Definition: Activity-based management is a cost accounting term where management uses past production activities and costs as a benchmark to adjust current activities as well as current company goals.
What does Activity Based Management Mean?
Activity-based management goes hand-in-hand with both activity-based costing and budgeting. Basically, managers use activity-based costing and budgeting to make decisions about the company. Usually, the goal of activity-based management is to try to improve the business’ customer satisfaction and profitability.
Using the same example as the activity-based budgeting dictionary word, let’s assume there are two different setup stages to make a cell phone: machining and assembling. A managerial accountant would look at the total amount of cell phones that need to be produced, the number of cell phones in each batch, the setup time for both machining and assembling, as well as the hourly rate of each machinists and assemblers. By looking at all of these different activities, management can decide what parts of production or what activities need to be improved.
For instance, management might decide that some processes are unnecessary and need to be eliminated or combined with other processes. Management might also find that slow and inefficient production activities can lead to customer complaints about slow shipping times. By examining and fixing the poor performing production activities, management can accomplish the two overall goals of activity-based management: improve business performance and customer satisfaction.