Applying Activity Based Management

Dr. Elijah EzenduFIMC, FCCM, FIIAN, FBDI, FAAFM, FSSM, MIMIS, MIAP, MITD, ACIArb, ACIPM,

PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC, CMgr

Activity based management is a logical technique of planning, controlling and improving labour and overhead cost.

It hinges on the principle “activities consume costs”. Whereas traditional cost system focuses on the ‘worker’, activity based management focuses on ‘work’.

Activity based management is a methodical analysis for improving operational systems and control so as to enhance value deliverables to clients and boost corporate profitability.

Merits of Activity Based Management

• It increases effectiveness of key business processes, activities and tasks by keeping costs at barest minimum while increasing value to clients.

• It improves management focus through allocation of resources to value added activities, customers, products and continuous improvement system for maintaining competitive advantage.

Activity Framework

Activities

Input

Output

Resources

These are components required for performance of activities. Three categories of resources are as follows:

• Labour• Physical• Material

Resources Hierarchy

Customer Level

Product Level

Batch Level

Facility Level

Unit Level

Unit level resources are obtained for unit of product. Example of unit level resource is material or labour acquired for unit of product.

Batch level resources are obtained for production of similar goods. Example of batch level resource is ten tins of ink which had been purchased for production of a group of similar products.

Product level resources are obtained for manufacturing of a specific product. Example of product level resource is a special machine bought for producing only a specific product.

Customer level resource is obtained due to decision to serve a particular customer. Example of customer level resource is a special equipment bought and installed for contract production programme of a customer.

Facility level resource is obtained for utilization as common capacity within a company. Example of facility level resource is ‘top management’ of a company.

Cost Object

A cost object is an item for which costs are accumulated. It’s the reason for performing an activity and stands as the final point to which cost should be traced.

Examples of cost objects are completed purchase orders, completed projects, customer, contract, finished products.

Cost Driver

A cost driver is a variable that demonstrates a logical and quantifiable cause and effect relationship between the use of resources, performance of activities and cost object.

It’s a factor that can generate effect of changing the level of total cost for a cost object.

Categories of Cost Drivers

Structural Cost Driver

Executional Cost Driver

Resource Cost Driver

Activity Cost Driver

Structural Cost Driver

These are decisions about the type of resources that an organisation should obtain. It determines and drives the overall makeup and structure of costs.

Examples of Structural Cost Driver in your firm are ...........................................

………………………………………………………………………………………………………………………………………………………

Executional Cost Driver

They are decisions about the specific processes and activities that consume an organization's resources.

Examples of Executional Cost Driver in your firm are ……………………..

………………………………………………………………………………………………………………………………………………………

Resource Cost Driver

Resource Cost Driver is a factor that determines the level of consumption of resources by activity.

The Resource Cost Driver of a material input is decision about the percentage of that material per unit volume.

Activity Cost Driver

Activity Cost Driver is a factor which causes activity to be consumed by cost object.

Purchase requisition is the activity cost driver of purchase order.

Number of movement required is the activity cost driver of moving from one point to another in a production facility.

Organizational Application of Activity Based Management

• Budgeting and Forecasting• Performance Monitoring• Process Improvement• Controlling Shared Services• Product Profitability Analysis• Customer Profitability Analysis

Problems of Traditional Budget System

• It focuses on function instead of processes.• It focuses on cutting costs instead of improvement.• It does not classify wastage.• It’s not designed to recognize work or workload.• It focuses on input and not output.• It does not focus on quality and time.• The information it provides shows what happened, but

does not demonstrate why and how it happened.

Performance Monitoring

Activity based management is used for performance monitoring through identification of performance goals, communication of targets to all employees, and controlling activities with the intention to achieve afore stated performance level.

Process Improvement

Activity Based Management can be applied in the analysis of business processes with the aim of discovering constraint points and non-value adding activities; after which improvement would be effected by optimizing activity work flow.

Controlling Shared Services

A shared service in an organisation shows the supply of service from one section to others, highlighting the role and consumption pattern of that service across the board.

Activity Based Management shows the true picture of size, type and cost of service provided by each support unit in an organisation.

Product Profitability

Activity Based Management provides a system for determining actual product profitability level by capturing the resources consumption flow in the total activities for production of an output.

Customer Profitability Analysis

Activity Based Management identifies resources, activities, costs and profit involved in servicing various customers of an organisation, thereby enabling thorough analysis of customers.

A B C D E

RevenueCost of ServiceMargin

7,000,0004,500,0002,500,000

8,500,0006,500,0002,000,000

6,800,0004,600,0002,200,000

9,000,0007,800,0001,200,000

6,900,0002,500,0004,400,000

Dr Elijah Ezendu is Award-Winning Business Expert & Certified Management Consultant with expertise in HR, OD, Competitive Intelligence, Strategy, Restructuring, Business Development, Sales & Marketing, Interim Management, CSR, Leadership, Project & Programme Management, Cost Management, Outsourcing, Franchising, Intellectual Capital, eBusiness, Social Media, Software Architecture, Cloud Computing, eLearning & International Business. He holds proprietary rights of various systems. He is currently CEO, Rubiini (UAE) and Hon. President, Worldwide Independent Inventors Association. He functioned as Chair, International Board of GCC Business Council (UAE); Senior Partner, Shevach Consulting, Nigeria; Chairman (Certification & Training), Lead Assessor & Council Member, Institute of Management Consultants, Nigeria; Lead Resource, Centre for Competitive Intelligence Development; Lead Consultant, JK Michaels; Technical Director, Gestalt; Chief Operating Officer, Rohan Group; Director, Fortuna, Gambia; Director, The Greens; Director of Programmes & Council Member, Institute of Business Development, Nigeria; Member of TDD Committee, International Association of Software Architects, USA; Member of Strategic Planning and Implementation Committee, Chartered Institute of Personnel Management of Nigeria; Adjunct Faculty, Regent Business School, South Africa; Adjunct Faculty, Ladoke Akintola University of Technology, Nigeria; Editor-in-Chief, Cost Management Journal; Council Member, Institute of Internal Auditors of Nigeria. He holds Doctoral Degree in Management, Master of Business Administration and Fellowship of Several Professional Institutes in North America, UK & Nigeria. He is an author & widely featured speaker in workshops, conferences & retreats. He was involved in developing Specialist Master’s Degree Course Content for Ladoke Akintola University of Technology (Nig) and Jones International University (USA). He also works as Adjunct & Visiting Professor of Universities and holds Interim Management Assignments on Boards of Companies.

Thank You