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:
- Identify the cost drivers of different activities.
- Determine the number of units associated with all activities.
- Compute the cost per unit of operational activity concerning that cost driver.
III. Advantages And Disadvantages Of Activity-Based Budgeting
|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 activities||It 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 Budgeting||Traditional 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.