I.                    What is Activity-Based Budgeting?

Activity-Based Budgeting is a process by which an organization plans its upcoming annual budget based on the budget of the current year. It follows Activity-Based Costing (ABC) that analyses all variable and overhead costs associated with activities. 

 It is a modern method of budgeting that involves controlling and planning expected operational activities for any organization. It helps the organization to create a cost-effective budget to meet strategic goals in order to improve performance. 

II.          How Does Activity-Based Budgeting  It Work?

Activity-based budgeting researches and analyses the costly activities of a company. The primary goal of an Activity-based-budgeting is to maintain the budget by lessening the cost and eliminating unproductive activities as a means to boost profitability. 

The activity-based budgeting (ABB) process splits up primarily into three steps that are:

  1. Identify the cost drivers of different activities.
  2. Determine the number of units associated with all activities.
  3. Compute the cost per unit of operational activity concerning that cost driver.

III.          Advantages And Disadvantages Of Activity-Based Budgeting

AdvantagesDisadvantages
Activity-based-budgeting helps an organization to control their costs and allows them to focus on their respective strategies. Activity-Based-Budgeting is not itself a disadvantage, but it is more complicated to implement.
It is an advanced technique of budgeting that analyses the costs over productive activitiesIt is not yet easier to maintain Activity-Based Budgeting than traditional budgeting.
It allows us to save over unproductive costs.More time-consuming and even more expensive. 
It enhances the efficiency of their business management and boosts profitability.It is the dominating pressure for tracking activities and progress without having a tracking facility. 

Moreover, the accountant handling ABB must have deep knowledge of business along with the budgeting processes. It is undoubtedly challenging to implement ABB specifically on a large business scale with complex production cycles.

V. Activity-Based Budgeting as compared with Traditional Budgeting Processes

Activity-Based BudgetingTraditional Budgeting Processes 
·       Activity-based budgeting (ABB) is not accessible to new companies that do not possess a previous budgeting framework.·       It is not necessarily suitable for all companies.·       Activity-based budgeting is a comprehensive and complex process.·       It can be the cause of a problem rather than giving the solutions if not handled properly.·       It provides an approach to look at things with a unique perspective.·       It is more suitable for an advanced organization willing for innovative ideas having a significant number of resources. ·       Traditional budgeting practices are less complicated.·       They are an even more cheap approach to budgeting than Activity-based-budgeting (ABB).·       ABB employs past budgeting experiences to procure exact estimates about the upcoming activities and expenses more diversely than traditional budgeting.

VI. Importance of Activity Based Budgeting

Activity-based-budgeting has its own importance that cannot be denied. It improves the efficiency of an organization and helps them manage their activities more efficiently by adjusting cost drivers. Activity-Based-Budgeting allows the company to create a budget based on productive activities. It prevents the company from getting out their budget that most usually caused by unproductive activities.

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