Critically assessing the adoption of Activity Based Management

1. Introduction

Management accounting is closely related to financial accounting, but it focuses more on assisting the management of the company to take vital business decisions. In this regard, it can be highlighted that management accounting provides the key financial/statistical information such as costs, profit, and market factors among others that supports the decision-making process of an organization (Ghanbari and Vaseli, 2015). Bronze Limited is a manufacturing organization operating its business in the UK. Recently, the company has expanded its business and thus became a medium-sized company. The Business Accounting Team Leader of the company has suggested in the last meeting that the company should now move from the traditional accounting method to Activity-Based Management (ABM). In this regard, this report focuses on critically evaluating the adoption of ABM in Bronze Limited. To achieve this primary aim, the report discusses the role of management accounting in contrast to financial accounting in business. Additionally, the report also emphasizes studying the benefits and limitations of ABM that Bronze Limited is planning to implement in its business. Lastly, the report discusses the problems associated with traditional management accounting that the company is likely to face in the modern business environment.

2. Discussion

2.1. Analyzing the role of management accounting in business in contrast to financial accounting

Financial and management accounting are the two different branches of accounting and used by organizations to develop strategies to grow and sustain business in the long run. Management accounting is about internal financial information and it comprises documents that investigate company resources such as labor, raw materials, and equipment. On the other hand, financial accounting is about external financial processes of the business and it comprises balance sheets and income statement that is used by external members such as investors. The role of management accounting and financial accounting is different (Bentley University, 2021). Management accounting provides both financial and non-financial information and thus it can provide better assistance to the company in terms of planning. The management of the company through using management accounting information can forecast and hence plan in a better manner. In contrast, financial accounting periodically provides financial information required by business owners, customers, and investors among others. The financial accounting information is vital for analyzing sales, profit and keeping the records of business expenses among others. In this regard, it can be argued that management accounting makes decision-making more flexible and easier for the management as all the information are available in simplified form (Bentley University, 2021; ICMAI, 2016).

Financial accounting helps in the financial control of the business. This accounting system enables monitoring the financial performance of businesses in such a manner that it minimizes any risk associated with theft or money fraud. However, the management accounting system enables tracking and measuring the overall performance of a business. This helps the managers of the company to take corrective measures in case of low or deteriorating business performance. In addition, management accounting assists in product price control through implementing various cost control measures. Thus, it plays an effective role in enhancing the profitability of the company by reducing the extra expenditure (Bentley University, 2021; Richardson, 2017).

2.1.1. Benefits and shortcomings of Activity Based Management (ABM)

ABM is the way of investigating the company’s business activities to determine the strong and weak areas that need improvements. In other words, it is a management approach that helps the management of the company to cut or reduce the non-value adding business activities and increase the value-adding activities that can enhance profitability in long run (CFI, 2021). This particular management approach enables comparing the cost associated with an activity and the value it adds to the business. ABM can be categorized into two types that are operational ABM and strategic ABM. The operational ABM focuses on evaluating the activity cost and minimizing the unnecessary costs. On the other hand, strategic ABM is about evaluating profitability in an activity such as gaining new customers and launching new products among others (CFI, 2021).

Based on the above understanding, it can be highlighted that ABM emphasizes more on the performance of activities and thus would be helpful in the management of the manufacturing activities. This would not only improve the valued customer receives but also increase company profit. The management of Bronze Limited would require accurate information throughout the business as it would assist in handling the key business issues. The key issues that the company may face in the future are how the business can be positioned in the market for long-term profit and how its capability can be improved by reducing per-unit costs. To solve all these issues the company requires information about products, customers, manufacturing process/systems, and delivery service among others. In this regard, ABM would be helpful for the company to gain the right information in the modern competitive business environment (ICMAB.Org., 2017). Apart from these, there are other benefits such as ABM helping in developing corporate strategy and business plans. Besides, it also helps in gaining a competitive advantage as it retains the quality and quantity despite cost cuts. ABM can also help in activity analysis by categorizing the activities as value-added and non-value added. In manufacturing companies such as Bronze, there are various non-value-added activities such as movement/transfer of materials, ideal time, time spent in inspecting and performing manufacturing activities among others. Furthermore, by eliminating the non-value added activities the company can quickly respond to customers’ orders and thus enhance productivity (ICMAB.Org., 2017; Capusneanu, 2009). Despite the number of benefits, ABM has certain limitations that can impact the operations of Bronze limited. AMB does not consider the intrinsic value associated with the activities. Besides, ABM is also likely to influence the strategic decisions of the company in case it costs high despite high payoff in the future. Furthermore, the effective adoption of AMB would also require Bronze limited to successfully implement the Activity Based Costing (ABC) in its business (E-Finance Management, 2021).

2.2. Key problems with traditional management accounting techniques when applied in a modern business environment

In the past few years, many modern management accounting techniques have been developed. In the competitive business world, managers have to take business decisions daily. The decisions are about the future and plans for surviving in the competitive business market. In this regard, the traditional, as well as modern management accounting techniques, provide the necessary financial and non-financial information that is vital for planning, business operations, and identifying opportunities among others. Based on the above analysis, it has been apparent that modern management accounting is different from the traditional and it is more effective in making sound business decisions and minimizing cost keeping in mind the quality of products offered to the customers (Lasyoud and Alsharari, 2019).

The business world is changing and dependent on technological innovations and focuses on high-quality customer service to boost the performance of the business in the long run. Thus, the business change also requires the adoption of new accounting techniques. The traditional accounting technique is efficient in tracking the performance of the business but it sometimes fails to respond in the ever-changing business environment. Thus, the new business demands a new accounting technique that can not only monitor the performance but also support the decision-making process of the management. In this regard, the traditional management accounting technique fails to support decision-making. Besides, there are other problems associated with it such as inaccurate measurement of business performance due to the use of the conventional method. In addition, there are chances of errors in the traditional accounting system due to the manual entry of data. Besides, it is time-consuming and more intensive as compared to the modern accounting procedure. The traditional accounting system does not offer the facility of data storage in the cloud and thus it requires keeping hard copies of business data. The physical data can be stolen or damaged and thus it is very risky for the business growth (Ashfaq, et.al., 2014; Ekbatani and Sangeladji, 2011).

The traditional accounting technique only emphasizes cost control where it includes forecasting outcomes such as labor and material cost among others. In this regard, the traditional approach does not help in finding the actual cause of cost. Thus, it becomes a major issue for the business to ensure total quality management. Thus, dissatisfaction and issues related to traditional accounting techniques have forced businesses to focus more on the non-financial performance measuring approaches to improve capability and gain success in the competitive business world (Lasyoud and Alsharari, 2019).

3. Conclusions

Based on the above discussion, it can be highlighted that implementing ABM will be beneficial for Bronze Limited in the long run. The ever-changing business world also requires implementing new accounting techniques along with new technology. Modern accounting management such as ABM is different from traditional accounting practices. The traditional accounting practices focus more on controlling business finance. On the other hand, ABM helps in monitoring the overall business that assists in detecting the weak and strong areas. Thus, it becomes easier for the management to take corrective measures to ensure improvement in the weak areas of business and maximize profitability in the long run.

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4. References

Ashfaq, K., et.al., 2014. Traditional Vs. Contemporary Management Accounting Practices and its Role and Usage across Business Life Cycle Stages: Evidence from Pakistani Financial Sector. International Journal of Academic Research in Accounting, Finance and Management Sciences, Vol. 4, No.4, pp. 104–125.

Bentley University, 2021. What are the Differences Between Financial Accounting and Management Accounting? [Online] Available at: https://www.bentley.edu/news/what-are-differences-between-financial-accounting-and-management-accounting [Accessed on 27 October, 2021].

Capusneanu, S., 2009. Activity-Based Management principles and implementation opportunities of the ABM system. Metalurgia International, Vol., 14(11), pp. 1-4. CFI, 2021. Activity-Based Management. [Online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/strategy/activity-based-management-abm/ [Accessed on 27 October, 2021].

E-Finance Management, 2021. Activity-Based Management – Meaning, Objectives, Drawbacks and More. [Online] Available at: https://efinancemanagement.com/costing-terms/activity-based-management [Accessed on 27 October, 2021].

Ekbatani, M. A. and Sangeladji, M.A., 2011. Traditional Vs. Contemporary Managerial/Cost Accounting Techniques Differences Between Opinions Of Educators And Practitioners. International Business & Economics Research Journal (IBER), Vol. 7(1), pp. 93-110.

Ghanbari, M. and Vaseli, S., 2015. The Role of Management Accounting in the Organization. International Research Journal of Applied and Basic Sciences, Vol. 9, No. 11, pp. 1912-1915.

ICMAB.Org., 2017. Activity based management. [Online] Available at: https://www.icmab.org.bd/wp-content/uploads/2019/11/BCAS-20-Activity.pdf [Accessed on 27 October, 2021].

ICMAI, 2016. Cost & management accounting and financial management. [Online] Available at: https://icmai.in/upload/Students/Syllabus2016/Inter/Paper-10-Oct.pdf

Lasyoud, A. and Alsharari, N. M., 2019. Is Traditional Management Accounting Still in Use? Contemporary Issues. Jurnal Dinamika Akuntansi dan Bisnis, Vol. 6(2), pp. 229-240.

Richardson, A. J., 2017. The Relationship between Management and Financial Accounting as Professions and Technologies of Practice. University of Windsor, pp. 1—15.