Activity-based management provides significant changes in cost management systems and making business decisions as well as in planning and controlling the activities in business. Activity-based management helps business success by providing information to apply long-term strategic decisions about things such as sourcing and product mix (Drury C., 1996).
Another use of the activity-based management is that it allows product designers to fully comprehend the effects of various designs on flexibility and product cost and also to change their designs based on that. Additionally, activity-based management also can be used in management allowing it to obtain new insights into performance of the activities by emphasizing on the sources of requirements and needs for activities and also by letting management to create behavioral motivations in order to enhance and improve many aspects of the business (J. Miller, 2000).
Generally, activity-based management is used to design products and services that either meet or exceed the expectations of the customers and also can provide profit after production and delivery. On the other hand, activity-based management is used to signal where either discontinuous or continuous enhancements or improvements in speed, quality and efficiency are required.
Another application and use of the activity-based management is to guide investment decisions and product mix and can be used to choose between alternative suppliers and negotiate about the quality, price, delivery, product features, and service with customers. Additionally, activity-based management is used to employ effective and efficient delivery and service procedures to aim customer and market sectors. Therefore, the application of activity-based management improves the value of products, services and overall performance of an organization (P. Armstrong, 2002).
To explain in more details, organizations implement activity-based management in five basic uses: the cost of activities and business processes and non-value-added activities, activity-based performance measures, cost drivers, and accurate product.
Since activities form the most basics of what a business does, the very core usage of the activity-based management system is to give related cost information on what a business does. By using activity-based management instead of reporting the expenditure of the business and the person in charge, the costs are assigned to activities. Additionally, activity-based management is used for the cost of non-value-added activities that does not contribute to customer value or the demands of organization which will provide important information output that leads to improvement efforts (R. S. Kaplan, R. Cooper, 1998).
As mentioned earlier, one of the important uses of activity-based management is to measure activity-based performance. In this case, activity-based management is used to identify whether the total cost of activity is sufficient or not. In order to do so, measuring cycle time, customer service, quality and productivity is needed to judge activity performance. By implementing activity-based management for measuring the performance of activities a scorecard is provided to report how well enhancement efforts are performing and is an important part of constant improvement of the business (R. Kiani, M. Sangeladji, 2001).
Another core uses of the activity-based management mentioned earlier is its use in accurate product or service cost. Products and services are delivered and distributed to customers and markets via numerous ways or relations. Since products and services use resources on various rates and therefore need alternative levels of support, costs should be determined accurately by using activity-based management. Precise product and service cost information is important for choosing the individual and divided markets where organizations compete with one another for pricing in the markets. Therefore, accurate product and service cost information is a vital information output that is derived by implementing activity-based management (R. Kiani, M. Sangeladji, 2001).
Finally, activity-based management is used to output information on cost drivers. A cost driver is any aspect that causes a change in the activity cost, for instance, the quality of the items produced during an activity is a factor that determines the work needed by that activity, because the quality of them influences the resources needed to perform the activity. Multiple cost drivers may be associated with one activity and therefore the use of activity-based management in this case is of importance.
Activity-based management systems are believed to provide more precise and accurate figures that assures an improved management. On the contrary, activity-based management have the limitations and disadvantages that in some cases may obscure the advantages and benefits of the activity-based management (E. Paul Green, S. Donald, 2014).
However, the disadvantage and limitation is that variable costing and cost-volume-profit analysis cannot help strategic management and therefore these figures provided by the activity-based management in long-term approach become too uncertain. Another limitation of activity-based management is that all data gathering is complex, time-consuming and extensively costly (E. Nowak, R. Piechota, M. Wierzbinski, 2004).
Sometimes activity-based management needs changing the organization or process of production of a company. In addition, since all employees should be involved in activity-based management so education of employee at all the levels is a necessity. However, by doing so staff resistance is caused forming another limitation of activity based management (T. Hopper, D. Northcott, R. Scapens, 2007).
The biggest problem and limitation related to activity-based management is the time. Probably, this is one of the limitations that was not solved by the activity-based management systems. The information derived ad delivered by activity-based management system is mostly based on monthly data however, nowadays, managers need daily or even hourly data or report (M. Reyhanoglu, 2004). These limitations with implementation of activity-based management can be overcome and tackled, however, even after that the company still have to use the old method cost allocation for external financial reports (W. Seal et al., 2006).
Moreover, activity-based management is criticized and limited for being only a modification of conventional management accounting. It is also believed that organizations use activity-based management systems only because it is helpful without considering the complex nature and developed features of activity-based management and taking into considerations its static and focused ex post.
Conclusion
In conclusion, activity-based management have a lot of uses and applications that contribute to management improvement initiatives and also enhances and improved decision making and planning by providing cost and operating information about the activities of the organization. However, it may have some limitations that must be taken under consideration by the company because even the best management approach will not work if it is not tailor to firm'''s requirements.