Finally, one of the main attributes of an ABC system is its ability to deliver costing information in a way which does impact on managerial decisions. This occurs principally through its focus on cost driver information and the appreciation of cost behaviour which
it promotes. Chapter 7 illustrates the way in which the ABC system has influenced behaviour in this research, and Innes and Mitchell (1991) report instances where there has been improved communication of cost information where ABC has been used. Improved understanding and understanding of cost data by management was apparent and their increased involvement with costing was visible in the use of their information to direct questions, suggestions, improvements and make decisions.
Activity Based Costing can therefore form the basis of an on-going Activity Based Management System and may also incorporate Activity Based Budgeting which is discussed in section 3.8. Those who champion ABM argue that it leads to better
understanding of cost/resource management. It does not control the business, but simply provides information that influences the decision makers in the management process by providing indicators that demonstrate the cost utilisation within the organisation
(Mabberley 1992). ABM utilises ABC as the basic component of financial management information that assists the operational control of the business by focusing attention on the key cost drivers and the factors that influence the day-to-day dynamics of the cost base (Mabberley 1992). Ways of managing the cost base depend on on-going planning and control of all aspects of the business. Activity Based Management may include the need to set targets for activities or costs but tends to focus on long-term improvements in the delivery of activities through monitoring productivity, capacity utilisation,
efficiency and effectiveness.
Activity based budgeting (ABB) is also derived from ABC. With respect to budgeting and variance analysis, Yoshikawa et al (1993) argue that ABC provides a methodology
which can contribute to the rectification of the difficulties associated with traditional budgeting and standard costing procedures.
3.8 Activity Based Budgeting
Activity Based Budgeting differs from traditional budgeting in that it concentrates on the factors that drive the costs and understanding the linkages between the drivers behind the activities, not just historical expenditure. ABB separates the analysis of cost/ benefit and value of activities from the more mechanistic budgeting exercise and reduces the
complexity of the budgeting process and concentrates attention on the management of the business not simply on costs incurred. Activity Based Budgeting can link business unit goals to corporate objectives so that managers become accountable for managing their costs.
Activity Based Budgeting enables activities to be classified under two main headings: Firstly, those costs that are incurred to sustain the basic fabric of the organisation and secondly, those costs that are driven by the levels of underlying business activity in some way. Sustaining costs may be analysed purely to ensure that the activities are both efficient and effective. The business-related costs must be reviewed in relation to the factors that drive the costs and managed to ensure that spending remains in line with consumption, both in terms of the volume of activity and the quality of service provided. The information can then be used as the basis of a regular reporting system, using Activity Based Budgeting to monitor and control the expenditure, efficiency and effectiveness of the activities performed in all parts of the organisation.
Activity Based Budgeting is often compared to Zero-based budgeting, (ZBB) and in some ways, is based on similar concepts (Mabberley 1992). ZBB requires justification of expenditure from a zero base and requires costs to be estimated for differing levels of output and service. Activity Based Budgeting, however, assumes an on-going operation, justifying expenditure on the basis of activities performed in relation to the pre
determined drivers and places responsibility for cost control on the manager with responsibility for the control of the driver. Activity Based Budgeting differs from Zero- based budgeting in that it assumes that activities exist and are related to the underlying cost drivers. Only if the cost driver can be eliminated can the cost of the activity fall to zero.
Dugdale (1990) supports Mabberley's assertion that an activity based costing exercise has many similarities with a 'zero base' budgeting exercise. He states that both are aimed at identifying 'activities' and the cost of resourcing those activities. Recall, the original emphasis of ABC was to identify the cost of activities and hence to predict the
consequences of alternative product strategies, but it is only a small step to employ the ABC analysis for resource allocation and control. Clearly, if the resource implications of a given product mix can be established, then that analysis can be used in deciding how to allocate resources during the budgeting process.
3.9 (Activity Based) Performance Management
The objectives of Activity-based performance management are likely to include the need to motivate management to focus attention on the improvement of productivity and cost management by means of improvements in efficiency and effectiveness and prioritisation of activities that drive the organisation towards its corporate goals.
The basis of any performance management system should be the key performance indicators. A key performance indicator is a quantifiable measure of an activity that the manager must do well. Indicators will generally relate to activities and should
incorporate measures that focus on financial performance, staff management, risk management, quality and customer service. The essence of a good performance management system depends on effective activity analysis and the identification of drivers that enable quantifiable measures to be agreed; there will thus be a strong connection between drivers and key performance indicators. Operation and financial performance can be managed by means of measurement, monitoring and control of the costs, efficiency and effectiveness of the activities performed within the organisation. Activity Based Costing can form a key component of this type of reporting as it
facilitates the classification of activities and the understanding of the causal relationships between costs and business activity.
Performance management combines objective setting, cost control and responsibility by setting people related targets or key performance indicators and monitoring activity against the indicators on a regular basis. Performance can be influenced by using these key performance indicators as the basis of regular reporting, identifying those areas where individual managers can control or influence behaviour towards the achievement of corporate objectives. The control of cost is a key component of any performance measurement system and activity-based analysis can be used to focus attention on the areas of cost over which the individual has responsibility.
Performance can be measured in relation to both long-term and short-term goals. For example, a manager may have responsibility for the development of a new market (which may take years to become profitable), and may also have short-term profit targets
relating to existing business. Key performance indicators based on activity analysis enable both types of performance to be measured by focusing attention on the factors that influence the behaviour.
Johnson (1988) has emphasised the contribution which ABC can make to day-to-day operational control through the regular reporting of cost driver volumes. Together these provide a package of non-fmancial performance indicators on the level of work
undertaken in many areas of activity within the organisation. As these measures are non- financial they can normally be more quickly prepared and fed back to managers and their meaning is easily understood. It has the further advantage of focusing on activities rather than costs. Johnson believes that it is activities rather than simply costs which can be managed most directly and effectively.
Yoshikawa et al (1993) cite performance measurement as one area where some care has to be taken when applying ABC because it is often the case that 'you get what you measure'.
"If employees take cost driver volumes as the main measures of their performance they may be motivated to increase the number of set-ups, inspections or orders which they may make in a period. This
behaviour will defeat the purpose of the costing system as these factors drive costs and will increase it." (PP 139)
They state that the impact of ABC data on performance requires some monitoring by management to assess its real effects which often may only become apparent in the longer term.