Activity-Based Budgeting
Activity-based budgeting (ABB) is a system that records, researches, and analyzes activities that lead to costs for a company. Every activity in an organization that incurs a cost is scrutinized for potential ways to create efficiencies. Budgets are then developed based on these results.
ABB is more rigorous than traditional budgeting processes, which tend to merely adjust previous budgets to account for inflation or business development.
Activity-Based Budgeting (ABB)
Definition
Activity-Based Budgeting (ABB) is a system that records, studies, and analyzes activities that cause company costs. Each cost-generating activity within the organization is reviewed to find potential ways to create benefits. Budgets are then formulated based on these results. ABB is more rigorous than traditional budgeting processes, which often merely adjust previous budgets to account for inflation or business growth.
Origin
ABB originated in the late 1980s and early 1990s when companies began seeking more precise cost management methods. It is an extension of Activity-Based Costing (ABC), which was first introduced by Robin Cooper and Robert Kaplan in the 1980s.
Categories and Characteristics
ABB can be categorized into the following types:
- Activity-Based Cost Allocation: Analyzing the costs of various activities to determine the resource consumption of each activity.
- Activity-Based Performance Evaluation: Evaluating the performance of activities through cost and benefit analysis.
- Activity-Based Budgeting: Formulating detailed budget plans based on the costs and benefits of activities.
Characteristics of ABB include:
- Accuracy: Provides more precise budgets through detailed analysis of activity costs.
- Flexibility: Can be adjusted according to changes in actual business activities.
- Benefit-Oriented: Focuses on optimizing activities to improve benefits.
Case Studies
Case 1: A manufacturing company used ABB to discover that maintenance costs for certain production lines were too high. By reallocating resources and optimizing maintenance processes, the company successfully reduced maintenance costs by 20%.
Case 2: A retail company used ABB to find that some promotional activities were not cost-effective. By adjusting promotional strategies, the company increased overall sales while reducing promotional costs.
Common Questions
Question 1: Is ABB suitable for all types of companies?
Answer: ABB is more suitable for companies with complex activities and diverse cost structures. For small businesses or companies with fewer activities, traditional budgeting methods may be more appropriate.
Question 2: Does implementing ABB require a lot of time and resources?
Answer: Yes, implementing ABB requires detailed data collection and analysis, which may require significant time and resources. However, the precise budgeting and benefit optimization it provides usually justify the investment.
