Common Questions & Answers about
Activity Based Management (ABM) & Activity Based Costing (ABC)

1. What is ABM?

   Activity Based Management (ABM) is common sense, systematic method of planning, controlling and improving labor and overhead cost. ABM is based on the principle "activities consume costs". While traditional cost systems focus on the "worker", ABM systems focus on the "work". The basic building block for ABM is Activity Accounting.

2. What is ABC?

   Activity Based Costing (ABC) is a systematic, cause & effect method of assigning the cost of activities to products, services, customers or any cost object. ABC is based on the principle that "products consume activities". Traditional cost systems allocate costs based on direct labor, material cost, revenue or other simplistic methods. As a result, traditional systems tend to overcost high volume products, services and customers and undercost low volume.

   ABC systems trace costs using multiple allocation methods in a Bill of Activity format. ABC allocation methods are frequently called cost drivers. Using the Order Processing example, ABC would assign more cost to a customer that orders once a week $1,513.20 (52 X $29.10) than a customer that orders monthly. Many organizations use ABC today for product costing, target costing, service pricing, customer profitability analysis and product line profitability analysis.

3. What is Activity Accounting?

   As the name implies, Activity Accounting is a system that defines and reports the activities, costs, activity characteristics and outputs of each department, cost center or group of employees in an organization. ICMS recommends that Activity Accounting be implemented and reported in a spreadsheet format, e.g. the columns are activities and the rows are costs. For example, the total amount of resources consumed by a value-added activity "Take Orders" is $291,000. The Order Processing department takes 10,000 orders annually. Therefore, the cost per order is $29.10.

   Activity accounting information must be created before an organization can do ABM cost improvement, ABC cost allocation or ABB planning.

4. What is ABB?

   Activity Based Budgeting (ABB) is a common sense, systematic method of planning and budgeting the resources of an organization. In essence, ABB is Activity Accounting in reverse, e.g. start ABB at the bottom of the Activity Accounting spreadsheet. Define the cost per output target and planned activity workloads to determine headcount and expense budgets.

5. What are other uses of Activity Accounting?

   ICMS customers have used Activity Accounting to address many business needs. Examples include:

   • Shared Services costing
   • Menu-based pricing
   • Process costing and improvement
   • Continuous Improvement
   • Performance Measurement
   • Benchmarking
   • Value analysis
   • Economic Value Analysis (EVA)
     
     
6. Who created ABM?

The basic principles of ABM and ABC were developed during a three year (1986-88) research project sponsored by fifty worldwide organizations under the auspices of CAM-I, an international cooperative R&D firm. Tom Pryor, currently president of Integrated Cost Management Systems, Inc. (ICMS), served as director of that CAM-I project. The project and Mr. Pryor were featured in a June, 1988 BUSINESS WEEK magazine cover story. ICMS was founded in 1988 to provide top quality ABM software, training and books to organizations of all types and sizes.

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ICMS, Inc.
PO Box 13206 Arlington, Texas  76094
Phone: 817-475-2945
E-mail: tompryor@icms.net