Activity-Based Management for Financial Institutions: Driving Bottom-Line Results

CHAPTER 1

What Are ABC and ABM?

The brain is a wonderful organ. It starts working the moment you get up in the morning and does not stop until you get into the office.

—Robert Frost

WHAT IS ABC?

Activity-Based Costing (ABC) is an accurate method of assigning costs to work activities, processes, products/services, customers, and lines of business. It is based on the notion that efforts required to produce products and services can be quantified and, therefore, assigned to the product or service. Similar to a bill of materials, products have a bill of activities required to deliver the product or service. For simplicity’s sake, “products or services” will be referred to as “products” from this point forward, understanding the concepts apply to both.

Background

After reducing direct material and labor costs in the mid-1970s, organizations recognized that antiquated information systems were not meeting their ever-changing management information needs. Many companies embarked on ABC initiatives to focus on indirect product and service costs. By assigning overhead costs, companies were able to clearly identify, improve, or divest unprofitable products, inefficient processes, and poorly performing regions.

FIGURE 1.1 Basic ABC Flow and Terminology

The cornerstones of ABC are that cost is consumed and consumption can be managed. As such, ABC provides an excellent basis for cost accounting, ...