Management And Accounting Web

Reeve, J. C. 1996. Projects, models, and systems - Where is ABM headed? Journal of Cost Management (Summer): 5-16.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

ABC Main Page | ABM Main Page

The purpose of this paper is to discuss three forms of ABM and the migration path to fully integrated ABM systems. Reeve begins with a number of questions regarding the future of ABM. For example, how do organizations know if ABM is working for them? Is ABM just another "non-value added" exercise? and Are we at the beginning or the end of ABM or just somewhere along the rocky road toward broad acceptance?

Although there are tangible costs associated with implementing ABM, the benefits are intangible, i.e., the promise of improved future decisions. ABM has been hard to sell for a number of reasons. There have been no visible reductions in inventories and cycle times like those achieved with just-in-time. There are few good examples of integrated ABM systems. There have been many false starts and organizations have tried to implement ABM without clear objectives. Part of the confusion is that there are three different approaches to ABM.

The Three Faces of ABM

There are three forms of ABM, each with different methods and objectives. ABM can be developed as a project, as a model, or as a system. The differences between the different approaches are outlined in the exhibit below adapted from Reeve's Exhibit 1 on page 6.

Exhibit 1: ABM as Project, Model, or System
Characteristic ABM as an Organizational
Improvement Project
ABM as a Model ABM as a System
Purpose To improve process performance and process diagnosis To use activity cost information to support strategic decisions To provide cost information to support dynamic operating decisions
Reporting frequency Single project: reporting not emphasized Reporting for a single time frame: infrequent updates Periodic reporting: frequent updates
Dimension Process Product Process and product
Degree of information
Disaggregated Aggregated Either: Use of extensive reporting hierarchies
Analytical scope Team: single process SBU Enterprise
Informal: ad hoc or absent Delayed, unsystematized Immediate, defined, systematized, formal
Information acquisition Informal: storyboards Informal: interviews, surveys Formal feeder systems
Information accessibility
by users
Local accessibility Informal: ad hoc accessibility Widely distributed accessibility
Information stratification Stratified by process Limited stratification options Extensive and flexible

ABM as a Process Improvement Project

Business processes are viewed as a network of activities influenced by cost drivers. This form of ABM includes cost driver analysis and value-added versus non-value-added analysis to support cost reductions. Tools include those associated with continuous improvement, quality management, and reengineering such as storyboards, affinity exercises, force field diagrams, and interrelationship diagraphs. The analyses are usually one dimensional in that the focus is on improving business processes, not on products, functions, or customers. The project approach can be risky unless management understands that the emphasis is on process improvement not on developing an integrated ABM system.

ABM as a Model

The ABM model approach often involves developing an activity-based description of the organization including activities, products and other cost objects. Activities are defined from interviewing employees and the model is frequently placed on a standalone software platform with limited relational capabilities. The ABM model supports product costing strategies and other decisions that do not require fast feedback. On the negative side ABM models are time-consuming to develop, difficult to update, and are risky if viewed as ABM systems.

ABM Projects and Models are attractive when management desires the following:

Limited investment in ABM,

Focus on team building and cost reduction,

Demonstrate quick successes,

Have an inexpensive way of learning.

However, ABM projects and models may lead to:

Diffused effort,

Organizational confusion,

Difficulty demonstrating tangible benefits,

Difficulty maintaining updating effort, and

Failure to act on the information generated for lack of ownership.

ABM as an Integrated System

ABM systems are updated frequently, fully relational, flexible to changes, have automated activity/resource feeds from other systems (e.g., accounts payable, payroll), and have flexible online reporting and query capabilities. The best ABM systems provide dynamic activity information in various formats to all managers from query screens. This dynamic information is useful for:

1. Managing and motivating cost improvements.

2. Improved organization learning, and

3 Supporting cost-based operational decisions.

Information is aggregated by process rather than by function, i.e., by activity since activities are the building blocks of processes. Feedback is immediate, defined, systematized, and formal to promote learning.

An ABM system can provide the information needed to support daily operating decisions. It is essentially a relational database updated from various information sources.

Standard cost ABM systems, Design Tradeoffs, and ABM with Actual Cost Only

Reeve includes a rather involved illustration of a standard cost ABM system, makes some additional points related to system design tradeoffs, discusses using actual cost only, and using activity-based standards.


Reeve ends by saying that it is too early to answer the questions regarding the future of ABM listed at the beginning of this paper. Mixed results have probably occurred because ABM Projects and Models have been evaluated as Systems. The desired benefits of ABM will arrive when it can provide timely cost driver information collected effortlessly by feeder subsystems for real time cost improvements, profit patterns and opportunities integrated across the business.


Related summaries:

Berliner, C., and J. A. Brimson, eds. 1988. Cost Management for Today's Advanced Manufacturing: The CAM-I Conceptual Design. Boston: Harvard Business School Press. (Short Summary or Concepts), (Longer Summary).

Beynon, R. 1992. Change management as a platform for activity-based management. Journal of Cost Management (Summer): 24-30. (Summary).

Campi, J. P. 1992. It’s not as easy as ABC. Journal of Cost Management (Summer): 5-11. (Summary).

Cokins, G. 1999. Using ABC to become ABM. Journal of Cost Management (January/February): 29-35. (Summary.)

Cooper, R. 1996. Activity-based management and the lean enterprise. Journal of Cost Management (Winter): 6-14. (Summary).

Cooper, R., and R. S. Kaplan. 1998. The promise - and peril - of integrated cost systems. Harvard Business Review (July-August): 109-119. (Summary 1, Summary 2).

Hughes, S. B. and K. A. Paulson Gjerde. 2003. Do different cost systems make a difference? Management Accounting Quarterly (Fall): 22-30. (Summary).

Johnson, H. T. 1989. Professors, customers, and value: bringing a global perspective to management accounting education. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 7-20. (Summary).

Keys, D. E. 1994. Tracing costs in the three stages of activity-based management. Journal of Cost Management (Winter): 30-37. (Summary).

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Sandison, D., S. C. Hansen and R. G. Torok. 2003. Activity-based planning and budgeting: A new approach. Journal of Cost Management (March/April): 16-22. (Summary).

Sweeney, R. B. and J. W. Mays. 1997. ABM lifts bank's bottom line. Management Accounting (March): 20-22 and 24-26. (Summary).

Swenson, D. 1997. Best practices in activity-based management. Journal of Cost Management (November/December): 6-14. (Summary).

Swenson, D. W. 1998. Managing costs through complexity reduction at Carrier Corporation. Management Accounting (April): 20-22, 24, 26-28. (Summary).