tejas.gaikwad.1044
Tejas Gaikwad
Activities based budgets ("ABB") are based on the same concept as activities based costing ("ABC"). I.e. a budgeting/costing system that is based on all activities performed rather than, say, income statement line items or COGS elements. I.e. identify all the activities in the organization (e.g. receiving, machining, packing, selling, R&D, QC, accounting, HR), and then allocate those activity costs to all the products and/or services sold. The goal is to identify all supposedly actual costs of revenue producing items.
ABB is a method of budgeting in which the activities that incur costs in every functional area of an organization are recorded and their relationships are defined and analyzed. Activities are then tied to strategic goals, after which the costs of the activities needed are used to create the budget.
Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period's budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives, streamline costs and improve business practices.
However, ABC is/was almost useless to small/medium sized companies, since the time and effort it takes to manage it is just not worth the "alternative costing view" benefits, if any. Larger companies with a solid costing department may have had some limited use for ABC, but personally I doubt it was ever a cost/benefit efficient method in itself.
Advantages of Activity Based Budgeting:-
1. ABB serve as the foundation of Master Budgeting.
2. More Precision in Determining and Tracking Costs.
Disadvantages of Activity-Based Budgeting:-
1. Costly.
2. Time-Consuming.
3. Complex.
4. Job Insecurity.
Other benefits of Activity-Based Budgeting include:-
a) Allows the managers and business owners view the business as a system from start to finish, rather than individual departments.
b) Produces a “culture of customer focus is reinforced, when employees understand they are in business to produce products and services for customers” Strategic Costing Techniques: Activity-Based Budgeting.
c) Strategic Planning is made easier when everybody knows that the consumer is the most important individual in the business.
d) The money saved from removing unnecessary process steps can be used for future projects and new products.
e) Promotes teamwork within and between departments.
f) Bottleneck-steps that slow down the complete process can be identified and removed.
ABB is a method of budgeting in which the activities that incur costs in every functional area of an organization are recorded and their relationships are defined and analyzed. Activities are then tied to strategic goals, after which the costs of the activities needed are used to create the budget.
Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period's budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives, streamline costs and improve business practices.
However, ABC is/was almost useless to small/medium sized companies, since the time and effort it takes to manage it is just not worth the "alternative costing view" benefits, if any. Larger companies with a solid costing department may have had some limited use for ABC, but personally I doubt it was ever a cost/benefit efficient method in itself.
Advantages of Activity Based Budgeting:-
1. ABB serve as the foundation of Master Budgeting.
2. More Precision in Determining and Tracking Costs.
Disadvantages of Activity-Based Budgeting:-
1. Costly.
2. Time-Consuming.
3. Complex.
4. Job Insecurity.
Other benefits of Activity-Based Budgeting include:-
a) Allows the managers and business owners view the business as a system from start to finish, rather than individual departments.
b) Produces a “culture of customer focus is reinforced, when employees understand they are in business to produce products and services for customers” Strategic Costing Techniques: Activity-Based Budgeting.
c) Strategic Planning is made easier when everybody knows that the consumer is the most important individual in the business.
d) The money saved from removing unnecessary process steps can be used for future projects and new products.
e) Promotes teamwork within and between departments.
f) Bottleneck-steps that slow down the complete process can be identified and removed.