Activity Based Management at Hewlett Packard (HP)

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Table of Contents

Activity Based Management: An Overview.........................................3

Hewlett Packard (HP).........................................................................3

Need of ABM in HP.............................................................................3

Creating and Implementing the System..............................................4

Benefits through Activity Based Management....................................6

References.........................................................................................6

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Activity Based Management: An OverviewActivity based Costing (ABC) along with Activity based management (ABM) has brought

along a radical change in the cost accounting management systems. Although the concept was originated in the manufacturing industry, it has found its widespread applications in other sectors as well. ABC or ABM although just twenty years old, is seen more of a strategic management tool rather than a cost management tool. It is a one- time exercise which measures the cost and performance of activities, resources and the objects which utilize of consume them so as to generate accurate and meaningful information for decision making. ABM follows ABC to provide management the necessary report for enhanced decision making. So sum it up (as portrayed in the adjoining figure), Activity based management is a method to identify and evaluate activities that a business performs based on certain cost drivers through activity based costing in order to carve out a value chain analysis to improve the strategic and operational decisions in a firm.

Hewlett Packard (HP)Hewlett Packard Company, better known as HP is an US based global information

Technology Company, which develops, manufactures and provides a wide array of hardware components and software services to the consumers including businesses as well. It has been one of the leading PC manufacturers of the world, and specializes in developing and manufacturing in data storage, networking, computing, and printers along with specialized software services. HP is primarily known for its innovation and action based approach with a consistency in leadership, focus and execution.

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Figure 1: Activity Based Management: A Summary

Need of ABM in HPThe greatest reason HP moved to ABM was its traditional labor based system. It

was not meeting expectations of both the costing and performance measurement systems. In addition to that, the primary method of manufacturing used in HP was surface mount manufacturing, which requires a capital intensive environment. It requires direct labor not more than 4% of the total product cost. Continuing with the traditional method was not adding any further value and was misleading decision making information. Also, there was no proper documentation available related to the traditional cost accounting system. This was hindering the management to take measures to improve and enhance their operations.

Another aspect to it was that the accounting department was never included in the decision making system. It was just viewed as a monitoring system for the cost management of the company. Activity based management was the most appropriate solution to bring the accounting department together with all the other departments and contribute in deciding the “real” cost of the product.

Creating and Implementing the SystemHP implemented Activity Based Management throughout the organization, though

independently in its divisions. To be specific and focus on the key aspects of ABM, the report restricts itself to the ABC accounting methods of one of the manufacturing divisions of the company: Roseville Network Division. The division is a high mix and low volume operating assembly. The product line has about 250 products with each of them having multiple options, which makes the number of items up to 1100! And yet the focus was on the individual products and not the manufacturing process.

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In order to build the new cost accounting system of Activity based Management, the first and foremost step was to gain the perspective of the manufacturing department and identify each and every element of the manufacturing process: all the sub processes and the

activities involved within them. The goal was to transform the manufacturing into a process environment, to create a continuous flow without any interruptions by set up or configuration changes. Employees from manufacturing finance and information systems were included in the whole transformation process. Every existing procedure was scrutinized and details were collected about them. Data (how the process is carried out, how much time does it take) about the processes was the most essential need for building the activity based costing methodology. The system was aimed at accurately reflecting manufacturing costs, use data that manufacturing department could collect easily, and meet the legal and practical needs of the firm.

The old traditional system allocated the overheads based on the direct labor hours required for the processes. The manufacturing overhead formed 30% of the total product cost, thus it made more important to identify how the end product used the things they included. Costs had to be allocated according to the things that were really driving them. The old system had three categories of costs: direct material, direct labor, and manufacturing overhead. The new system changed that to: procurement overhead, production overhead, and support overhead.

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Figure 2: Cost Allocation for the production of a board through ABC

Procurement overhead: Cost of buying raw materials and receiving, storing and documenting them.

Production overhead: Cost of sub processes (activities) required to assemble and test the products

Support overhead: cost for production engineering and post sales services managementOn deciding these three categories, direct labor was removed gradually as a cost

driver. The next step was to determine the actual cost drivers for each of the manufacturing activities. This was done by just getting information as much as possible through the people working on the manufacturing floor. It was found out that cost accounting using the cost drivers was much more accurate than the previous old traditional system. Thus the new cost accounting method of activity based costing improved the conditions of the HP division. This was then refined over a period of time with much more inputs added to it to make it more efficient.

Benefits through Activity Based ManagementHP divisions had a successful impact of the implementation of Activity Based

Management, which can be summed up as follows:

Improvement in the communication amongst the departments Improved visibility of the process costs Better and transparent performance measurement system with key performance

indicators

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Figure 3: Costing a PC board

Improved product costing, thus helping in better pricing Designing economic heuristics to enhance and improve the innovational capabilities Proper documentation of the cost accounting methods Process manufacturing reflecting trends, successes and improved target settings Establishment of cost and productivity goals Transparent system reducing causal ambiguity

ReferencesI. http://www.cimaglobal.com/Documents/ImportedDocuments/ABM_techrpt_0401.pdf

II. http://www8.hp.com/us/en/hp-information/index.html III. https://en.wikipedia.org/wiki/Activity-based_management IV. https://en.wikipedia.org/wiki/Hewlett-Packard V. https://hbr.org/1990/01/how-hewlett-packard-gets-numbers-it-can-trust

VI. http://www.ame.org/sites/default/files/target_articles/92Q2A2.pdf

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