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Jargon review - glossary of Activity Based Management terms
ABM Customer Contribution. Revenue less the product costs less the costs of servicing the customer gives the ‘ABM Customer Contribution’. The sum of all the customer contributions has to pay for all those remaining costs that are not associated with the current products or customers, such as New Product Development and Statutory Accounting. Anything left after that is the Profit. It is at the level of ‘ABM Customer Contribution’ that we use the term ‘Customer Profitability’ as it is at this level that meaningful comparisons can be made between customers. It is this type of analysis that exposes small or negative values prompting a serious review of which customers to keep, or at least take action to try and turn the relationship into one that provides positive contributions.
ABM Model A representation of resource costs during a time period that are consumed through activities and assigned to products, services, and customers or to any other object that creates a demand for the activity to be performed.
ABM Product Contribution. Revenue less the real costs to produce the products based on an ABM analysis gives the ‘ABM Product Contribution’. It is at the level of ‘ABM Product Contribution’ that we use the term ‘Product Profitability’ as it is at this level that meaningful comparisons can be made between products. It is this type of analysis that exposes small or negative values prompting a serious review of which products to keep, or at least take action to try and turn them into positive contributions.
Activity Work performed by people, equipment, technologies or facilities. Activities are usually described by the “action-verb-adjective-noun” grammar convention. Activities may occur in a linked sequence (a process).
Activity Analysis The process of identifying and cataloguing activities for detailed understanding and documentation of their characteristics. An activity analysis is accomplished by means of interviews, group sessions, questionnaires, observations, and reviews of physical records of work.
Activity Based Budgeting (ABB) An approach to budgeting where a company uses an understanding of its activities and driver relationships to quantitatively estimate workload and resource requirements as part of an ongoing business plan. Budgets show the types, number of and cost of resources that activities are expected to consume, based on forecasted workloads.
Activity Based Costing (ABC) A methodology that measures the cost and performance of cost objects, activities and resources. Cost objects consume activities and activities consume resources. Resource costs are assigned to activities based on their use of those resources, and activity costs are reassigned to cost objects (outputs) based on the cost objects’ proportional use of those activities. Activity-based costing incorporates causal relationships (cost drivers) between cost objects and activities and between activities and resources.
Activity Based Management (ABM) A discipline focusing on the management of activities within business processes as the route to continuously improve both the value received by customers and the profit earned in providing that value. ABM uses activity based cost information and performance measurements to influence management action.
Activity Dictionary A listing and description of activities that provides a common or standard definition of activities across the organisation. An activity dictionary can include information about an activity and/or its relationships, such as activity description, business process, function source, inputs, outputs, supplier, customer, output measures, cost drivers, attributes, tasks, and other information as desired to describe the activity.
Activity Driver The best single quantitative measure of the frequency and intensity of the demands placed on an activity by cost objects or other activities. It is used to assign activity costs to cost objects or to other activities.
Allocation A distribution of costs using calculations that may be unrelated to physical observations or direct or repeatable cause-and-effect relationships (eg using Overhead Recovery Rates). Because of the arbitrary nature of allocations, costs based on cost driver analysis (as in ABM) are viewed as more relevant for management decision-making.
Assigning The practice of relating resources, activities and cost objects using the drivers underlying their cost causal relationships. The purpose of assigning is to observe and understand how costs are arising in the normal course of business operations.

A distribution of costs using causal relationships (cost drivers). Cost causal relationships are viewed as more relevant for management decision-making and are the basis of ABM analysis approaches.

Attributes A label used to provide additional classification or information about a resource, activity, or cost object. Used to extract data from the model by the attribute. Attributes are used to define the process in which the activity takes place, a characteristic of the type of cost or work being done or any other dimension of interest to analyse.
Budgetary Accounting

The tracking of costs to a budgetary account is often combined with cost centre accounting. In this case, the major concern of the spenders of resources is to ensure that their total expenditures do not exceed the allocated budgetary amounts.

Cost Centre A sub-unit in an organisation that is responsible for costs.
Cost Centre Accounting A method for applying resource costs to an organisation. The accounting system identifies each of the organisational parts of the traditional functional structure and applies the identifiable costs to that part of the structure.
Cost Driver Any situation or event that causes a change in the consumption of a resource (resource driver) or activity (activity driver).
Cost Driver Analysis
The examination, quantification, and explanation of the effects of cost drivers. The results are often used for continuous improvement programmes to reduce throughput times, improve quality, and reduce cost.
Cost Element The lowest level component of a resource (items on the ledger).
Cost Management The management and control of activities and drivers to calculate accurate product and service costs, improve business processes, eliminate waste, influence cost drivers, and plan operations. The resulting information can be used in setting and evaluating an organisation’s strategies.
Cost Object Any product, service, customer, contract, project, process or other work unit for which a separate cost measurement is desired.
Cost Object Driver The best single quantitative measure of the frequency and intensity of demands placed on a cost object by other cost objects.
Cost Pool A logical grouping of Resources or Activities aggregated to simplify the assignment of resources to activities or activities to cost objects. (eg aggregating stationery consumables costs with salaries prior to assigning costs to activities to reduce the number of assignments in the model)
Cross-charges are used in an attempt to link services from one department to another based on an estimate of the work done. However, as the underlying drivers of the activities are never the focus of a meaningful discussion between departments, cross-charges become an emotive issue and source of much wasted argument.
Customer Profitability (see ABM Customer Contribution)
Direct Assigned Cost A cost that can be directly assigned to a cost object since a direct or repeatable cause-and-effect relationship exists. A direct assigned cost uses a direct assignment or cost causal relationship to transfer costs. (eg An external delivery charge)
Direct Costs In a manufacturing business direct costs are conventionally used to describe the raw materials that go into a product and the labour content to manufacture piece parts and assemblies.
Embedding Constructing an ABM model starts the process of obtaining new benefits. To ensure that the ABM approach is used in the longer term requires technical and management embedding. Technical embedding automates the links between the model and the organisation’s transaction systems. Management embedding is the process of getting ABM to be a natural way of understanding the business and acting on the information ABM provides.
Enterprise-Wide ABM A management information system that uses activity-based information to facilitate decision making across an organisation.
Frontline Activity An activity that has something to do with producing the primary product or service and any activities that interface with customers. Frontline activities have a direct cause-and-effect relationship to products and customers through cost drivers.
Functional Silos A term used to suggest that functions exist in virtual isolation with high walls around them.
Gross Margin The gross margin is the difference between revenue and the direct costs. When this margin is positive it is deemed to be making a contribution towards the costs of the overheads. However, an ABM analysis often shows that the real costs of the overheads for a particular product or customer are so high as to be greater than the gross margin. In these cases, increasing sales would erode profit contrary to the indication from the gross margin, which would infer that more volume brings more contribution to overheads.
Hook Curves A graph that plots cumulative profitability of either products or customers, starting with the highest profitability through to the lowest. When the lowest are negative the curve describes a characteristic hook shape. The Hook Curve with generally show the Pareto Rule holds true (eg 80% of the final profit comes from 20% of the customers). However, the Hook Curve exposes another rule in that 125% of the profit comes from 75% of customers, the final 25% of customers eroding the profit to the overall corporate figure.
Indirect Assigned Cost A resource or activity cost that cannot be directly assigned to a final cost object since no direct or repeatable cause-and-effect relationship exists.
Indirect Costs In a manufacturing business indirect costs are those activities, departments or functions that support the direct manufacturing activities, such as the Quality Department or Materials Handling.
Internal Service Costs Typically, training, recruitment, current use of IT networks are examples of internal services to all the other departments in the organisation. There are no direct relationships to current products and customers other than through the frontline activities that are supported. The key here is to understand and then assign the internal service costs and activities in an appropriate manner to all the other areas of the business that are supported.
Ledger The ledger lists all the resources in an organisation. The cost elements on the ledger are those things that provide the means so work can be done in the organisation. Cost elements would include salary costs for the people doing the work, accommodation costs so people can work in buildings, utilities so people can see what they are doing and keep warm, vehicles so goods can be delivered and customers visited. In some cases, the list of types of resources on the ledger may seem endless.
Legal Entity Costs Legal entity costs exist because the organisation must fulfil specific tasks. The annual audit and financial reporting would fall into this category. Such costs are largely independent of the product or service being provided. They are the costs of being in business. These costs and activities have no causal relationships to current or future products and services. The level of costs is unlikely to change with say throughput volumes or number of customers.
Overhead Costs All costs that are not defined as direct are overheads. The term overhead is unhelpful as it lumps together a wide range of disparate costs and activities, all of which describe the rich diversity of the many functions in the business. The word ‘overhead’ and the American term ‘burden’ imply that overheads are in some way bad for the business. The key is to understand all the activities and how essential they are, or otherwise, to producing products and servicing customers. ABM very specifically analyses the overheads and through causal relationships links these costs to the products and services and onwards to customers.
Pareto Analysis An analysis that compares cumulative percentages of the rank ordering of costs, cost drivers, profits or other attributes to determine whether a minority of elements have a disproportionate impact. For example, identifying that 20 percent of a set of independent variables is responsible for 80 percent of the effect.
Performance Measures
Indicators of the work performed and the results achieved in an activity, process, or organisational unit. Performance measures are both non-financial and financial. Performance measures enable periodic comparisons and benchmarking.
Process A series of activities that are linked to complete a specific output.
Product Profitability (see ABM Product Contribution)
Profitability Analysis The analysis of profit derived from cost objects with the view to improve or optimise profitability. Multiple views may be analysed, such as market segment, regions, distribution channel, customer segments, individual customers, product families, products and so forth.
Resource Driver The best single quantitative measure of the frequency and intensity of demands placed on a resource by other resources, activities, or cost objects. It is used to assign resource costs to activities, and cost objects, or to other resources.
Resources Cost elements applied or used in the performance of activities or to directly support cost objects. They include people, materials, supplies, equipment, technologies and facilities. Resources feature on the ledger.
Surrogate Cost Driver A substitute for the ideal driver but is closely correlated to the ideal driver. A surrogate driver is used to significantly reduce the cost of measurement while not significantly reducing accuracy.
Sustaining Costs These costs are essentially an investment to achieve a return in the future. Organisations need to have funds to pay for the current costs of the people doing, say, new product development, but the benefits are expected to be derived in the future. The current product throughputs or current customers do not directly influence these activities. The organisation has a choice over the level of Sustaining costs it wants to have. A reduction in Sustaining costs would transfer directly to the bottom line, but it would risk the future of the business. It could be argued that Sustaining costs should be made specifically visible to shareholders as they are investments in the business made out of retained profits that could have been distributed.
Tasks The breakdown of the work in an activity into smaller elements.
Unit Cost The cost associated with a single unit of measure underlying a resource, activity, product or service. It is calculated by dividing the total cost by the measured volume. Unit costs can be used for benchmarking or to construct models of new scenarios for running the business. Also used for Activity Based Budgeting.







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