Activity-Based Management (ABM)

What is ABM?

Activity-Based Management (ABM) is a management approach that analyzes the profitability and cost of every part of a business so strengths can be enhanced and weaknesses can be improved or eliminated. First developed in the 1980s, ABM allocates costs associated with employees, equipment, facilities, distribution, overhead, and other resources to the activities that consume them, revealing where money is made or lost.

How ABM works

ABM examines business processes and managerial activities to:
* Identify cost-consuming activities and the resources they use.
* Allocate costs to products, services, customers, or channels based on actual activity drivers.
* Evaluate the profitability and cost-effectiveness of each segment of the organization.
* Guide decisions to improve, reengineer, or discontinue unprofitable activities.

The results of ABM can improve budgeting and long-term financial forecasting by providing more accurate, activity-level cost information.

Where ABM is applied

ABM can be used across sectors, including:
* Manufacturing
* Service industries
* Non-profits and educational institutions
* Government agencies

It provides actionable cost information for any operational area, from production lines to support functions.

Examples

• New product analysis: Assess marketing, production, warranty, returns handling, and after-sales support costs to determine whether a product is profitable.
• R&D evaluation: Measure the costs of research activities, testing, and development against the commercial returns of resulting products.
• Multi-location assessment: Compare the full costs of operating a second office (staff, facilities, overhead) with revenue and strategic value to decide whether to keep, expand, or close the location.

Relationship to Activity-Based Costing (ABC)

Activity-Based Costing (ABC) is closely related and often used as an information source for ABM. Distinctions:
* ABM focuses on managing and improving activities and processes to meet organizational goals.
* ABC focuses on allocating costs to activities and identifying cost drivers to improve cost accuracy.
ABC can be viewed as the costing component that supports ABM’s managerial decisions.

Benefits

• Clearer visibility into true costs and profitability by activity, product, customer, or location
• Better-informed decisions about pricing, resource allocation, process improvements, and discontinuation of unprofitable activities
• Improved budgeting and forecasting based on activity-level data
• Enhanced transparency and managerial accountability

Practical steps to implement ABM

1. Identify and document core activities and processes.
2. Determine the resources consumed by each activity.
3. Select appropriate activity drivers and allocate costs.
4. Analyze profitability and performance at the activity level.
5. Take action—improve, redesign, or eliminate low-value activities—and monitor results.

Key takeaways

• ABM analyzes the profitability of each aspect of a business to highlight strengths and expose problem areas.
• It is widely applicable across industries and supports better budgeting and forecasting.
• ABM typically uses data from Activity-Based Costing to allocate costs accurately and inform managerial decisions.