This article attempts to help management clear up confusion about Activity Based Costing (ABC) and Activity Based Management (ABM) and how these concepts should be applied to help solve operational and strategic problems with the data that is produced by these systems.

Which kind of pilot program should come first, a top-down ABC approach or a bottom-up ABM approach? Cokins suggests that a company should use an enterprise wide ABC for strategic cost reporting and analysis and immediately use the results. Using the same information from the strategic ABC, the company should then look closely at operational cost issues and apply ABM.

1. Use ABC for strategic analysis to take advantage of strategic opportunities that will quickly bear fruit.
2. Use same ABC data for ABM using one of two approaches:

1. Disaggregate the activity costs and their outputs to allow for more detail. Added detail allows more opportunity to uncover possible benefits. This approach usually requires smaller dedicated ABC models to provide this detail. This approach helps managers appreciate how the complexity of modern businesses affects costs.
2. Calculate business process costs. Use activity costs prior to ABC the company should consider how the activities are sequenced in time. Apply ABM techniques to seek out root causes of problems.

Managers can use ABM to learn how their organization’s cost structure and behavior affect profits. Using this data managers have three available options:

1. Raise prices, particularly where there is little or no adverse volume reduction from lost sales, since any incremental price increase will fall directly to the bottom profit line.
2. Rationalize the mix.
3. Fix the process and remove waste.

ABC data can help with root cause analysis and help raise important questions on a company wide basis.

Companies usually have little idea about what activities make up their external and internal outputs or how much of each activity’s cost is being consumed. "Process-based thinking" should be adopted and companies need to recognize that all processes have outputs. Both internal and external output should be identified. Mini ABC models within the company wide ABC model can be constructed to help cost intermediate and unit level outputs in order to facilitate greater learning and discovery about the organizations cost structure.

The "ABC comes first" approach allows a model to be constructed quickly so that managers can see results quickly. By seeing activity costs in the big picture managers gain a better understanding of their cost structure and master the ABC/ABM design which will help construct more detailed ABM models. Management needs to take a broad view of the business process and recognize the important contributions that a more accurate cost accounting system can provide.

In order to sustain an ABC/ABM system, managers and employees who use the data must have an understanding of the system and be sold on the idea. ABC/ABM should not be seen as an improvement program, but as an enabler for other improvement programs. The output of ABC/ABM is always the input for some other system. Once the appropriate level of aggregation is achieved then the connection of ABC/ABM data to the analysis of business problems will become obvious.