Expenses are a consequence of running a business. How can a business reduce costs and generate added value? The solution is implementation of an activity-based cost management system. It was revealed by the Advisor at PT. Capable of Partnering with Abadi, Sofi Suryasnia, in a guest lecture at SBM ITB in the Tutorial 1B classroom in Bandung (05/10/2022)
The former President Director of the Bank Jabar Banten Pension Fund said that the activity-based cost management approach views the whole system as integrated and focused on the management of various activities to increase value for customers and profit for the company, which is achieved by realizing that value.
“This approach aims to improve decision-making by informing accurate costs and reduce costs by encouraging and supporting various efforts to make continuous improvements,” said Sofi.
Sofi compares accountability from the financial approach to the activity approach. Financial-based accountability emphasizes local operational efficiency by corporate units resulting in individual accountability. Thus, the measure of performance accountability is also static.
This is different from activity-based accountability, emphasizing the overall efficiency of the system, which is based on processes or activities that result in the overall efficiency of the system. Performance accountability is more dynamic, with optimal standards aimed at reducing costs and improving quality to have added value.
Company Application
If a company wants to implement an activity-based cost management approach, it needs to map out the two main dimensions of this approach. The first is the cost dimension, where information about resources, activities, and cost objects of concern exists. While the second is the process dimension, providing information about what activities are carried out, why they must be carried out and how well these activities are carried out.
The results of the analysis and mapping of activities within the company must show four results, namely a list of activities carried out, an understanding of the amount of human resource involvement, deepening of the time and resource processes needed to carry out various activities, and an assessment of activities for the company. In the end, decision-makers can choose ways to reduce costs by eliminating activities, choosing alternative activities, reducing activities, pooling activities, or other ways.
“An example of optimizing process value analysis is the cost efficiency of moving raw materials due to factory layout. This results in information that can make decision-makers rearrange the factory layout to reduce the cost of moving raw materials,” said Sofi.
While there are great benefits to implementing this approach, companies need to know that, in practice, this approach doesn’t always go smoothly. Failure to implement activity-based management causes is lack of support from top management, resistance to change, lack of expertise in using activity information, and failure to integrate systems. For this reason, it is necessary to have the will and commitment from various lines within the company to apply this approach optimally.