ABC stands for Activity Based Costing and ABM for Activity Based Management. These are management techniques that are commonly employed in business and every business student must be thorough with their concepts. Here are their meanings and their differences:
- ABC is the technique of determining the cost of activities related to products or services. Every organization produces goods, which are sold to its customers. It incurs costs right the time it sources the raw material till the time a customer actually buys a product. Examples of such costs can be liaising with vendors, transporting raw material to factory, processing raw material and adding it to the machinery, arranging, sorting, packing and transporting the finished product, marketing the product, etc. Resources are allocated to each activity. ABC first determines the total number of activities involved and then determines the cost per activity.ABM is much wider in its scope. It includes the measurement of all activities including cost-related activities. In addition to cost, ABM also measures employee performance, customer satisfaction, business processes, and just about every other activity that is undertaken by an organization. ABC is part of ABM. ABM analyzes and measures every activity (even if that activity does not generate a sale) and it not only helps lower costs, it also cuts down inefficiencies across the organization.
- ABC is more related to productivity; ABM is related to both, profitability and productivity.
- The objectives of ABC are to determine the cost per activity and then trace it back to a product. The sales of the product are then compared with its activity cost and this helps the management find out whether the product generates a profit or loss. The management can then take steps to plug leakages or improve efficiencies by optimizing an activity that needs improvement.The objectives of ABM are much wider. ABM fleshes out every single activity that goes into a business process and analyzes it. If the process is faulty, then it is corrected, if it can be bettered, it is enhanced. So, ABM helps improve the overall organizational efficiency (including controlling costs) and eliminate process wastages, while ABC is more concerned more with cutting inefficiencies in order to save costs.
- Both these techniques analyze each activity by interviewing managers and ascertaining the process, its outputs, the customers, qualitative and quantitative metrics, and how, why, and when, what, who, which, of the activity. After the individual interviewing is done with, a group workshop is then held and the results obtained from the individual interviews is verified and enhanced. The results are then analyzed and re-checked. 3rd parties may be interviewed as well. Then the report goes to the management, which can then figure out which business activity is not performing well or leaking profits.
- ABC is concerned with cost-related activities while ABM covers all activities.
This is the difference between ABC and ABM.