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Keys, D. E. and R. J. Lefevre. 1995. Departmental activity-based management. Management Accounting (January): 27-30.

Summary by Cathy Riemer
Master of Accountancy Program
University of South Florida, Summer 2002

ABC Main Page | ABM Main Page

Departmental Activity-Based Management (DABM) is a new approach that improves Activity-Based Management (ABM). One of the main problems with ABM is that it analyzes information differently than traditional accounting systems. ABM ignores departments, which are a main focal point in the tradition system. DABM incorporates the ideas of ABM and displays the information in the common language of departmental information that managers understand.

In stage one, of DABM, costs are assigned to departments instead of activities, as in ABM. Then, in stage 2, DABM uses multiple cost drivers to assign costs to specific products. Traditional accounting systems generally use one overhead base to assign costs. DABM users will generate more accurate information because it is unlikely that one overhead base will cause, or accurately represent all of the department costs.

The following two illustrations provide an example of how the same costs are allocated differently in an ABM and DABM system.

Activity-Based Management for one year


Table 2 - Departmental Activity-Based Management*
Material Handling
Department Cost Total # of Moves Cost/ Move Number of Moves Total Cost Unit Cost
Product A Product B Product A Product B Product A (1,000 U) Product B (2000 units
Staging 20,000 200 $100 100 100 10,000 10,000 $10 $5
Fabrication 36,000 400 $90 200 200 18,000 18,000 18 9
Assembly 1 84,000 600 $140 600 - 84,000 - 84 -
Assembly 2 30,000 500 $60 - 500 - 30,000 - 15
Finishing 60,000 600 $100 200 400 20,000 40,000 20 20
Total $230,000 $2,300 $1,100 $1,200 $132,000 $98,000 $132 $49


Table 2 - Departmental Activity-Based Management Continued *
Inspections
Department Cost Total #
Inspection
Cost per Insp. Number of Inspections Total Cost Unit Cost
Product A Product B Product A Product B Product A (1,000 U) Product B (2000 units
Staging 40,000 400 100 200 200 20,000 20,000 20 10
Fabrication 30,000 500 60 100 400 6,000 24,000 6 12
Assembly 1 66,000 100 660 100 - 66,000 - 66 -
Assembly 2 40,000 200 200 - 200 - 40,000 - 20
Finishing 144,000 800 180 500 300 90,000 54,000 90 27
Total $320,000 $2,000 $900 $1,100 $182,000 $138,000 $182 $69
Total material handling and inspections cost $314 $118
*Adapted from Table 2 p. 29.

These illustrations show that DABM provides all of the same information as ABM plus four types of addition information. First, DABM establishes the cost of material handling and inspection in each department. This information can help managers in calculating the cost/benefit relationship of each department. Second, DABM calculates the different departmental rates, while ABM only calculates a company-wide average. The cost of a move in each department is calculated to help analyze plant layout, required capital investment, and skill level of employees. Third, DABM provides information on the inspection cost attributed to each department, while ABM only calculates an average cost. This provides managers with more accurate information on where they need to focus their efforts in reducing inspection and move costs. Forth, DABM provides a more detailed and accurate description of the specific product costs.

There are five general advantages of using DABM instead of ABM listed in the article. The five reasons are as follows:

1. DABM is more similar to the tradition accounting approach than ABM. Therefore, DABM is easier for a company to use and understand.

2. DABM costs significantly less to implement than ABM.

3. DABM calculates departmental costs, that can be used to perform cost/benefit analysis of decisions and to help allocate resources to specific departments.

4. DABM provides more specific information, such as, department’s cost drivers and cost rates. ABM only provides information on plant-wide activities.

5. DABM is flexible. For example, companies can work on one department at a time or numerous departments at once. Also, DABM can be broken down further than the department level, such as calculating rates for specific machines in each department.

There are a few problems that have occurred when the DABM system has been implemented. The two main problems mentioned in the article are:

1. Traditional cost system errors are not corrected when transferred into the new system.

2. Managers do not accept DABM numbers over the original numbers calculated by the tradition system.

Overall, switching to the DABM system is met with less resistance than ABM because of its similarities to the traditional approach. DABM provides more accurate and a greater amount of information than ABM, and is easier for a company to implement.

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