The article introduces Activity-Based Budgeting (ABB), a budgeting method that focuses on business activities and resource usage rather than traditional cost centers. It outlines the ABB process, its reliance on activity-based costing, and highlights its growing use in large organizations along with its advantages and disadvantages.
Activity-based budgeting is budgeting based on activities rather than units, products, or departments. An extension of ABB.
Activity-based budgeting is based around activities; it centers on the information generated through the activity-based costing (ABC) system, focusing on the operations of the business within the value chain.
Activity-based budgeting is gaining significant use in very large organizations. The process of creating ABB is as follows:
- Analyze products and customers to be able to predict the production and sales demand.
- Use the information from the ABC system to estimate the resources required to perform organizational activities.
- With demand predicted, estimate the quantity of each resource that will be needed to meet the demand.
- Allocate resources based on these predictions for each activity.
Advantages and Disadvantages
See the advantages and disadvantages of ABB in Figure 1.
Figure 1: Advantages and disadvantages of (ABB)
Activity-Based Budgeting (ABB) Key Takeaways
Activity-Based Budgeting (ABB) plays a crucial role in enhancing the accuracy and efficiency of financial planning by aligning resources directly with business activities. Its application is particularly valuable in large organizations, where detailed insights into operational demands and cost drivers help improve decision-making, optimize resource allocation, and support strategic objectives.