Define Activity-Based Budgeting (ABB)

 Activity-Based Budgeting (ABB)

What is Activity-Based Budgeting (ABB) and how does it work?

ABB (activity-based budgeting) is a system for tracking, researching, and analysing actions that result in expenditures for a business. Every function that incurs a cost in an organisation is analysed for possible efficiency. Following that, budgets are created based on the findings.

Traditional budgeting techniques, which essentially alter past budgets to accommodate for inflation or company expansion, are less stringent than activity-based budgeting (ABB).

TAKEAWAYS IMPORTANT

·   Activity-based budgeting (ABB) is a budgeting strategy that involves recording, analysing, and researching actions that generate expenditures.

·   Traditional budgeting systems, on the other hand, tend to simply update past budgets to allow for inflation or corporate growth.

·   Activity-based budgeting (ABB) can help businesses save costs and squeeze more profit out of their sales.

·   This strategy is especially effective for young businesses and businesses that are through significant changes.

What is Activity-Based Budgeting (ABB) and why should you use it?

Activity-based budgeting (ABB) is a technique for tracking, researching, and analysing activities that result in a company's costs. Every cost-generating operation in a company is examined for possible efficiencies. On the basis of these findings, budgets are created.

Traditional budgeting techniques, which usually only alter past budgets to allow for inflation or company expansion, are less stringent than activity-based budgeting (ABB).

1. Determine which actions are relevant. These cost drivers are the elements that cause the organisation to incur income or costs.

2. Determine the amount of units each activity requires. This is the starting point for all computations.

3. Calculate the cost per unit of activity and multiply it by the number of units of activity.

Traditional Budgeting Processes vs. Activity-Based Budgeting (ABB)

ABB (activity-based budgeting) is a type of alternative budgeting. Traditional approaches are more straightforward, revising budgets from previous periods to allow for inflation or income increases. Instead of utilising previous budgets to estimate how much a company would spend this year, activity-based budgeting (ABB) goes deeper.

For certain businesses, activity-based budgeting (ABB) isn't essential. For example, established businesses with little change find that applying a flat rate on data from the previous year to account for company growth and inflation is adequate.

Newer businesses, on the other hand, without access to prior budgeting data, cannot consider this a viable choice. Firms that are undergoing substantial changes, such as those with new subsidiaries, large clients, company locations, or products, are likely to use activity-based budgeting (ABB). Historical data may no longer be usable as a foundation for future budgeting in several situations.

Budgeting Based on Activities is an example of activity-based budgeting.

 

In the following year, Company A expects to receive 50,000 sales orders, with each order costing $2 to complete. As a result, the activity-based budget (ABB) for the future year's expenditures related to processing sales orders is $100,000 ($50,000 * $2).

This statistic may be compared to a standard budgeting strategy. If last year's budget called for $80,000 in sales order processing charges and sales were projected to increase 10%, this year's budget only includes $88,000 ($80,000 + ($80,000 * 10%)).

Activity-Based Budgeting's Benefits and Drawbacks

More control over the budgeting process is possible with activity-based budgeting (ABB) systems. Revenue and spending planning is done at a fine level, providing helpful information about estimates. ABB gives management more control over the budgeting process and helps them to connect the budget with the company's overall goals.

These advantages, however, come at a price. Traditional budgeting strategies are more expensive to develop and maintain than activity-based budgeting (ABB). It also takes more time. Furthermore, ABB systems require extra assumptions and information from management, which might lead to budgeting mistakes on occasion.