What is Activity Based Costing
What is Activity Based Costing
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Defining What is Activity Based Costing SiteMap

Activity Based Costing System is a subset of ABM. ABC improves costing by tracing expenses (e.g. salaries, supplies, rent) to activities and tracing activities to business processes, products, services, customers, distribution channels, etc.

Activity Based Management (ABM) Defined

  • focuses on managing activities/business processes to achieve organizational objectives.
  • reduces cost drivers and non-value and transfers resources to economic value creating activities/business processes the customer wants and is willing to pay for.
  • Creates performance measures for cost, time, quality, and outcomes so everyone understands how their activities contribute to the mission and strategy.
  • Supports Balanced Scorecard by creating performance measures
  • Improves cash flow, quality, cycle time reduction,
  • Basis for Business Process Redesign,
  • Supports gain sharing /goal sharing, and teams.

Activity Based Costing Information

We thank Mike Roberts for the following information.

For those new to ABM, this section will introduce you to the world of ABM.

We have provided a vast amount of free material that will enhance your ABM presentation. This includes The CAM-I Glossary, our fast track Approach and the ABM Bibliography.

By now you have probably either read or heard success stories about how ABC or ABM techniques have helped companies better understand product cost and profitability, identify opportunities or develop improved performance measurement. What you may not know is that recent studies have shown that 70 percent of ABC/ABM implementations fail! Indeed, some organizations have achieved great success as a result of their ABM efforts. For these companies, Activity Based techniques have helped lead management to find ways to significantly improve bottom line profits and returns.

On the other hand, for many companies, ABM implementation has become a long and drawn out affair, consuming considerable resources in terms of management time, consulting fees and software costs. Worse yet, many of these efforts ended as dismal failures, producing little, if any, tangible benefit.

Why would a web page on ABM begin by describing this high rate of failure? Because our organization is a different kind of company and we want you to be in the top 30 percent of successful ABM implementers. More importantly, we're prepared to help you plan, develop and implement an ABM system tailored to your company's needs; a system which is practical, produces positive results and provides a sound basis for continuous improvement. We believe that the success of any improvement program is largely dependent on three key elements which are incorporated in every ABM project we undertake.

Designing a practical approach to fit the organization's objectives.

The caliber and experience of people involved in the program

Providing hands-on support to ensure timely execution, measurable results and ongoing improvement.

Practical, Tailored Solutions

First, we recognize each company has different objectives and requirements for their ABM System. Even within the same company, different organizations will commonly have different objectives which should be addressed through the ABM implementation. ABM should be adapted so it "fits" with other organizational initiatives such as BPR, TQM and employee empowerment. Our first objective is to understand your needs and objectives. Only then can we tailor an implementation approach that is right for your company.

Experts Secondly, developing the right Activity Based Approach for your company requires experience. We are highly experienced experts, not just in ABM, but in other advanced management techniques as well. Our Team is comprised of many of the leading experts in ABM, who have extensive experience in successfully leading ABM implementations in a number of different industries. Support Finally, throughout your ABM implementation, our experts will assist you through the process. We'll work closely with your team to successfully complete the implementation and to enhance their understanding of Activity Based Management. Our goal is to transfer our skill and knowledge to your team so that future ABM projects can be undertaken with minimal outside support. Take a minute and review our experience and qualifications. Review fast track Approach we developed to speed our clients through the ABM process. Finally, contact us so we can get you on fast track to successful ABM.

We are is a different kind of company. We are an elite coalition of recognized industry experts in Activity Based Management and Process Improvement. Every Associate has over twenty years of hands-on industry experience and each of these experts have successfully lead ABM implementations for major companies. When you review our team and their credentials, you'll probably recognize the names of these experts who have helped pioneer ABM. By working together, we provide an unparalleled level of expertise and support to our clients. We have extensive experience in the manufacturing, service, distribution and medical fields.

Activity Based Costing Method and Approach

Our approach to ABM is different. We developed a fast track approach to provide clients an accelerated approach and software to ABM which is both practical and consistently produces measurable results. Our approach and software is tailored to specific needs of clients and is linkable to ABM software products.

Our unique approach to ABM implementation combines group techniques, process mapping and ABC to improve business processes, provide strategic cost data, and promote continuous improvement. This approach utilizes cross-functional teams to define outputs and activities, trace cost to activities and products, develop process maps, define and prioritize improvement opportunities, and build group consensus on performance measures and process improvement opportunities. This approach significantly reduces ABM implementation time and allows organization to rapidly begin realizing measurable results.

Our Results

Our results have been excellent. During these projects participants typically identified improvement opportunities with first year payback of 15-20 times the investment in the project. Our approach emphasizes "learning by doing". This enables the company to develop its own internal team and eliminates the need for full time outside support.

Next Steps

The information included in this Web site will provide you with some additional information on our Associates and ABM approach. If you're serious about implementing a successful Activity Based Management system, contact us. We will be happy to discuss availability of training, education, workshops or seminars that are tailored to your organization. We'll be glad to provide references from our most recent ABM implementations and discuss your company's ABM needs and objectives.

We have a wealth of experience in ABM processes and work with some of the biggest companies in the US.

Alexian Brothers Medical Center, Blue Cross Blue Shield, CAM-I, Caterair, Ciba-Corning, Discover Card, Delta Dental, Ford, GATX, Harris, IBM, J.C. Penney Life, Johnson & Johnson, JLG Industries, LAM Research, National Semiconductor, Norton, Racal Datacom, Tredegar Industries, US Air Force, University of Alabama, Zenith. What is difference between Activity Based Costing (ABC) and Activity Based Management (ABM)? Activity Based Costing is a technique that was originally developed to improve a company's understanding of the cost of the products and services it provides. ABC provides this improved understanding by first tracing resources (operating costs) to the activities (work) performed within the organization. Secondly, these activities are traced to the products, services, or customers for whom the activity is performed. The primary uses of Activity Based Costs tend to be strategic in nature and include:

Evaluation of product line or customer profitability
Enhancement of make or buy decisions, and
Costing of intra-company services.

Activity Based Management, addresses not only the strategic issues of profitability of products, customers, or services, but expands the analysis to understand and define:

Non-value-added activities, Cost drivers, Performance measurements, and
Opportunities to redefine or redesign business processes. ABM provides decision makers the opportunity to not only assess which products or customers are more profitable, but defines the opportunities to eliminate waste and improve the profitability of all products and services.

How does Activity Based Costing differ from traditional cost accounting systems?

Most traditional costing systems utilize a single basis, (e.g. direct labor) to distribute the indirect costs to all products and services. This method of allocating indirect costs commonly results in erroneous cost data. Often products which have high volume (and high labor cost) are over costed. Likewise, the cost of lower volume products are often understated, and many of the indirect costs of these products are overlooked.

Rather than relying on a single basis to distribute costs, ABC assigns costs to activities and products based on how the costs (resources) are actually consumed by the process or product. By moving away from traditional cost allocation methods and using improved ABC methods of tracing and assignment, ABC provides managers with a clearer picture of cost of processes and the profitability of customers and products.

How are activities analyzed?

The three most common techniques for defining and analyzing activities are as follows:


Interview techniques rely on asking an expert on the activity or process specific questions about the work that is performed within their area. These interviews are used to determine:

  • The outputs of the process
  • The customer for the output
  • The quality measurement for the output
  • The activities required to produce the output
  • The resources consumed by the activities
  • How the activities add value
  • The cost drivers of the activities
  • A series of questions are used during the interview to elicit the required information.

Group Workshop

Group workshop techniques utilize working sessions with the people who actually perform the activity, to gather the information noted above. Utilizing work groups improves understanding of the process, while at the same time helping to build consensus about the process, activities, and opportunities to make improvements. Typically these working sessions will include training on how ABC and ABM are used, as well as specific techniques to define the activities and build group consensus. Some of the more popular

techniques used in these workshops are:

  • Nominal Group Technique
  • Process Mapping
  • Affinity Diagramming
  • Story Boarding
  • Brainstorming
  • Cause and Effect Analysis (Fishbone Diagramming)

Groups that participate in activity analysis workshop are better prepared to begin development of plans to implement process improvements that have been identified. The fast track process developed by Mike Roberts is an excellent example of using the group workshop technique to perform activity analysis.

Specific Observation

Analyzing activities through specific observation utilizes time-study and other work measurement techniques to define activities and resources consumed by the activity. These techniques have disadvantages related to their impact on people and the work being studied. People tend to behave differently when studied which can lead to a poor or incorrect definition and analysis of an activity. Specific observation is best used as a follow on to group analysis to confirm information provided by the group or to develop more precise data. It should only be used when the group understands the need for it and there is consensus for using it.

How do you define non-value-added (NVA) activities?

The concept of non-value-added activities is without a doubt the most controversial issue within ABM. There are a number of definitions in use for NVA; some of the most common ones are:

NVA Activities are activities that do not contribute to meeting customer requirements and could be eliminated without degrading the products, service, or functionality of the business.

NVA Activities are those activities and tasks within activities an informed customer is not willing to pay for.

NVA is anything other than the absolute minimum of material, machines, and human power required to add value to the product or service.

Activities that have any of the following words as part of their name or definition are generally considered to be non-value-added:

  • Scrap/Rework/Return Materials/Move
  • Count/Wait/Setup/Inspect
  • Check/Test/Store/Measure

Mike Roberts has developed the concept of Ownership Value Added tm (OVA) to help define those portions of activities that are NVA and assign responsibility for eliminating the waste. The OVA concept separates the NVA waste into two buckets; one that can be fixed by operational people and the other that requires strategic changes that have to come from the top of the business.

What is the relationship between ABM and other improvement techniques such as Reengineering and Total Quality Management (TQM)? ABM complements Reengineering and TQM by providing quantified cost data associated with existing processes and activities, thus enabling intelligent evaluation of process changes and improvements. Further, ABM can be used effectively to model and measure the cost/cost savings of redesigned or improved processes that result from TQM and Reengineering efforts.

What is the difference between Cost Drivers, Resource Drivers and Activity Drivers?

Here are some definitions of these ABM terms that can sometimes cause confusion. For more information the CAM-I (Consortium for Advanced Manufacturing International) Glossary of ABM should be consulted.

Cost Driver - cause of activity and its cost; any factor causes increase or decrease in occurrence of an activity or level of effort required to perform activity. There are often several cost drivers for a single activity.

Resource Driver - is the means for tracing the resources that are consumed by a particular activity to that activity. As an example, when tracing the cost of a resource such as labor to an activity, the amount of effort to perform that activity must be identified. Here, the Resource Driver called Headcount or FTE's is very useful. In the old days, Resource Drivers were called 'first stage drivers'.

Activity Driver - means for tracing a costed activity to the object consuming that activity. The object can be a product, a service or a customer, depending on what you are trying to establish the cost of. For instance, if costed activity is Assemble Product, and you want to establish product costs, Activity Driver called Product Volume, might be appropriate. Again, in the old days, Activity Drivers were called 'second stage drivers'.

What is Activity Based Budgeting?

How does it differ from traditional budgeting techniques? Activity Based Budgeting (ABB) is a technique for enhancing the accuracy of financial forecasts and increasing management understanding. When automated, ABB can rapidly and accurately produce financial plans and models based on varying levels of volume assumptions. Also, ABB eliminates much of the needless rework created by traditional budgeting techniques. ABB analyzes the products or services to be produced, what activities are required to produce those products or services, and finally what resources need to be budgeted to perform those activities. Simply said, ABB is the reversing of the ABC process to produce financial plans and budgets.

What kind of software do I need and what are some of the pitfalls in doing an ABM pilot project?

The most important element in completing an ABM pilot is how well the activity analysis is done and the depth of understanding of the ABC/ABM process from the bottom to the top of the organization. Many organizations will embark on an ABM pilot by purchasing an expensive piece of software and spending an inordinate amount of time learning to use the software; time that should be spent during a pilot on the aforementioned issues. RPM Associates has found that using a spreadsheet or simple data base product is all that is required during a pilot project. In fact, we provide Microsoft Access-based software free to our clients that are embarking on a pilot project. The time to decide on a permanent software solution is after the pilot is completed and the long term strategy for using ABM is rolled out.

The duration of a pilot is another important consideration. We have found that depending on the scope of the area to be piloted, a project should take at least four weeks and no longer than three months. Pilots that take longer than this usually lose focus and consume too much of an organization's resources. The three month time frame is fully adequate to evaluate the benefits of ABM and to make the decision to go forward.

Developing a solid plan with specific phases and objectives will help avert many pitfalls. As a minimum, the following phases are suggested:

  • Project Planning
  • Preliminary Data Analysis
  • Team Development
  • ABM Training
  • Activity Analysis and Costing
  • Identification of Process Improvement Opportunities
  • Project Evaluation and Reporting
  • Call or email below John Antos at 972-980-7407 to find out how Activity Based Costing can help you reach your goals and give your peace of mind

    Activity Based Costing A Superior Costing Tool

    Have Consultant contact me

    Phone: 972.980.7407 email: Contact us
    Value Creation Group, Inc.
    7820 Scotia Dr. #2000
    Dallas, TX 75248


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