Costs Report-Rabanal Vargas Joseluis Enrique

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FACULTY OF BUSINESS

ACCOUNTING SCHOOL

ACADEMIC REPORT
“ACTIVITY BASED MANAGEMENT”

COURSE:

ADVANCED COSTS ACCOUNTING

AUTHOR:

RABANAL, JOSELUIS ENRIQUE

TEACHER:

MORALES, MARCO ANTONIO

Chepén- Perú

(2023)
I. INTRODUCTION..........................................................................................................................
II. DEVELOPMENT.........................................................................................................................
II.1. CONCEPT...........................................................................................................................
II.2. DIFFERENCES AND RELATIONSHIP WITH ABC.............................................................
II.3. ELEMENTS.........................................................................................................................
II.4. PROCEDURE & STEPS.....................................................................................................
III. BIBLIOGRAPHICAL REFERENCES........................................................................................
I. INTRODUCTION
Regularly it's well known the fact that all sorts of entities must be aware of
correct management processes for their optimal performance over the
years and decades. Such efforts must be expressed, according to Charaf
(2022) in precise techniques and guides to maintain its longevity and
relevance. For the upcoming pages, the reader will get a glimpse to one of
the most recent and effective management techniques ever created, the
activity-based one. Please do not confuse such term as “ACTIVITY-BASED
COSTS” (ABC) as their respective differences, & more, will be discussed in
this precise document.

II. DEVELOPMENT

II.1. CONCEPT
We should define Activity Based Management, according to Widodo (2020),
as a systematic planification method which focuses on the improvement
and control of the labor present in the Indirect Fabrication Costs. Therefore,
it should be made clear that it emphasizes the role of the work itself in the
production processes, rather than the workers in question. Apart from that,
it’s considered to be a discipline whose main focus is the efficiency of
activities as the ideal path for continuous improvement of the value offered
to the customers.

II.2. DIFFERENCES AND RELATIONSHIP WITH ABC


Now, in order to proceed, there’s a constant confusion with a similar term,
which is “Activity-Based Costing”. This one is, according to Antos (2022),
merely a calculus method used to make appropriate and more reasonable
distributions of the Indirect Costs, as well as to create better confidence in
the profitability margins. It measures the general performance of activities,
resources and cost objects, while the ABM tends to focus more on the

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variables to make sure the costs occur while taking advantage of the data
left by the ABC in order to redirect and improve the way all resources are
used.

In other words, there are certain features that should help us get a better
glance of the main differences between ABC and ABM. Starting off with the
objectives in questions, while one calculates costs, the other one helps to
manage all kinds of actions. With that said, it’s fair to add that while one
focuses on costs, the other focuses on giving value. When it comes to the
tools, the ABC tends to apply more the presence of cost drivers, while its
counterpart focuses on efficiency drivers.

In order to complement what’s been previously said, there’s also certain


comparisons used for each term. In case of ABC, this one quantifies the
costs of each member’s activities, while ABM looks to offer even more to
the value chain in matters such as preserving better relationships with the
clients or developing a more optimal benchmarking.

Finally, when it comes to results, ABC looks for getting more precision in
costs and profitability offered per each client, as well as helping to get a
more precise budgeting and perform a better cost simulation. On the other
side, ABM looks for continuous improvement while encountering the main
factors that drive our entity to success, as well as simulating scenarios and
giving more emphasis to the reengineering of different processes and
competitive advantages.

II.3. ELEMENTS
Now, of course, according to Jiao (2023) this approach is built on several
key elements:

Firstly, ABM generates information on how to manage processes, which


involves identifying the necessary resources to conduct business activities
and processes. These resources must be allocated efficiently to maximize

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the organization's value. This implies a strategic focus on resource
management, where each resource is aligned with the company’s activities
to ensure optimal use and contribution to the overall goals.

Additionally, ABM places significant emphasis on activities and processes,


recognizing that they consume resources. Therefore, understanding and
identifying critical activities and processes for achieving business objectives
is essential. This understanding includes recognizing the resources these
processes consume. By focusing on these activities and processes, ABM
facilitates a more strategic allocation of resources, ensuring they are used
where they can contribute most effectively to achieving business goals.

Lastly, ABM aims to assign indirect costs to processes based on their actual
consumption, with these costs absorbed by each product or service
according to their use of the processes. This involves linking the costs of
activities and processes to products and services. Such linkage allows for a
better understanding of profitability and the costs associated with each
product or service. By doing so, ABM provides a more accurate picture of
product and service cost structures, enabling more informed pricing and
investment decisions.

II.4. PROCEDURE & STEPS


For Activity-Based Management (ABM) to be effective, according to Lee
(2022) the following steps are undertaken:

Firstly, key and strategic activities are evaluated. This involves a thorough
assessment of the activities that are crucial to the organization's success.
This step is essential for identifying which activities contribute significantly
to achieving strategic goals and which may need re-evaluation or
improvement.

Secondly, there is an analysis and decision-making process based on the


costs of the activity. By understanding the costs associated with each

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activity, management can make more informed decisions about resource
allocation, cost reduction, and process improvement. This analysis helps in
determining the financial efficiency of each activity.

Thirdly, activities are identified and decisions are made regarding those that
add value and those that do not add value to customers and the company.
This step involves distinguishing between value-adding and non-value-
adding activities. The aim is to enhance or expand activities that add value
to customers and the company, while minimizing or eliminating non-value-
adding activities.

Fourthly, the results of the activities are evaluated using performance or


management indicators. These indicators help in assessing the
effectiveness and efficiency of activities. They provide a quantitative basis
for measuring performance, enabling managers to track progress and
identify areas for improvement.

Furthermore, the causal factors of the cost of an activity are analyzed. This
involves understanding the underlying reasons for the costs associated with
each activity. By identifying these causal factors, management can address
inefficiencies and optimize the cost structure.

Lastly, from the costing perspective, the cost of activities to manufacture


products or provide services is understood. And from the ABM perspective,
these activities are managed to improve the financial results of the
company. This dual approach allows for a comprehensive understanding of
both the cost implications of activities and how they can be managed
effectively for better financial performance.

To put it simply, Activity-Based Management involves a detailed analysis


and management of activities, focusing on cost efficiency, value addition,
and strategic alignment to improve overall financial performance and
customer satisfaction.

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III. BIBLIOGRAPHICAL REFERENCES

Charaf, K., Rahmouni, A., Sabar, M. (2022) The association between


Activity-Based Costing and performance: Empirical evidence from
Moroccan companies. In Journal of Accounting & Management
Information Systems / Contabilitate si Informatica de Gestiune. ( Vol. 21
Issue 1, p25-50. 26p.) Groupe ISCAE.

Widodo, E., Singgih, M.L., & Rosiawan, M. (2020). Activity-based


Management as Economic Effect Measurement for Implementing ISO
9001:2015 Clause. In International Journal of Services and Operations
Management.(Vol. 40, Issue 1, pp. 1-22). Inderscience Publishers.

Antos, J. (2022). BENEFITS OF ACTIVITY-BASED COSTING AND


MANAGEMENT IN A DIGITAL WORLD. In Cost management (Vol. 36,
Issue 2, pp. 5–10). Thomson Reuters (Tax & Accounting) Inc.

Jiao, L., Baird, K., & Nuhu, N. A. (2023). TRADITIONAL


CONTEMPORARY VS. MANAGEMENT ACCOUNTING PRACTICES. In
Strategic finance (Montvale, N.J.) (Vol. 104, Issue 12, pp. 34–39).
Institute of Management Accountants.

Lee, C., & Kapanowski, G. (2022). MORE ACTIVITY-BASED COSTING


METHODS. In Cost management (Vol. 36, Issue 2, pp. 3–4). Thomson
Reuters (Tax & Accounting) Inc.

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