TOPIC: ACTIVITY-BASED MANAGEMENT (ABM)

COURSE: COSTS AND BUDGETS

MEMBERS:
Condori Cabrera, Joselyn
Dávalos Palomino, Brandon
Dávalos Palomino, Bryan
Ibañez Berrospi, Luz de Maria
Rupailla Ruiz, Williams

CYCLE: VI

TEACHER: Mag. Manuel E. Pingo Zapata

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BASED ADMINISTRATION
IN ACTIVITIES (ABM)

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ACTIVITY-BASED MANAGEMENT
(ABM)
• ITIS DEFINED AS A METHOD TO IDENTIFY AND EVALUATE THE ACTIVITIES THAT
CARRY OUT AN ORGANIZATION THROUGH ABC COSTING TO PERFORM AN ANALYSIS
FROM THE VALUE CHAIN OR A REENGINEERING INITIATIVE WITH THE PURPOSE OF
IMPROVE STRATEGIC AND OPERATIONAL DECISIONS.
• THE ABM HAS BEEN WIDELY USED TO IMPROVE PROCESSES AND
INCREASE THE profitability OF COMPANIES.

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TRADITIONAL COST AND
LABM COST

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Activity-Based Management is a
methodology derived from activity-based costing,
which has been applied not only to cover the
products more closely aligned with reality,
but also to other areas of management, such as
it is the case of determining the profitability of the clients,
select investment options, prepare
budgets and in the case that deals with a study, the
correct selection of suppliers and the choice of
better product design.
Many manufacturing companies use the system
traditional cost methods for allocating overhead expenses
manufacture to the units produced.

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Therefore, the ABM develops and achieves its objectives through these
pillars, aiming to increase the competitiveness of companies, and
pursuing the achievement of three clear objectives:
a) Cost reduction.
b) The increase in quality.
c) The optimization of time in the company.

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Activity-based costing has proven its usefulness in costing items and
services, according to the activities and resources used by each product, which
effected through appropriate cost drivers, which establish a
cause-effect relationship between resource consumption and cost object,
What is normally the manufactured article (Kaplan and Cooper, 1999).

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We found these differences of the ABM with traditional cost:
Traditional cost Costs of the ABM
The traditional cost The ABM costing of products in a way
Use related measures with the closest to reality.
volume, just like labor, as
unique element to assign the costs to the
products.

The traditional cost only uses the costs of the ABM determines the profitability of the
product. clients

The allocation of indirect costs is carried out by selecting investment options, preparing
ends in two stages: first, budgets are assigned and in the case that this deals with
an organizational unit whether it is the plant or studio, the correct selection of suppliers and
some department and secondly, the choice of the best product design.
products.
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• Exercise:
A fictional case is presented of an accounting firm that has clients it has grouped together.
in 5 segments. The objective is to illustrate the application of ABM in evaluating profitability of
the clients.

The accounting firm keeps a record of its clients, classifying them into 5 main segments:
Metalworking Industry, Textile Industry, Construction Companies, Individuals and Businesses
Commercials.

Under traditional costing, fixed costs are allocated based on the revenues generated by each group.
of clients generates. The annual period that has just ended yielded the results presented
in table I:

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DELABM APPROACHES

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ABM is the technique that
integra el ABC con
strategic decisions and
operational based on the
cost of the activities, and
through measurement
of the added value
contenido en los procesos
will provide information
about the value of the
same.

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The ABM allows for having information for decision-making.
of decisions such as whether to make or outsource,
product design and profitability analysis. The
important in this chart is not how it flows the
information, but how the capacity increases
analysis and therefore decision making

ABM is a management tool that

allows for better decisions by focusing attention
what activities are done, how they are done, why
they are made, and how much it costs to make them, and in this way
search for the company to achieve its results
with fewer resource requirements, that is to say achieve
achieve their results at a lower total cost.

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The ABM achieves its objectives through two subsystems.
complementary, the operational ABM and the strategic ABM.

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The operational ABM accepts the demand for resources as given and tries either to
increase the use of productive factors or reduce costs, so that they
they need fewer physical, human, and capital resources to generate income, for
Thus, the results are measured by the reduced costs.

Strategic ABM, on the other hand, seeks to alter the demand for activities.
to increase profitability, while assuming that the efficiency of the
activity remains constant; in this case if the product that is being
analyzing it becomes profitable we seek to strengthen marketing campaigns for
increase sales volume.

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The design of these models may vary
depending on the type of objective being pursued.
Strategic systems may require
relatively few activities, while the
ABM operating systems generally require several
hundreds of activities to provide a better
vision of the processes. It is important to highlight that
operational and strategic decisions not only do not
they are not exclusive, but should complement each other
para obtener los mejores resultados.

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To evolve towards the ABM is
convenient to think about rates of
budgeted inductors that also
reflect the utilized and idle capacity
of the resources, and in this way not only
measure their consumption if not
also manage them; especially the
unused capacity should be the focus
of attention in budgeting, in
views of achieving an administration of
the most efficient resources

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STEPS TO ESTABLISH
ELABM

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Mark Hixon (1995) states that to establish the ABM, the following steps must be followed:

Planning:
Develop a detailed project that includes the implementation phase. with the
necessary resources for it.

Education and Awareness:

All those involved in the project need to be trained, remembering that the
ABM is a management strategy, which is why it should not be undertaken alone.
the accountants.

Define the process and the activities:

Define a model that links activities with the business process. At this stage
The process mapping tool is extremely useful.
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 Collect Data for Activity Analysis:
Use standard packages to track costs to activities. The analysis of activities
it must be flexible enough

Performance improvement techniques:

Performance measures should be defined for key activities at the level of
process, since if the process is under control, the activities will also be.

Plan the system in operation:

This is the most challenging stage, as few organizations have ventured to carry it out.
out.

Implementation:
It should be well planned and care should be taken with the management of changes. For this reason
Hixon says that ABM is a fundamental change in the emphasis of the business.
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 THE APPLIED ABM IN THE
INVESTMENT EVALUATION

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The ABM evaluates investments based on the changes that occur
in the yields of the resources needed to manufacture the items,
upon acquiring new equipment or technology, which is reflected in
greater benefits or lower costs.

With the support of the ABC methodology, information has been generated about
planning and control to support decision-making and
they established the links between emerging technologies, the new
business processes and financial forecasts.

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Robert Kaplan (1986) comments that financial analysis methods
traditional ones are not suitable for justifying investments in
computer-integrated manufacturing (CIM), since it does not
they consider some of the costs incurred when introducing a
new process technology, as well as several of the benefits
obtained.

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Among the tangible benefits, Kaplan lists the following:

Savings in inventories: Requirements

smaller quantities of items in
inventory. More orderly flow of the
products.
Less floor space: A requirement is needed
smaller number of teams
conventional, which means that
needs less space for the
manufacturing.

Higher quality: More production

uniform and with fewer defects.
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Likewise, Kaplan (1986) states that there are other benefits that are intangible.
are more difficult to quantify since they represent higher income and not savings
in costs.

Greater flexibility: MIC technology can respond better and faster to a

change in the demand for products.

Shorter manufacturing times: This allows satisfying the customer by arriving the
products to market more quickly.

Main learning: The MIC allows managers and administrators to gain

experience with the use of technology and closely monitor advancements of
process.

Finally, Kaplan points out that, although these intangible benefits are difficult to
quantify, they should not be assumed to be zero.
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Concepts to consider:

Cost of capital: Rate of return or yield that every project of

investment must provide for the market value of the shares
the company remains unchanged.

Net Present Value (NPV): A procedure that consists of updating the

collections and payments of a project or investment and calculate their difference. For
Hello brings all cash flows to the present moment by discounting them.
a determined interest rate.
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 EXERCISE:
The hypothetical case of a company in the metalworking sector is presented.
which sells an item for which it manufactures a volume of 120,000
monthly units. The following points are taken into account:
The manufacturing cost of each item is $300 and the cost per hour
machine $480.
With the current process, the productivity is 500 units per hour.
The manufacturing staff consists of 10 employees, each of
los cuales gana $280 diarios por turno de producción de 8 horas.
The fraction of defective items is currently 0.65 per thousand.
The average inventory is 8 production shifts.
The company has the option to invest in new equipment that is managed
by computer, which has a purchase cost of $3,000,000, to which
amount would need to include the cost of staff training for its
management, which is an additional 12%.
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With the new equipment, productivity would be 800 units per hour and with the
new distribution of the process area, it would only occupy 6 employees
production shift. The defective fraction with the new process is expected
that it is 0.1 per thousand and the inventory would drop to 0.6 manufacturing shifts.

Furthermore, with the new process, a warehouse would no longer be needed for
store the products, for which a rent of $24,000 is paid monthly
and it would be possible to do without 4 employees from the administrative area and 3 more from
warehouse, who earn $9,500 and $8,800 monthly each
respectively. Likewise, savings would be made in other supply expenses and
transport an estimated amount of $8,000 monthly.

If the inventory handling cost is $6 monthly per item and the cost of
the company's capital is 11.5% annual, it is desired to evaluate the convenience of
make the investment, if the maximum recovery period of it has
defined in 2 years.
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PROFITABILITY ANALYSIS
WITH THE USE OF LABM

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Traditional financial information does not generate information about
profitability by business segment since it does not allocate a assignment
of costs and indirect expenses, and when it does, it is done incorrectly,
since it prorates them to products and customers based on volume or
income, does not accurately identify the demand for resources,
resulting in overpriced and underpriced products or services, giving
as a result, a vision of costs and profitability that leads to decisions
erroneous.

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The information generated by a Profitability Analysis provides
countless benefits, the main ones:

It allows for a detailed profitability analysis that indicates us

Which products or services generate profit and which generate losses.

It allows detecting cost reduction opportunities by improving the

efficiency and productivity in the development of activities and processes.

It allows finding efficiencies in costs, times, and quality of the

different members of the supply and demand chain.

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WHALE CURVE OR
USEFULNESS

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IT IS NECESSARY TO HAVE THE PROFITABILITY FOR EACH OF THE CLIENTS.
CLASSIFYING THEM FROM MOST PROFITABLE TO LEAST PROFITABLE WITH BENEFITS
NEGATIVES OR LOSSES. IN MOST CASES, THE MOST PROFITABLE CUSTOMERS
THEY CREATE MOST OF THE PROFIT WHERE THE CURVE INCREASES AFTER THE
WHICH THE GROWTH CURVE DECREASES AS THE CLIENTS WITH
NEGATIVE BENEFITS (LOSS) ARE REPRESENTED IN THE WHALE CURVE.

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 Exercise:
The company 'La Estrella' has 20 clients. After conducting a study of
costs and profitability, obtained the following information on the profit for each one
of its clients. Create the Whale Graph and identify the maxima.
contributors, contributors and the destroyers.

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We identify those customers whose accumulated profit is within the range of
80% of the total profit, we call these 'Maximums'
Contributors, we call clients whose profit is less than zero
"Destructors" and those who are in the "middle" will be called contributors. Thus
we could obtain the following table:

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"The Star" can make decisions starting with those who
they are destroying the usefulness, which will allow the establishment of the
strategy that best fits your reality. the
contributors are sought to return them to the category
superior. While those in the first category,
Maximum Contributors are sought to be retained.

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BEHAVIORS OF THE
WHALE CURVE

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There are two behaviors of the whale graph:

The dependence is on those we rely on to obtain a

usefulness; of which there are two that are key: the products and the
clients. Likewise, we can consider other variables of which
we can be dependent on utility, as it can be a
branch.

The subsidy; like the dependency can be: the clients or the
products.

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POSSIBLE RESULTS OF THE
Utility Curve

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Possible results of the utility curve
High Dependency - Low Subsidy
We depend on a few clients and/or
products to obtain utility. There are
few or no products whose utility
suffer from others. This situation
requires having it under control.

2. High Dependence - High Subsidy:

We depend on few clients and/or
Products to obtain profit. There are
few products and/or customers that
subordinate to other products, that is,
many of our products and/or
clients are representing us
loss.
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3. Low Dependency - Low Subsidy:
"Ideal" situation. We do not have one.
marked dependence on a few clients
and/or products to be profitable.
We also do not have a high rate of
subsidies.

4. Low Dependence - High Subsidy:

We do not have a marked dependency.
in few clients and/or products to be
profitable. Yes, we have a high
number of products and/or customers that
subsidy to others. This situation requires
keep it in control.
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HOW TO IMPROVE THE
RENTABILITY OF
CLIENT?

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1. Perceived value of the customer:
It consists of identifying what the attributes or qualities of the
products and services for which customers would be willing to
to pay a higher amount.

2. Modify the mix of products and services:

It consists of offering combinations of products and services that
allow for higher profit margins.

3. Modify distribution channels and service levels:

Once the value of the customer acquiring the products has been analyzed
services, it can be concluded that not all clients require and are given
it must provide the same level of service. To achieve this, it is necessary to identify the
distribution channels and the levels of service that should be provided to them
each category of customers.
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5. Reconfiguration of processes:
In highly competitive environments and especially in production
of goods, companies benefit more through the
optimization of the cost base of the infrastructure, resources
humans and technology used to execute the processes,
that increase in price.

6. Introduce new products and additional services:

It is possible to design and market products and services that
satisfy the specific needs and preferences of the
customer segments that are also highly profitable
for the company.
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THANK YOU

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