ACTIVITY BASED BUDGETING Activity Based Budgeting is a

ACTIVITY BASED BUDGETING Activity Based Budgeting is a method of budgeting in which the activities that incur costs in every functional area of an organisation are recorded and their relationships are defined analysed. Activities are then tied to strategic goals, after which the costs of the activities needed are used to create the budget. This budgeting provides opportunities to align activities with objectives , streamline costs and improve business practices.

STEPS IN ACTIVITY BASED BUDGETING Select function for which costs are to be estimated i. e. Finance , Accounting , Distribution , Marketing etc. q Identify all activities necessary to execute the selected function. q Identify the activity driver for each activity. q Estimate the necessary volume of each activity driver to meet output objectives i. e. production and sales level specified in the master budget. q

CNTD. Identify the resources consumed by each activity. � Estimate the cost of providing each resource. �

ADVANTAGES � It draws attention to the cost of overhead activities which can be a large proportion of total operating costs. � It can provide useful information in a Total Quality Management environment , by relating the cost of an activity to the level of service provided. � It allows the managers and business owners to view the business as a system from start to finish , rather than individual departments. � It promotes teamwork within and between departments.

With the help of ABB bottlenecks that slow down the complete process can be identified and removed. � It helps in identifying non value adding activities that can be eliminated. � It allows for an optimal utilisation of resources. � ABB provides opportunities for better communication of strategic objectives throughout the company. � With the help of ABB the money saved from removing unnecessary process steps can be used for future projects and new products. � It produces a culture of customer focus. �

DISADVANTAGES REQUIRES SPECIAL SOFTWARE : Activity based budgeting typically requires purchase of software to keep an accurate record of company’s cost incurring activities. This software can be expensive and the total price can increase. v TRAINING TO STAFF : Managers must be specially trained in activity based budgeting. This can be complicated and time consuming due to complex nature of keeping track of each activity and then examining each activity. v

TIME CONSUMING : The activity based budgeting system requires a lot of record keeping time for managers. Managers will also have to teach their employees how to keep track of their individual activities. � REQUIRES DEPTH UNDERSTANDING : If the managers cannot understand how to keep track of the activities within their section , the system will fail. They need to understand how the cost of each activity can impact the overall budget of the business. � COSTLY : This process is costly because managers have to prepare comprehensive review of each activity in the organisation. �

INVERSE RELATION BETWEEN Activity Based Costing RESOURCE ACTIVITIES COST OBJECTS PRODUCTS AND SERVICES PRODUCED AND CUSTOMERS SERVED Activity Based Budgeting RESOURCE ACTIVITIES FORECAST OF PRODUCTS AND SERVICES TO BE PRODUCED AND CUSTOMERS TO BE SERVED

DIFFERENCE BETWEEN ABB and CBB � MEANING FOCUS � REALISTIC APPROACH � ACCURACY � COMBINATION OF COST and VOLUME DRIVERS �