Activity Based Management
Chapter Five
Definition
Activity Based Activities plus Value Added
or
 How to submit a successful and profitable
BID

ABC Steps

1. Identify and Classify Activities
◦ Unit, Batch, Product, Customer, Facility
◦ Exercise 4.33 pg 168 and 4.35 pg 169



2. Estimate Cost of Activity
3. Determine cost driver and calculate rate
Estimated Cost/ Estimated driver = rate
◦ Exercise 4.31 and 4.32 pg 168

Assign or apply rate to actual driver
Activity Based Management Steps
1. Identify Value Added vs non value
added activity
 2. Score as high or low
 3. Identify opportunities that enhance
value added and decrease non value
added.

Target Costing

Company Needs = Company profit goals
Revenue
 X Return on Sales (ROS) GM% no S&A
 = Target Cost
 3 elements of Target Costing
 # of units sold, Sales price, ROS %
 Exercises 5.34, 5.35, 5.36

Non Value Added Examples
Pg 190
 Build up of Inventory
 Queque Time
 Production Moving Time
 Worker Moving Time
 Poor Quality

What Makes a Value Added Activity
1. How do you measure value added
Acitivities
 2. Who would be responsible for the
activity

 Customer
wants more of the activity
 Reach the company’s goal by
performing the activity
Example
On - time delivery adds value
 Rework and rewrite – non value added

Costing our each activitity
1. Identify major activity
2.Identify Subactivity and cost – usually just DL
3. Assign Order- Value from 1-5 highest value
4. Cost the activity
5. Cost each level of value – How much would
you save
Exercise 5.25, 5.26, 5.27and 5.28 pg 205 - 206

By doing Activity Based Management
analysis for one customer your efforts
will affect the production of other
products.
Chapter 5 Homework
5.41 (60 Min)
 5.47 ( 40 min)
 5.54 ( 45 min)
 Can you get the homework done faster.

Strategic Planning Part II
Submit online with excel spreadsheets
 Due ???????
