Businesses engage in several organisational activities to manage their losses and profits. ABC and ABM are two such methods that aim at achieving an evaluation of the expenses incurred as well as the profits and losses.
While ABC and ABM may seem to mean the same, they have considerable differences in their functions.
Key Takeaways
- Activity-Based Costing (ABC) allocates costs to products or services based on activities, while Activity-Based Management (ABM) uses ABC information to manage and improve operations.
- ABC focuses on accurate cost calculation, while ABM emphasizes cost control and process improvement.
- Implementing both ABC and ABM can lead to better decision-making and resource allocation.
ABC vs ABM
ABC (Activity-Based Costing) is a cost accounting methodology used to assign costs to specific activities that go into producing a product or service. ABM (Activity-Based Management) is a management approach that uses the insights provided by ABC to improve the efficiency of business processes.
ABC refers to a method of costing and monitoring activities that record the use of various resources and costs final outputs. It helps in the differentiation of fixed costs, overhead costs, and variable costs.
In addition, ABC also enables the allocation of more resources to profitable items. ABC provides several helpful analyses for companies.
ABM determines the profits of every aspect of the business. The main objective behind this approach is to minimise the losses incurred and help promote activities that yield profits.
It serves as a means of identifying and eliminating any cost drivers. It emphasizes the organisational objectives of various firms.
Comparison Table
| Parameters of Comparison | ABC | ABM |
|---|---|---|
| Full Form | Activity Based Costing | Activity Based Management |
| Main Focus | The main focus of ABC is to identify the causal relationships of cost drivers to activities. | The main focus of ABM is to manage activities of various business enterprises. |
| Relationship | ABC is a component of ABM. | ABM consists of ABC as a subcategory. |
| Practical Application | It has a practical application in analysing the cost per activity. | It has a practical application in analysing the profits and losses of each activity. |
| Goal | The goal of ABC is managerial accounting. | The goal of ABM is financial accounting. |
What is ABC?
ABC refers to activity-based costing. It refers to a method of costing and monitoring of activities that records the use of various resources and costs final outputs.
Each activity is accorded some resources, and there are activities to cost objects based on the consumption estimates. ABC assigns more indirect costs when compared to conventional costing.
ABC has a practical application as it allows companies to estimate the expenditure incurred on activities, services, and products. This information, in turn, enables the company to eliminate products that yield a lower profit.
At the same time, it allows companies to increase the sale of products that result in a higher profit. ABC helps in the differentiation of fixed costs, overhead costs, and variable costs.
It also enables the allocation of more resources to profitable items. Additionally, ABC helps to locate unnecessary costs and eliminate them.
It has a practical application in controlling the costs at every level of product manufacturing. ABC performs the function of recognising the casual relationships of cost drivers to activities.
ABC is known as the subcategory of activity-based management. One prominent role of ABC is that it consumes the costs and manages the consumption.
To sum up, ABC provides several helpful analyses for companies.
What is ABM?
ABM refers to activity-based management. It determines the profits of every aspect of the business.
The main objective behind this approach is to minimise the losses incurred and help promote activities that yield profits. ABM originated in the early 1980s and caters to the purpose of underscoring the areas where the businesses may be at loss.
ABM has a practical application in companies including non-profits, government agencies, schools, and manufacturers. ABM allows the production of long term financial forecasts and accurate budgets.
In addition, ABM can be used for the analysis of the profits incurred on every single product. ABM also incorporates activity-based costing.
It serves as a means of identifying and eliminating any cost drivers. It emphasizes the organisational objectives of various firms.
Additionally, ABM allows the determination of the contribution of each person. It also tends to support the balanced scorecard and serves as the foundation for Business Process Redesign.
The main aim behind ABM is to manage business activities. There are three stages of ABM: identify the activities carried out by each company, find out the expenditure on each activity, and evaluate the activity cost driver for each activity. Thus, ABM serves various functions in a business.
Main Differences Between ABC and ABM
- ABC refers to activity-based costing. In contrast, ABM refers to activity-based management.
- ABC has a practical application in analysing the cost per activity. On the other hand, ABM has a practical application in analysing the profits and losses of each activity.
- ABC is a component of ABM.
- The main focus of ABC is to identify the causal relationships of cost drivers to activities. On the other hand, the main focus of ABM is to manage the activities of various business enterprises.
- The goal of ABC is managerial accounting. In contrast, the goal of ABM is financial accounting.
- https://search.proquest.com/openview/b21c255542d1bc3fb067f467fcc23221/1?pq-origsite=gscholar&cbl=48426
- http://www.revecon.ro/articles/2011-1/2011-1-9.pdf
Last Updated : 13 July, 2023
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
It’s interesting how ABC and ABM complement each other in terms of financial and managerial accounting methods. The article explained it very well.
I agree. The way this article explains the relationship between ABC and ABM was very clear. I have a better understanding of both methods now.
This article’s detailed explanation of both ABC and ABM greatly helps in understanding their individual roles and applications in business management.
This is an interesting article, explaining the differences between ABC and ABM, two important methods for evaluating a company’s expenses and profits. I found the comparison table very helpful.
I completely agree, Hughes. The comparison table at the end gives us a clear idea of the focus, main differences, and practical application of each method.
I also found the comparison table very interesting. It helps to understand the key differences between ABC and ABM.
The descriptions of ABC and ABM’s practical applications and main focuses were very thorough. I appreciate the clarity in this article.
I didn’t know that ABC and ABM had such different goals and focuses. This article was an enlightening read.
I appreciate the detailed breakdown of ABC and ABM in this article. It provided comprehensive insights and clarifications.
This article was an excellent resource to understand the differences and usage of ABC and ABM. It provided an in-depth comparison and useful insights.
The information about ABC and ABM in this article was enlightening and well-structured. The comparison table was particularly useful.