Activity-Based Management

ACTIVITY-BASED SYSTEMS: MEASURING THE COSTS OF RESOURCE USAGE

Activity-based cost (ABC) systems estimate the cost of the resources used in organizational processes to produce outputsùproducts or services. While attempts are made to interpret activity-based costs within the context of the traditional fixed versus variable cost framework, this approach is inconsistent with an ABC system's measurements of resource usage costs. The fixed versus variable cost classification attempts to classify the likely change in spending or supply of a resource. Measurement of unused capacity through the application of the ABC model provides the critical link between the costs of resources used and the costs of resources supplied or available.

The ABC resource usage cost information can be used by managers to monitor and predict the changes in demands for activities as a function of changes in output volume and mix, process changes and improvements, introduction of new technology, and changes in product and process design. As changes are contemplated, managers can predict where either shortages or excesses of capacity will occur. Managers then can either modify their decisions so that activity demand will be brought into balance with activity supply, or they can change the level of activities to be supplied in

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ering that value. A new approach to management accounting that encourages companies to manage activities, not costs, is based on activity-based information, which is information based on the activities that consume resources and, ultimately, deliver value in a business. To become world-class competitors, companies must shift their emphasis away from the traditional system of measuring costs alone and learn instead to manage activities. This new approach to management accounting must be built on activity-based information. This information concerns the work, or activity, that consumes resources and delivers value in a business. People consuming resources in work ultimately cause costs and achieve the value customers pay for. Ideally, the way to achieve profitability is to manage activities. When managers attempt to achieve profits by managing costs, as has been done for decades, they implicitly use cost to measure activities indirectly. Initially, this practice was probably a matter of convenience and economy. Until the advent of electronic information processing it was very difficult, and costly, to gather information about activities. Two types of activity-based information should form the backbone of world-class manag
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Approximate Word count = 9668
Approximate Pages = 39 (250 words per page)

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