Activity-based management (ABM) is a method that is used to understand and determine the profitability of every aspect of a business. This is done so that the necessary things can be identified to be upgraded or eliminated.
This will allow achieving higher-level of profitability for the business.
One of the major things that ABM does is that it helps in identifying a business’ significant activities. This becomes important because a business is involved in several activities on a daily basis and one of the most important areas that affect the business both positively and negatively is finances.
Identifying cost drivers for each activity is one of the major steps. Since these cost drivers vary from activity to activity. For instance, when a business sets up computers, the cost driver is the number of machines set up. This is directly related to indirect costs like labour, etc.
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Businesses need to calculate the cost of each activity by involving all the direct and indirect costs related to the activity. This method is known as activity-based costing.
Along with this, the value generated from each activity has to be quantified so that it can be compared to the costs, which further allows the evaluations of the activity.
Once the necessary information is collected and analysed, businesses can now go onto to divide the management process into two other categories known as Operational Activity-based Management and Strategic Activity-based management.
Operational ABM includes to analysing the cost of each activity and increase the operational efficiency of profit-generating activities. This involves the elimination of those activities that do not generate profit. The non-profit generating activities can be uprooted and the resources can be diverted to those that are generating profit.
Strategic ABM includes the activity-based costing method to analyse the profitability of an activity. This could be the introducing of a new product or service. It allows the business to study their target audience and develop a product or service to boost the sales of profitability of the same.