1. Introduction and Objectives
Activity-Based Costing data can be leveraged to drive operational improvements and strategic changes across an organization. This process is known as Activity-Based Management (ABM).
 
2. Operational vs. Strategic ABM
  • Operational ABM: Uses activity cost data to improve efficiency and optimize processes. It classifies activities as value-added or non-value-added:
    • Value-Added Activities: Tasks that increase the value of the product to the customer (e.g., precision machining, functional product testing).
    • Non-Value-Added Activities: Tasks that add cost and time but do not increase the product’s value to the end user (e.g., moving materials between warehouses, storing buffer inventory).

  • Strategic ABM: Uses ABC data to guide long-term strategic decisions, such as product mix adjustments, target pricing, and vendor selection.

3. Customer Profitability Analysis
Customers consume different levels of support resources. A high-volume customer who places standard orders may require very little customer service overhead. Conversely, a smaller customer who demands frequent design changes and emergency deliveries can consume a disproportionate share of support resources.
Customer Profitability Whale Curve:
Profitability (%)
  ^      
  │          ┌───────┐
  │      ┌───┘       └───┐
  │  ┌───┘               └───┐
  ├──┘                       └───┐ <─ Peak cumulative profit (often 150-200% of total)
  │                              └─── Drop-off caused by high-maintenance, unprofitable accounts
  └────────────────────────────────────> Customers ranked by profitability (Most to Least)

By mapping customer revenue against the true activity costs required to serve them, companies can identify their most profitable relationships and take corrective action on accounts that erode overall margins.
 
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