What Is Activity-Based Planning?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 May 2020
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Activity-based planning (ABP) is a business planning strategy that focuses on identifying the types of activity that are needed to produce a desirable level of goods and services, with attention also paid to the type and amount of resources required to efficiently engage in those activities. Considered part of a larger process known as activity-based costing (ABC), the focus of ABP is to determine if the expenditure of resources to engage in those activities is in the best interest of the company. In addition, the nature of each activity is also evaluated closely, to make sure that the resources set aside are in fact being used to best effect.

With activity-based planning, the goal is to match the activities that the business undertakes with the amount of product that must be produced in order to satisfy consumer demands. Activity is typically used to identify such issues as the arrangement of a manufacturing floor, the specific tasks involved with the operation of each piece of machinery, and how goods in process move from one section of the floor to the next, ultimately resulting in a finished product. The goal with activity-based planning is to arrange that production process so that all resources devoted to the business effort are used in the most efficient manner.

By employing the concept of activity-based planning, business owners will look for ways to refine the production process so that the least amount of resources are expended in the production of goods and services, while still utilizing sufficient resources to produce high quality products. To this end, this may mean rearranging the production floor so there is less time lost moving goods in process from one machine to the next. Depending on how it affects production, this may involve adding or reducing the number of employees who work on those machines. The goal is to evaluate each action or step that takes place in the production process and minimize the waste of resources, so the average cost per unit produced is kept as low as possible.

When used to best advantage, activity-based planning helps to streamline a business operation, reduces operational costs, and prevents waste throughout the production process. At the same time, activity-based planning makes it possible to receive the greatest benefit from the use of labor and other resources, which means that more profit is made off each unit sold. With the right balance between costs and profits, the business is likely to remain in operation for many years to come.

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