Balanced Scorecard Benchmarking Business Process Reengineering Collaborative Innovation Core Competencies Customer Relationship Management Customer Segmentation Decision Rights Tools Downsizing Growth Strategy Tools Knowledge Management Lean Six Sigma Loyalty Management Mergers and Acquisitions Mission and Vision Statements Online Communities Outsourcing Price Optimization Models Scenario and Contingency Planning Shared Service Centers Strategic Alliances Strategic Planning Supply Chain Management Total Quality Management Voice of the Customer Innovation Related Topics Activity-Based Costing (ABC) Customer Profitability Analysis Product Line Profitability Description Activity-Based Management (ABM) uses detailed economic analyses of important business activities to improve strategic and operational decisions. Activity-Based Management increases the accuracy of cost information by more precisely linking overhead and other indirect costs to products or customer segments. Traditional accounting systems distribute indirect costs using bases such as direct labor hours, machine hours or material dollars. ABM tracks overhead and other indirect costs by activity, which can then be traced to products or customers. Methodology ABM systems can replace traditional accounting systems or operate as stand-alone supplements. They require a strong commitment from both top management and line employees in order to succeed. To build a system that will support ABM, companies should: Determine key activities performed; Determine cost drivers by activity; Group overhead and other indirect costs by activity using clearly identified cost drivers; Collect data on activity demands (by product and customer); Assign costs to products and customers (based on activity usage). Common Uses Companies use Activity-Based Management to: Re-price products and optimize new product design. Managers can more accurately analyze product profitability by combining activity-based cost data with price information. This can result in the re-pricing or elimination of unprofitable products. This information also is used to accurately estimate new product costs. By understanding cost drivers, managers can design new products more efficiently. Reduce costs. Activity-based costing identifies the components of overhead costs and the drivers of cost variability. Managers can reduce costs by decreasing the cost of an activity or the number of activities per unit. Influence strategic and operational planning. Implications for action from an ABM study include target costing, performance measurement for continuous improvement, and resource allocation based on projected demand by product, customer and facility. ABM can also assist a company in considering a new business opportunity or venture. Related Bain capabilities Cost & Supply Chain Management Revenue Enhancement Product management Performance Improvement Selected References Cokins, Gary. Activity-Based Cost Management: An Executive’s Guide. John Wiley & Sons, 2001. Cooper, Robin, and Robert S. Kaplan. Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press, 1997. Cooper, Robin, and Robert S. Kaplan. “The Promise—and Peril—of Integrated Cost Systems.” Harvard Business Review, July/August 1998, pp. 109-119. Forrest, Edward. Activity-Based Management: A Comprehensive Implementation Guide. McGraw-Hill, 1996. Hicks, Douglas T. Activity-Based Costing: Making It Work for Small and Mid-Sized Companies, 2d ed. John Wiley & Sons, 2002. Kaplan, Robert S., and Steven R. Anderson. “Time-Driven Activity Based Costing (TDABC).” Harvard Business School, Working Paper Series No. 04-045, 2003. Pryor, Tom. Using Activity Based Management for Continuous Improvement: 2000 Edition. ICMS, 2000.