Activity-Based Management (ABM) Definition and Examples

What Is Activity-Based Management?

Activity-based management (ABM) is a system for determining the profitability of every aspect of a business so that its strengths can be enhanced and its weaknesses can either be improved or eliminated altogether.

Activity-based management (ABM), which was first developed in the 1980s, seeks to highlight the areas where a business is losing money so that those activities can be eliminated or improved to increase profitability. ABM analyzes the costs of employees, equipment, facilities, distribution, overhead, and other factors in business to determine and allocate activity costs.

Understanding Activity-Based Management (ABM)

Activity-based management can be applied to different types of companies, including manufacturers, service providers, non-profits, schools, and government agencies. ABM can provide cost information about any area of operations in a business.

In addition to improving profitability and the overall financial strength of a company, the results of an ABM analysis can help that company produce more accurate budgets and long-term financial forecasts.

Examples of Activity-Based Management (ABM)

ABM can be used, for example, to analyze the profitability of a new product a company is offering, by looking at marketing and production costs, sales, warranty claims, and any costs or repair time needed for returned or exchanged products. If a company is reliant on a research and development department, ABM can be used to look at the costs of operating the department, the costs of testing out new products and whether the products developed there turned out to be profitable.

Another example might be a company that has opened an office in a second location. ABM can help management assess the costs of the running that location, including the staff, facilities, and overhead, and then determine whether any subsequent profits are enough to make up for or justify those costs.

Special Considerations

A lot of the information gathered in activity-based management is derived from information gathered from another management tool, activity-based costing (ABC). Whereas activity-based management focuses on business processes and managerial activities driving organizational business goals, activity-based costing seeks to identify and reduce cost drivers by optimizing resources.

Both ABC and ABM are management tools that help in managing operational activities to improve the performance of a business entity or an entire organization.

Activity-based costing can be considered an offshoot of activity-based management. By mapping business costs like supplies, salaries, and leasing activity to business processes, products, customers, and distribution activity, activity-based costing helps improve overall managerial effectiveness and transparency.