Overview of Cost Management

Cost management is a process to ensure a smooth running operation of the

business. The process involves two major functions, which are planning and
control of the costs involved in a day-to-day operation of the business.

Cost

planning is a process of establishing limits on individual elements or activities

while cost control ensures those limits are adhered to. The effectiveness and
efficiency of these two functions rely on various activities such as collecting,
analysing, evaluating, and reporting cost statistics for budgeting.
http://home.cogeco.ca/~pcreighton/PMWEB/Module%2006.htm

Introduction of Activity-based Management (ABM) (source Technical

Briefing CIMA on developing and promoting strategy of Activity based
management april 2001)
A proper definition of ABM must begin with the history of early adoption of
Activity-based Costing (ABC).

The ABC is not a method of costing, but a

technique for managing the daily operation of the business. As defined by CIMA
Official Terminology in 2005,
An approach to the costing and monitoring of activities which involves tracing
resource consumption and costing final inputs. Resources are assigned to
activities, and activities to cost objects based on consumption estimates. The
latter utilise cost drivers to attach activity costs to outputs
ABC is a one-off exercise which measures activities costs, their performance,
resources and the activities consuming them. This will produce a comprehensive
report with more accurate and reliable information for effective decision making
process. This is where ABM fits in, by giving a broader view of the ABC with a
sense of management. Put simply, ABM is ABC in action.
ABM provides relevant and timely information which then make it easy for the
management to facilitate long-term strategic decisions earning the business its
market share through effective and efficient product mix and sourcing. Through
all of the relevant information provided, the product designer understands the
impact of different designs, thus make it possible for them to fine-tune various
designs according to the cost and flexibility. Furthermore, with such informative

management data provided by ABM, the product designers and decision makers
will be able to stay relevant to the market.

Below is the list of factors benefited from ABMs ability to provide such
meaningful information for the management;
I.
II.
III.
IV.
V.

Lines of business offered to customers

Collective product mix
Process and product designs relevant to the preferable of the market
Capital Investment
Competitive pricing strategy

There are five basic information outputs of ABM information system (as outlines
by CIMA Technical Briefing, April 2001);
I.

The cost of activities and business processes

The information on cost is provided by assigning each relevant cost to the
respective activities. This will enable the management to understand the
business better, right to every bit of details.

II.

The cost of non-value added activities

There are two types of activities, which are value added and non-value
added activities. By identifying those non-value added activities, it will
help the management to identify wastes and allowing the business to
rectify through continuous improvement efforts.

III.

Activity-based performance measures

Measuring the performance of activities provides a valuable information to
the management as the measurement done based on the total cost of
activity is insufficient to aid in effective decision making process as part of
the continuous improvement efforts.

IV.

Accurate product/service cost

Every product and services are consuming resources at different rates and
requiring different level of supports during the manufacturing of the
products and also rendering of services. Hence, the importance of
accurate cost information is highly regarded in ensuring effective and
efficient business management.

V.

Cost drivers
Each activity has its assigned cost driver (some activity has multiple cost
drivers) and through ABM, the information provided on the cost drivers is a
determining factor in ensuring proper management decision is taken.

ABM and Business Process Re-engineering (Activity Based Management:

Improving Processes and Profitability by Brian Plowman)
There are two types of improvements whether in quality, efficiency and speed,
which

are

continuous

or

discontinues

improvements.

The

discontinuous

improvement is also known as Business Process Re-engineering (BPR) or

Business Process Management. The key factor in understanding this process is
the radical approach of getting rid of the old and have it replaced with a new
one. If it wasnt radical, then it wasnt re-engineering.
There are numerous steps in implementing BPR and for the purpose of
understanding the connection between BPR and ABM, it is important to realize
that ABM is relevant to be used all the way in implementing BPR as it can be
considered as the side-kick of the effective BPR.
For example, in the first two steps of BPR, which are assessing the current
processes and selecting the processes to be re-engineered, it is vital for business
to understand its capability in order for it to achieve a new positioning in a
market with its newly refined processes. Without having a comprehensive
understanding on the customers composition, the business might hurt some
customers (there are various types of customers and the business has to finetune its current processes to meet the needs and wants of the majority, while not
forgetting the minority).
This is where ABM comes into place as it introduces a vital piece of information
at this point by analysing customer profitability. Without having this key
information, the business might attract unprofitable customers with its newly
refined processes, thus jeopardizing its going concern. ABMs nature of focusing
on assigning key drivers to individual activities is useful in aiding the
implementation of BPR as it provides certain weigh on the key determining
elements.