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John M. Trussel: Pennsylvania State University, Harrisburg, Pennsylvania, USA
Larry N. Bitner: Hood College, Frederick, Maryland, USA
Many organizations are designing and implementing new strategic management initiatives, such as reengineering (Hammer and Stanton, 1994). Reengineering and otherstrategic management initiatives have become popular since the publication of Hammer and Champy's (1993) Reengineering the Corporation: A Manifesto for Business Revolution. However, the cost management system has been almost completely ignored from the discussion. Activity-based management (ABM) is a modern cost accounting and management model that is consistent with the concepts of strategic management and reengineering. ABM is both an accurate cost accounting system and a performance improvement tool (Turney, 1991). Like reengineering, ABM focuses on business processes, which are collections of activities or work that result in valuable output. The purpose of this paper is to describe the design and implementation of an ABM system. The design and implementation steps are applied to an actual organization.
Overview of activity-based management
Business process reengineering (BPR) is a management tool for redesigning business processes in order to obtain dramatic improvements in performance measures, such as cost and quality. The idea behind BPR is to fundamentally revise all aspects of performing activities, from a revision of strategic goals and operating objectives to an alteration of work methods. Under BPR, work should be focused on processes and not functional tasks. BPR begins with a clear mission statement and continues with a redesign of processes in line with the mission statement.
Activity-based management (ABM) issimilar in nature to BPR but adds theanalysis of the cost management system. ABM consists of two primary viewpoints: a cost view and a process view. Under the cost view, ABM is a cost accounting system (called activity-based costing). It is a system that is used to more accurately determine the full costs of services and products. This system allows for the cost analysis of serviceactivities (such as payroll accounting and duplicating), costs of core activities (such as production processes) and costs of products, services, and other cost objects.
Under the process view, ABM is used to develop financial and non-financial performance indicators for the output of eachactivity center. The two viewpoints of ABM are summarized in Figure 1. The goal of the cost view is to determine...