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

Summary by Jason Henderson
Masters of Accountancy Program
University of South Florida, Summer 2001

ABC Main Page | ABM Main Page

This article attempts to clear up confusion about Activity Based Costing (ABC) and Activity Based Management (ABM) and to show how these concepts should be applied to help solve operational and strategic problems.

Which kind of pilot program should come first, a top-down ABC approach or a bottom-up ABM approach? Cokins suggests that a company should use an enterprise wide ABC for strategic cost reporting and analysis and immediately use the results. Using the same information from the strategic ABC, the company should then look closely at operational cost issues and apply ABM.

The "ABC Comes First, ABM Second" Approach

Use ABC for strategic analysis to take advantage of strategic opportunities that will quickly bear fruit.

Use same ABC data for ABM using one of two approaches:

1. Disaggregate the activity costs and their outputs to allow for more detail. Added detail allows more opportunity to uncover possible benefits. This approach usually requires smaller dedicated ABC models to provide this detail and helps managers appreciate how the complexity of modern businesses affects costs.

2. Calculate business process costs. Use activity costs prior to ABC and consider how the activities are sequenced in time. Apply ABM techniques to seek out root causes of problems.

Benefits from Strategic ABC

Managers can use ABM to learn how their organization’s cost structure and behavior affect profits. Using this data managers have three available options:

1. Raise prices, particularly where there is little or no adverse volume reduction from lost sales, since any incremental price increase will fall directly to the bottom profit line.

2. Rationalize the mix.

3. Fix the process and remove waste.

ABC data can help with root cause analysis and help raise important questions on a company wide basis.

Understanding the True Cost of Work

Companies usually have little idea about what activities make up their external and internal outputs or how much of each activity’s cost is being consumed. "Process-based thinking" should be adopted and companies need to recognize that all processes have outputs. Both internal and external output should be identified. Mini ABC models within the company wide ABC model can be constructed to help cost intermediate and unit level outputs in order to facilitate greater learning and discovery about the organizations cost structure.

Top-Down Versus Bottom-Up ABC/ABM

The "ABC comes first" approach allows a model to be constructed quickly so that managers can see results quickly. By seeing activity costs in the big picture managers gain a better understanding of their cost structure and master the ABC/ABM design which will help construct more detailed ABM models. Management needs to take a broad view of the business process and recognize the important contributions that a more accurate cost accounting system can provide.

Sustaining an ABC/ABM System

In order to sustain an ABC/ABM system, managers and employees who use the data must have an understanding of the system and be sold on the idea. ABC/ABM should not be seen as an improvement program, but as an enabler for other improvement programs. The output of ABC/ABM is always the input for some other system. Once the appropriate level of aggregation is achieved then the connection of ABC/ABM data to the analysis of business problems will become obvious.

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