Activity Based Management at

Hewlett Packard (HP)

Table of Contents
1

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

Activity Based Management: An Overview

Activity 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 onetime
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
Figure 1: Activity Based Management: A Summary
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.

Need of ABM in HP
The 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
3

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 System

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

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 management
On deciding these three categories, direct labor was removed
gradually as a cost

driver. The
was
to
the

next step
determine
Figure 3: Costing a PC board

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 Management

HP 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
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

References
I.
II.
III.
IV.
V.
VI.

http://www.cimaglobal.com/Documents/ImportedDocuments/ABM_techrpt_04
01.pdf
http://www8.hp.com/us/en/hp-information/index.html
https://en.wikipedia.org/wiki/Activity-based_management
https://en.wikipedia.org/wiki/Hewlett-Packard
https://hbr.org/1990/01/how-hewlett-packard-gets-numbers-it-can-trust
http://www.ame.org/sites/default/files/target_articles/92Q2A2.pdf