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What Is an Activity-Based Analysis?

Jim B.
Jim B.

An activity-based analysis occurs when a company studies its operations in terms of the individual processes by which products and services are created for customers. This process is closely associated with activity-based costing, which assigns costs based on how they contribute to production, and activity-based management, which attempts to streamline these costs and make each individual process better so that the company improves as a whole. Companies who undertake an activity-based analysis can pinpoint areas of weakness and work on improving them. In addition, they can identify which activities are most valuable to the company and concentrate their resources on these activities.

It is crucial for a company to take the time at periodic intervals and review the way that it does business. Failing to do so can lead to poor performance and diminishing results, both of which will eventually affect the bottom line. While it can be tempting to study financial statements and focus on the big financial picture, it can also be useful to take a closer look at each and every step of the process by which those numbers are created. A company taking this approach should consider activity-based analysis.

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One of the ways that an activity-based analysis makes a difference is its approach to costing. By separating costs according to what processes they fund, a company can spot areas of waste or inefficiency. Identifying these costs as direct, meaning that they are related to one and only result or product, or indirect, which means that they are shared by multiple activities, is an important part of activity-based costing. In addition, cost drivers, the specific reasons that costs are accumulated by different activities, also must be highlighted.

There are specific management tactics that are closely associated with activity-based analysis. If there is a specific part of the production or service process that is necessitating large costs, efforts should be put in place to try to eliminate this discrepancy. The areas where costs are being kept low should be studied so the same practices used in those areas can be applied elsewhere.

Using activity-based analysis is a good way for company management to find areas of value. Certain activities, by nature, add more value to the business than others that might not be helping the bottom line. The activities producing value should be emphasized and should have the first crack at company resources. Those activities that are less valuable might have to be mitigated or, if possible, eliminated to improve efficiency and reduce costs.

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Discussion Comments


I'm not certain that I see any real distinction between activity-based analysis and a well-implemented activity-based costing system. An effective ABC implementation focuses on identifying activities, aligning them with processes, and assigning costs to each. The end result identifies areas where costs are high and can help with the identification of waste; often, ABC practitioners will identify activities of high and low value, value-add and non-value add, resource-intensive or automated, etc.

We can call this activity-based analysis, but, in the end, it's the result of any thoughtful, effective and targeted activity-based cost implementation.

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