Value-Based Management in Government

CHAPTER ELEVENFundamentals: What Is ABC/M?

IN THIS CHAPTER, WE will get into a lot more of the nitty-gritty involved in designing an ABC/M system. Chapter 10 briefly covered some of the basic concepts underlying the ABC/M model and introduced the ABC/M cross in its simplified form as Figure 10.4. Now we will enlarge upon the basic view in Chapter 10 to show the fuller richness and complexity of the ABC/M model as it actually works.

EXPANDING THE TWO-STAGE ABC/M CROSS MODEL

The ABC/M cross in Figure 10.4 depicted the key relationship between ABC/M and the management analysis tools that are needed to bring full realization of benefits to the organization. ABC/M is a methodology that can yield significant information about cost drivers, activities, resources, cost objects, and performance measures. This information gives an organization the opportunity to improve the value of its products and services. The ABC/M data reflect how the organization is consuming its resources, and this image in turn serves as an enabler for inferences and decision support.

The initial focus of early ABC/M applications was the determination of product and service-line costs through better segmentation and assignment of resource expenses consumption. Subsequent applications in larger and more complex organizations revealed that ABC/M information is useful in solving broader problems. For these solutions, the ABC cost calculation usually required more than a simple, so-called “two-stage” cost reassignment, ...