So fellow Financial Controllers, Finance Managers and Accountants, have you ever heard the following phrase ;

I want across-the-board-cuts–everyone reduce costs by 10%

I bet you did, the percentage might be different, but we all heard this phrase, in some way or the other. But does it work? It barely gets the desired results. Why? Because reducing costs across the board doesn’t really work. The cost of Material stays the same, most conversion costs stay the same. You can’t find a new factory location at 10% reduced rent or cheaper warehouse location (as these are strategic locations) or a utility company supplying cheaper electricity and water, your telephone bills stay the same, you can’t reduce the depreciation cost by 10% in a click or lower banks financing costs or lower interest rates, etc. We just find Staff Cost that can be reduced, new or open positions offered lower pay, and in some difficult situations layoffs in the staff to reduce cost.

There is a rule Products consume activities; activities consume resources. The basic objective of the phrase above is to stay competitive. We need to understand that: 1) Activities that go into producing goods and services 2) the cost of those activities.

ACTIVITY BASED MANAGEMENT (ABM) has recently become one of the most important methods to achieve competitive advantage by cost or Cost-advantage strategy. To be successful ABM is implemented enterprise-wide, integrated with all parts of the value chain. This approach attracts management’s attention on activities with the end-result of improving customer value, reducing cost, and which in turn increases profits.

To achieve desired cost reductions, you must first put the spotlight on the activities that product or service consumes after that you must work out how to re-engineer those activities to enhance productivity & efficiency.

A Process value analysis is a method used by Management Accountants to determine why activities are done and how efficiently they are performed. Activity-based costing is a tool used in activity-based management by Management Accountants to analyze the cost pattern to aid Activity-Based Management (ABM).