BUDGETARY CONTROL 241
žtravel: what causes people to travel to other locations and by what methods?
žIT and telecommunication costs: what data is being processed and why?
žstationery: what is being used and why?
The questions that can be asked in relation to most costs are: What is being done?
Why is it being done? When is it being done? Where is it being done? How is it
being done?
We have already mentioned both activity-based costing (ABC, Chapter 11) and
activity-based budgeting (ABB, Chapter 14). Kaplan and Cooper (1998) defined
activity-based management (ABM)as:
the entire set of actions that can be taken, on a better informed basis, with
activity-based cost information. With ABM, the organization accomplishes
its outcomes with fewer demands on organizational resources. (p. 137)Kaplan and Cooper differentiatedoperationalandstrategicABM. The former is
concerned with doing things right: increasing efficiency, lowering costs and
enhancing asset utilization. Strategic ABM is about doing the right things, by
attempting to alter the demand for activities to increase profitability.
Strategic ABM can be used in relation to product mix and pricing decisions.
It works by shifting the mix of activities from unprofitable applications to prof-
itable ones. The demand for activities is a result of decisions about products,
services and customers. Costing was the first application of activity-based man-
agement. It attempted to remove the distortions caused by traditional methods
of overhead allocation based on direct labour. ABC assigned overhead costs to
products/services based on the cost drivers of activities and the resources con-
sumed by those activities for individual products. Product-related actions can
reduce the resources required to produce existing products/services. Pricing and
product substitution decisions can shift the mix from difficult-to-produce items
to simple-to-produce ones. Redesign, process improvement, focused production
facilities and new technology can enable the same products or services to be
produced with fewer resources.
Strategic ABM extends the domain of analysis beyond production costs to
marketing, selling and administrative expenses, reflecting the belief that the
demand for resources arises not only from products/services but from customers,
distribution and delivery channels. Cost information can be used to modify a
firm’s relationships with its customers, transforming unprofitable customers into
profitable ones through negotiations on price, product mix, delivery and payment
arrangements.
Similarly, strategic ABM can be pushed further back along the value chain
(see Chapter 9) to suppliers, designers and developers. Managing supplier rela-
tionships can lower the costs of purchased materials. ABM can also inform
product/service design and development decisions, which can result in a lower-
ing of production costs for new products/servicesbeforethey reach the production
stage.