Part 1 - Activities Based Management Flashcards
What is ABM?
Activity based management (ABM) applies activity based costing (ABC) principles in order to satisfy CUSTOMER NEEDS using the LEAST amount of resources
Which activities does ABM include?
- Improving the DESIGN of products and developing better RELATIONSHIPS with customers and suppliers.
- Performing activities more EFFICIENTLY,
- Eliminating the need to perform certain activities that do NOT ADD VALUES for customers,
What is the benefits of ABM?
(a) Improved quality => (b) Increased customer satisfaction
(c) Lower cost => (d) Increased profitability
- Choosing which products to manufacture
- Review of costs, prices and designs
- Customer profitability analysis
Benefits of Lower costs:
+ Better control costs by CONTROLLING ACTIVITIES which drive the costs.
+ Identify VALUE ADDED activities and NON VALUE ADDED activities. Non value added activities should be reduced without affecting the quality of service or product for Vunderg’s customers.
Benefits of Choosing which products to manufacture
+ By understanding the cost of a product, and therefore its profitability, Vunderg can decide whether to DISCONTINUE AN UNPROFITABLE product or whether to produce a new one.
+ Loss making products identified using ABM are often those which are highly CUSTOMIZE and produced in LOW VOLUMES. => STANDARDIZE
Benefits of Review of costs, prices and designs
+ By understanding what drives the costs of a product, Vunderg can TAKE ACTIONS to make an unprofitable product PROFITABLE => identifying the causes, or drivers, of the product cost and taking action to manage these.
+ ABM will also help identify products which may need to be RE-PRICE
+ ABM may identify possible improvements to the DESIGN of a product by focusing on activities which add value for the customer and eliminating those which do not
Benefits of Customer profitability analysis
+ Customer profitability analysis (CPA) involves APPORTION OVERHEAD COST to different types of customers, or categories of customers, using ABM principles.
=> Insisting on MINIMIZE ORDER SIZE to reduce the costs driven by the number of orders processed
What is limitations of AMB?
- Difficult to separately identify key activities
- Limited use
- Incorrect decisions
- Problems of implementing ABM
Limitation - Limited use
+ ABM is most useful where products are CUSTOMIZE and contain HIGH OVERHEAD COSTS such as design, procurement and customer administration
+ As this market is very COMPETITIVE, there may be little Vunderg could do to improve profitability, for example, by increasing prices, so the use of ABM to choose which products to sell could therefore be of little use.
Limitation - Incorrect decisions
+ Discontinuing conservatories could REDUCE CONTRIBUTION. As conservatories are at the start of their life cycle, expecting them to be profitable immediately could be UNREALISTIC.
+ Does NOT mean that these costs will be SAVED in the short term if the products are discontinued. The depreciation or lease costs of the factory are FIXED
Limitation - Problems of implementing ABM
+ CONSIDERABLE RESOURCES and MANAGEMENT TIME will be needed to set this up
+ RESISTANCE from staff
+ Need to invest in these in order to collect LARGE VOLUMES of data on costs
What is value added activities and NON value added activities?
- Added: An activity may increase the WORTH of a product or service to the customer; in this case the customer is WILLING TO PAY for that activity
- Non added: INCREASE TIME spent on a product or service but do NOT increase its worth to the customer
What is primary and secondary activities?
- Primary: Adds value to a product
- Secondary: Supports a core activity, but does not add value in itself. For example, setting up a machine so that it drills holes of a certain size is a secondary activity.
