Activity-based costing and activity-based management

1. Activity-based costing and activity-based management Lasse Arildslund Anita Horgosi Jørgen Solland Julia Tsirulnikov

2. What is Activity-based costing? Activity-based costing: is a costing approach that assigns resource costs to a cost object based on activities performed for the cost object • This method enables traditionally fixed costs to be distributed among product groups, converting them into variable costs • Also gives non-financial information in opposition with conventional costing system Management Accounting, Professor I. Baranov

3. What is the objective of Activity-based management? Activity-based management: is a method of business analysis that utilizes ABC information • improving competitiveness, cost reduction, increasing productivity and augmenting flexibility in meeting customers needs • Focuses on changing the way the work is carried out or on the reasons why the work is performed • Operational ABM: doing things right and performing activities more efficiently • Strategic ABM: Choosing appropriate activities for the operation Management Accounting, Professor I. Baranov

4. How would you describe strategic ABM? • Strategic ABM: Choosing appropriate activities for the operation, „doing the right things” • Encompasses actions that shift the mix of activities away from unprofitable applications Management Accounting, Professor I. Baranov

5. Under which circumstances would you recommend to consider introducing strategic ABM? • Highly recommended for service sector organisations, and companies with complex production processes and a wide portfolio • ABC is not a quick fix: requires patience and participation to see the results cultures that reward only short-term results are not fertile grounds for ABC • Most common characteristics of successful systems: • High level of top management support and commitment • Technical competence of the implementation team • Effective change management Management Accounting, Professor I. Baranov

6. In which respect is the policy of "doing right things" under strategic ABM different from the same policy under such management systems as TQM, BPR, etc.? • ‘Management system in the management system’ • ABM is a more detail focused strategy, whereas TQM and BPR are strategies on a macro level Management Accounting, Professor I. Baranov

7. What is a difference, if any, in decision making between companies adopted and not adopted strategic ABM? • Using also non-financial information • Time-consumption • Division of accounting activities • Ethical problems and sub-optimization Management Accounting, Professor I. Baranov

8. How is strategic ABM related to strategy implementation? • ABC can be used as a basis for strategic decision making • E.g. regarding changes in the supply chain and changes in target customers Management Accounting, Professor I. Baranov

9. How would you calculate the costs of introducing ABM in a company and potential benefits? • Predictable costs: Consultancy hours, ABC software, Education • Unpredictable costs: Use of employees in the development process, Organizational changes • Benefits: More efficent processes, Easier to make rational decisions Management Accounting, Professor I. Baranov

10. Thank you for your attention! Management Accounting, Professor I. Baranov

11. Literature • Baranov: Management Accounting for Multinational Companies (reader, 2007, p.28-52) • Blocher, Chen, Cokins, Lin: Cost Management: A Strategic Emphasis (2005, p.120-135) • Coombs, Hobbs, Jenkins: Management Accounting Principles and Applications (2005, p.67-74) • Londerback, Holmen: Managerial Accounting (10th edition, 2003, p.133) • Maher, Stickney, Weil: Managerial Accounting- an introduction to concepts, methods&uses (9th edition, 2006, p.89-90) Management Accounting, Professor I. Baranov