Limitations of Activity Based Management

The limitations of activity-based management

Although ABM is one of the most effective management tools, it has some limitations. The limitations of activity-based management are explained below:

ü  The cost of implementing activity-based management is very high. Only a few organizations have been successfully implemented this ABM. Developing product survey, ABC tables, interviews etc require many hours of consulting. In addition, organization structure change, change of job flows etc also creates the necessity of further change that will incur more costs. However, activity-based management does not decrease costs rather it helps an organization to understand costs what to correct. The costs of manpower play very significant role that also affect the implementation cost of ABM. 

ü  Activity-based management process often fails to measure intangible benefits as for example creating goodwill to public by a business program. For instance, organizations have specific budget for specific activities. ABM process can only measure the benefits of these tangible activities but does not measure the intangible activities incur from these activities or others. When organization does not measure the all tangible and intangible benefits, the actual operational and strategic performance of an organization cannot be found out.

ü  It is difficult to determine the non-value adding activities thus taking effective decision often may not be possible. In addition, this shortcoming also affects in improving the efficiency of utilization of resources and fails to acquire desired productivity and profitability.  For example, a good and safe workplace helps to retain expert workers and decrease employee turnover, but it may not be determined as a value added activity by operational activity-based management. However, each activity either value added or non value added needs certain time, costs and other resources. So, the failure in determining and eliminating cost oriented non value added activity may incur costs of the organization.  

ü   Still managers are not used to with this activity-based management system and depend on the traditional systems (Cokins and Capusneanu, 2011). So that implementing the activity-based management system within the organization and getting good output are time oriented.

Reference 

Cokins, G. and Capusneanu, S. (2011) Sustaining an effective ABC/ABM system. Theoretical and Applied Economics. Vol. 18, issue 2, pp. 47-58.

    

What is Activity Based Management and its uses

Introduction

An organization needs to take a decision about its various activities frequently. To gain continuous improvement in the decision making and doing the activities successfully, it requires accurate and timely information about the activities and related objects regarding the work. Activity-based management (ABM) is one of the most important management tools for planning operations, controlling activities and making business decisions. It emphasizes on the reducing the cost of organization and shares of organizational resources through managing activities to achieve organizational objectives. 

Definition of activity-based management

Over the past several decades, the management practices and methods have continuously changed and the process is still ongoing. To improve the organizational activities, it applies just-in-time, total quality management, business process re-engineering and other initiatives as a part of horizontal management. These initiatives are developed to accelerate the activities and work process of an organization to complete the tasks effectively and efficiently within the available resources and meet changing customer requirements.

Activity bases management mainly looks at the management of the organizational activities according to the objective of increasing the profit picked up by the company by rendering the value and value picked up by the customer. Hansen, Mowen and Guan (2007) explained activity-based management as the heart and soul of organization’s operational control system. ABM includes activity analysis, driver analysis, and activity-based costing and performance evaluation. 

ABM looks at business processes activities that are related to the customer needs and is ready to spend for these. It assists in identifying the contribution of each individual in order to the cost, quality and time. ABM method improves the need for relevant information in relation to the cost of resource needed by individual services, goods and customers that enabled indirect assistance to reduce costs of activities and processes (Cardos and Pete, 2011). In short, activity-based management describes management decisions; control activities and costs satisfy customers’ needs and enhance organizational profits.

The uses of activity-based management

Using the data of activity-based costing; ABM looks at to improve the use of resources for the intention of enhancing the value created for customers and stakeholders. ABM is used in an organization in two areas such as operational activity and strategic activity. Kaplan and Cooper (1998) showed how activity-based management is using for operational improvements and strategic decisions. 

Operational uses of ABM: The main focuses of operational activity-based management are to increase asset utilization, increase of efficiency and lower costs. Organizations require looking at the activities costs, and processes, customer satisfaction, productivity, flexibility, cycle time, performance measurements and reliability. The critical success factor of an organization relies upon ensuring top quality service in an effective manner (Ismail, 2010). Operational activity-based management can enhance the capability of resources through decreasing the downtime of machine, process and enhancing the efficient utilization of organizational resources and eliminating defective activities. A core advantage of activity-based management is that costs are categorized according to the activities instead of traditional cost categories. For example, in traditional costing system may look like e.g. staff costs, cost of sales, depreciation etc. But, in activity-based management system costs may look like e.g. direct material costs, received materials, direct labor costs etc. As a result, the managers will get much more accurate and reliable information by activity-based management tool.

Activity-based management does not use separately rather it is used to improve performance activities more efficiently by business process re-engineering, activity management, and performance measurement and total quality management. Activity-based management helps these techniques is various ways such as determining the activities need to be improved and identifying priorities, monitoring the utilities of the projects and giving cost justification of the project (ACCA, 2015). However, operational ABM provides some benefits like more revenues by better utilization of resources, reduction of costs and cost avoidance through eliminating faulty activities.

Strategic uses of Activity based Management: It gives different ways to an organization thus it can create a sustainable competitive advantage. As the part of business strategy, ABM attempts to increase demand for product design, distribution channels, product line and customer mix, market segmentation and supplier relationships, capital investment and pricing (CIMA, 2001). In addition, in modern organization ABM is also used for some specific tasks such as bench marking, attribute analysis, process improvement, strategic decision making, pricing or profitability analysis, and operations analysis (Cardos and Pete, 2011). For determining specific cost, ABM uses various data tags. Data attributes help an organization solving different management problems by applying the similar primary data store.  

Moreover, ABM is used to find reliable and accurate information about the business process and activities costs. It helps to find out non-value added activities that have not any support to create customer value. ABM provides scorecards thus management body can able measuring activity-based performance. However, organizations use activity-based management for optimizing the design of products and re-pricing of products. So that managers will gain more capacity to analyze products profitability more accurately. Accurate information gives managers more scope developing new products more efficiently and eliminates unprofitable products.

In short, the use of ABM system enhances the accuracy of information, planning, controlling and decision-making process beyond traditional role of management accounting reporting.

References

ACCA (2015) Activity based management. [Online]. Available at: http://www.accaglobal.com/an/en/student/exam-support-resources/professional-exams-study-resources/p5/technical-articles/activity-based-management.html# (Accessed: 1 January 2017).

Cardos, I. and Pete, S. (2011) Activity based costing and activity based management implementation-is this the solution for organizations to gain profitability. Romanian Journal of Economics. Vol. 32, issue 1 (41), pp- 151-168. 

CIMA (2001) Activity-based management-an overview. [Online]. Available at: http://www.cimaglobal.com/Documents/ImportedDocuments/ABM_techrpt_0401.pdf (Accessed: 1 January 2017).

Cokins, G. and Capusneanu, S. (2011) Sustaining an effective ABC/ABM system. Theoretical and Applied Economics. Vol. 18, issue 2, pp. 47-58.

Hansen, D., Mowen, M. and Guan, L. (2007) Cost Management-Accounting and Control. 6^th Edition. Mason: Cengage Learning.

Ismail, N. (2010) Activity-based management system implementation in higher education institution-benefits and challenges. Campus-Wide Information Systems. Vol. 27. Issue 1, pp-40-52.

Kaplan, R. and Cooper, R. (1998) Cost and Effect-Using Integrated Cost Systems to Drive Profitability and Performance. Massachusetts:  Harvard Business School Press.