Difference Between ABC and ABM
The Activity Based Coasting relates to the measurements of
ABC vs ABM
ABC means Activity Based Coasting and ABM means
Activity Based Management. Both the ABC and ABM are
management tools that help in managing business activities.
These two help in improving the performance of a business
firm or an organization.
ABM mainly focuses on the business processes and managing
activities aimed at deriving organisational objectives. The
Activity Based Management helps in reducing cost drivers
and transfers the resources.
Both ABC and ABM differ in their functions. The Activity
Based Coasting relates to
the measurements of the cost and the performance of the
various activities, cost objects and resources. The ABC
mainly recognizes casual relationships of cost drivers to
activities. The Activity Based Management mainly focuses on
management of activities as a method for improving the value
obtained by the customer and the profit got by giving this
value.
The Activity Based Management focuses on the various
activities and the business processes that the customer needs
and is willing to pay for. The Activity Based Management
helps in determining the contribution of each person. This is
based on the measures for cost, quality and time. The ABMs
also support Balanced Scorecard and is considered to be a
basis for Business Process Redesign.
The Activity Based Coasting can be called as a subset of
Activity Based Management. The ABC helps in improving
the costing by outlining the various expenses like supplies,
salaries and rent to activities and outlining these activities to
services, business processes, products, customers and
distribution.
One of the basic concepts of Activity Based Coasting is that
cost is consumed and consumption is managed.
1. ABM mainly focuses on the business processes and
managing activities aimed at deriving organisational
objectives.
2. The ABC helps in improving the costing by outlining the
various expenses like supplies, salaries and rent to activities
and outlining these activities to services, business processes,
products, customers and distribution.
3. The Activity Based Coasting can be called as a subset of
Activity Based Management.
4.
the cost and the performance of the various activities, cost
objects and resources.
5. The Activity Based Management mainly focuses on
management of activities as a method for improving the value
obtained by the customer and the profit got by giving this
value.
6. The Activity Based Management helps in determining the
contribution of each person and also support Balanced
Scorecard. It is considered to be a basis for Business Process
Redesign.
Activity categories
While using cost drivers to assign overhead costs to
individual units works well for some activities, for some
activities such as setup costs, the costs are not incurred to
produce an individual unit but rather to produce a batch of the
same units. For other costs, the costs incurred might be based
on the number of product lines or simply because there is a
manufacturing facility. To assign overhead costs more
accurately, activitybased costing assigns activities to one of
four categories:
Unitlevel activities occur every time a service is
performed or a product is made. The costs of direct
materials, direct labor, and machine maintenance are
examples of unitlevel activities.
Batchlevel activities are costs incurred every time
a group (batch) of units is produced or a series of
steps is performed. Purchase orders, machine setup,
and quality tests are examples of batchlevel
activities.
Productline activities are those activities that
support an entire product line but not necessarily
each individual unit. Examples of productline
activities are engineering changes made in the
assembly line, product design changes, and
warehousing and storage costs for each product line.
Facility support activities are necessary for
development and production to take place. These
costs are administrative in nature and include
building depreciation, property taxes, plant security,
insurance, accounting, outside landscape and
maintenance, and plant management's and support
staff's salaries.
The costs of unitlevel, batchlevel, and productline activities
are easily allocated to a specific product, either directly as a
unitlevel activity or through allocation of a pooled cost for
batchlevel and productline activities. In contrast, the
facilitylevel costs are kept separate from product costs and
are not allocated to individual units because the allocation
would have to be made on an arbitrary basis such as square
feet, number of divisions or products, and so on.
Activity Cost Pools Defined
Manufacturing companies use product costing techniques to
determine how much it costs to manufacture each product it
produces. One such technique is activity-based costing.
Activity-based costing systems allocate manufacturing
overhead by assigning indirect costs to activity cost pools,
then dividing each cost pool by a cost driver to obtain the
rates used for allocation. Manufacturing overhead costs are
the expenses incurred in the manufacture of a product that
cannot be directly allocated to that product. These costs are
also known as indirect costs. Activity cost pools are groups
of individual costs influenced by the same cost drivers ,
which are activities that control the amount of costs incurred.
Activity-based costing allows for more accurate product
costing than other types of costing method because it requires
the calculation of multiple rates to allocate manufacturing
overhead to products. Activity cost pools are an important
part of activity-based costing as they enable companies to
group similar overhead costs together and divide by a
common cost driver. This enables the companies to have
multiple criteria for allocating overhead instead of just one
like in traditional costing systems. For example, instead of
allocating overhead based on machine hours alone, the use of
activity cost pools would allow a company to allocate
overhead based on machine hours, direct labor hours, number
of inspections, and other criteria as their specific processes
required.
What is an 'Activity Cost Driver'
An activity cost driver is a factor that influences or
contributes to the expense of certain business operations. In
activity-based costing (ABC), an activity cost driver drives
the costs of labor, maintenance or other variable expenses.
Cost drivers are essential in ABC, a branch of managerial
accounting that allows managers to determine the costs to
perform an activity at various activity levels.
Understanding Traditional Costing
Many manufacturing companies use the traditional costing
system to assign manufacturing overhead to units produced.
Users of the traditional costing method make the assumption
that the volume metric is the underlying driver of
manufacturing overhead cost. Under traditional costing,
accountants assign manufacturing costs only to products.
Traditional accounting fails to allocate nonmanufacturing
costs that also are associated with the production of an item,
such as administrative expenses. Companies commonly use
traditional accounting in external financial reports because it
provides a value for the cost of goods sold.
Pros and Cons of Traditional Costing
An advantage of using traditional-based costing is that it
aligns with Generally Accepted Accounting Principles, or
GAAP. Easy implementation for companies that provide one
product also is a plus. However, traditional costing is an
outdated costing system in many companies because those
manufacturing companies now use machines and computers
for much of their production. Computers and machines make
the system outdated because it often uses direct labor hours to
calculate cost. Cost is not appropriately assigned because
direct labor hours is not the best cost driver to use. Traditional
costing negates other cost drivers that may contribute to the
cost of an item. Another disadvantage of solely using the
traditional costing system is that it can lead to bad
management decisions because it excludes certain
nonmanufacturing costs.
Understanding Activity-Based Costing
Activity-based costing provides a more accurate view of
product cost, but companies typically use it as a supplemental
costing system. The allocation bases used in activity-based
costing differ from those used in traditional costing. Activity-
based costing determines every activity associated with
producing an item and allocates a cost to the activity. The cost
assigned to the activity is then assigned to products that
require the activity for production.
Pros and Cons of Activity-Based Costing
Greater costing accuracy is the primary benefit of activity-
based costing. Companies assign cost only to the products
that require the activity for production. This method
eliminates allocating irrelevant costs to a product. Other
advantages of activity-based costing include an easy
interpretation of cost for internal management, the ability to
enable benchmarking and a greater understanding of overhead
costs. Implementing an activity-based costing system within a
company requires substantial resources. This can prove a
disadvantage for companies with limited funds. Another
disadvantage of using activity-based costing is that it is easily
misinterpreted by some users