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What Is Activity-Based Management?

Activity-based management, common in manufacturing facilities, takes into account the overhead costs of running the factory.
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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 16 December 2014
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Activity-based management is a tool managers can use to control various internal business functions. Business owners use this tool to improve the quality of products and the profitability of their companies, and to increase market share. Activity-based management can also help companies reduce waste in their production process. Waste occurs when managers and employees use too many economic resources to produce too few goods. Business owners may also develop business analysis tools centered on this management tool so managers and employees can understand the importance of improving business operations.

Activity-based management can include several types of business analysis tools. Strategic analysis, value analysis, cost analysis, and activity-based budgeting are a few examples of business analysis tools. Strategic analysis involves a company-wide review of business operations. Strategic analysis can also involve reviewing internal and external factors that can affect the company. Companies can use strategic analysis to review the performance of owners, directors, and managers in the company.

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Value analysis is another important feature of activity-based management. Company owners and managers often review the activities of each division or department in the company. Each activity should bring some value to the company’s overall operations. Value can be operational or financial. Improving production output, using fewer resources to produce goods and services or increasing the technical skills of employees are a few examples of operational value. Financial value can include reducing production or general and administrative business costs. Improving financial value may be closely related to the cost analysis found in activity-based management.

A cost analysis involves carefully reviewing all items, functions and processes that adds costs to the company’s business operations. This analysis is usually an extension of the company’s management accounting function. Raw materials, labor, facilities, equipment, and marketing are a few examples of costs that may be included in this analysis. Extremely high business costs can reduce the efficiency and effectiveness of a company’s business operations. Larger business organizations may also conduct a cost analysis on each business location or facility in the company.

Activity-based budgeting is usually an important tool in activity-based management. Companies often create budgets for each activity in the company. To limit the excessive amount of financial information and budgets in the company, each activity budget is often rolled into one larger division or department budget. Business owners, directors, and managers use budgets to provide road maps for future financial expenditures. These budgets can help managers focus on areas where cost reductions are needed to improve business operations. Activity-based budgets are usually more in-depth than the company’s traditional management accounting budget process.

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