Activity Based Budgeting (ABB)

What is Activity Based Budgeting (ABB)?

Activity Based Budgeting (ABB) is an approach to budgeting that helps companies estimate their workload and resource requirements based on their activities and driver relationships. It is an essential part of an ongoing business plan and allows organizations to understand the types, number, and cost of resources that activities are expected to consume.

In traditional budgeting, companies allocate resources based on historical data or arbitrary percentages. However, ABB takes a more strategic and data-driven approach. By analyzing the activities that drive costs and resource consumption, companies can make more accurate budget estimates.

The first step in implementing ABB is to identify the activities that contribute to the organization's overall goals. These activities can be both operational and non-operational, such as production, marketing, or research and development. Once the activities are identified, the next step is to determine the drivers that influence the consumption of resources for each activity. For example, the number of units produced may be a driver for production costs, while the number of sales calls made may be a driver for marketing costs.

Once the activities and their drivers are established, companies can use this information to forecast the workload for each activity. This involves estimating the expected level of activity and the resources required to support it. For example, if the forecasted workload for production is an increase in units produced, the budget should reflect the additional resources needed to meet this demand.

The budget developed through ABB provides a detailed breakdown of the resources required for each activity. It includes the types and quantities of resources, as well as their associated costs. This level of granularity allows organizations to make informed decisions about resource allocation and prioritize activities based on their strategic importance.

Furthermore, ABB is not a one-time exercise but an ongoing process. As the business environment changes, organizations need to update their budgets to reflect new forecasts and goals. By regularly reviewing and adjusting the budget, companies can ensure that their resource allocation aligns with their strategic objectives.

ABB also plays a crucial role in evaluating the success of an organization in achieving its strategic goals. By comparing the actual resource consumption with the budgeted amounts, companies can identify areas of inefficiency or unexpected resource demands. This information can then be used to make informed decisions and improve future budgeting processes.

In conclusion, Activity Based Budgeting is a strategic approach that allows companies to estimate their workload and resource requirements based on their activities and driver relationships. By using this method, organizations can make more accurate budget estimates, allocate resources effectively, and evaluate their success in pursuing strategic goals. ABB is an ongoing process that requires regular review and adjustment to ensure alignment with changing business conditions.