Activity Based Management (ABM)
What it is:
Activity based management (ABM) is an administrative method which examines how a company incurs costs from the standpoint of its activities rather than its final products.
How it works (Example):
Companies have ordinarily managed costs from the perspective of the labor and capital which go into their final products. Activity based management (ABM) takes a broader approach and considers the specific costs incurred by a company's discrete activities. By analyzing the relationship between activities and their costs, ABM helps a company's management to determine which activities contribute to productive efficiency and which do not. In this sense, ABM is useful for streamlining production processes and increasing overall efficiency. For instance, ABM might help a company to determine whether or not its technical support functionality is overstaffed with respect to its client call volume.
Why it Matters:
Though ABM helps to readily identify unnecessary cost-consuming activities, its evaluations are exclusively quantitative and not qualitative. For this reason, though an activity or process may appear inefficient under ABM, the non-quantifiable ramifications of its removal need to be carefully considered.