers.
Recourse
Root cause
Driver Activity Driver cost driver
a cost driver a cost driver the essential
used to used to factors that
estimate the estimate the cause activities
cost of cost of an to be
resources activity performed and
consumed by consumed by their costs to be
an activity the cost object incurred
 Activity-Based Costing Model
The Relationship of ABC and ABM
 Cost driver
a factor or activities that causes a cost to be
incurred. It can be used in three different ways
which are resource drivers, activity drivers and root
cause cost drivers.
Recourse
Root cause
Driver Activity Driver cost driver
a cost driver a cost driver the essential
used to used to factors that
estimate the estimate the cause activities
cost of cost of an to be
resources activity performed and
consumed by consumed by their costs to be
an activity the cost object incurred
 Activity-Based Costing Model
The Relationship of ABC and ABM
 Cost driver
a factor or activities that causes a cost to be
incurred. It can be used in three different ways
which are resource drivers, activity drivers and root
cause cost drivers.
Recourse
Root cause
Driver Activity Driver cost driver
a cost driver a cost driver the essential
used to used to factors that
estimate the estimate the cause activities
cost of cost of an to be
resources activity performed and
consumed by consumed by their costs to be
an activity the cost object incurred
 Activity-Based Costing Model
The Relationship of ABC and ABM
 Cost driver
a factor or activities that causes a cost to be
incurred. It can be used in three different ways
which are resource drivers, activity drivers and root
cause cost drivers.
Recourse
Root cause
Driver Activity Driver cost driver
a cost driver a cost driver the essential
used to used to factors that
estimate the estimate the cause activities
cost of cost of an to be
resources activity performed and
consumed by consumed by their costs to be
an activity the cost object incurred
 ACTIVITIES IN ABM

Identify the activities that the organization
performs
Calculate the cost of each activity
Identify the activity cost driver for each
activity.
 Identify the Activities

It would not be realistic, or even useful, to
identify every activity that the organization
performs, so judgment will need to be used to
identify the significant activities.
Example activities in manufacturing organization:
Activities
Set-up
Material Handling
Quality Control
Machinery
Calculate the cost of each activity

The total cost of each activity will include not only
manufacturing overhead cost but also the cost of
the direct labour used to undertake activities.
Example activities in manufacturing organization
Activities RM
Set-up XX
Material Handling XX
Quality Control XX
Machinery XX
TOTAL XXX
Identify the activity cost driver for
each activity

More cost drivers can generally be identified for a
given activity than should be used for cost
accumulation or activity elimination.
Example of cost drivers for each activities in
manufacturing organization
Activities Cost Drivers
Set-up No. of Set-up
Material Handling Material Movement
Quality Control No. of Inspection
Machinery No. of Machine Hour
 Reduce Cost Using ABM

Identifying the Major Opportunities for Cost
Reduction
Determining the Real Causes of Non-Value-Added
Costs
Developing a Program for Reducing Costs
Measuring Performance
Identifying the Major Opportunities
for Cost Reduction

Value (or activity) analysis is a method that
classifies activities as value-added and non-
value-added activity.

Value-added activity Non-value-added

activities
An activity that a
customer is willing to An activities that the
pay for that contributes customer would not pay
to the end product they for
expect
Example: In baking factory
 Video of VA & NVA

VA & NVA 2.mp4
Determining the Real Causes of
Non-Value-Added Costs

The root cause cost driver of
major non-value-added
activities can be detect by using
Building cost driver analysis.
activities into
Cost driver
processes
analysis

Non-value-added can be
eliminated by clearly
understanding of the way work
is done in an organization
Developing a Program for
Reducing Costs

The Business
fundamental process
rethinking and reengineering
radical redesign to achieve dramatic
of business improvement in
process critical areas of
performance such as
cost, quality and
delivery.
 Measuring Performance

Measure to monitor the effectiveness of cost
reduction effort, customer value
Managers could obtain feedback on their
performance
 3 Steps in Activity
Based Management
Step 1:

Identify activities required to
complete products.
Step 2:
Determine whether activities
are value-added or non value-
added.
Step 3:
Continuously improve the
value added activities and
minimize or eliminate non
value-added activities.
 Benefits of ABM

Pricing Decision Improve pricing by identifying more
accurate product costs
Product Mix Market the higher profitability product;
Decision shift the product mix away from less
profitable products
Cost Cutting Analyse costs in value-chain;
Decision value engineering (value-added, non
value-added)
Planning & Uses the costs of activities to create
Control budget;
compare with actual activities to see if
 Disadvantages of ABM

Highly expensive to implement
 The Impact of ABM
Customer Satisfaction
Improves Profitability
--------------------------
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Providing the more
accurate product costs,
which provided reliable
basis for strategic
decision making
-------------------------
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Enabled the company
to monitor and
improve quality and
delivery of the
products and services.