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The use of ABC as a costing tool to manage costs at activity level is known as Activity Based Management (ABM). ABM is a discipline that focuses on the efficient and effective management of activities as the route to continuously improving the value received by customers. ABM utilizes cost information gathered through ABC. It determines what drives the activities of the organization and how these activities can be improved to increase the profitability.
Core Areas In Activity Based Cost Management
• Cost Object–It is an item for which cost measurement is required e.g. a product or a customer.
• Cost Driver–It is a factor that causes a change in the cost of an activity.
There are two categories of cost driver:
• Resource Cost Driver–It is a measure of the quantity of resources consumed by an activity. It is used to assign the cost of a resource to an activity or cost pool.
• Activity Cost Driver–It is a measure of the frequency and intensity of demand, placed on activities by cost objects. It is used to assign activity costs to cost objects.
Business Application of ABM
(i) Cost reduction
(ii) Activity Based Budgeting
(iii) Business process re-engineering
(iv) Benchmarking
(v) Performance measurement
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