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What do you understand by the term activities based budget?

Hadji Amran's Profile


Looking for activity based budgeting definition, meaning, uses & examples.Activity Based Budgeting


(Section Leader Financial Servi) |

Grouping expenditures into buckets for items like safety, environmental, emergency, or preventive.

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

I used to use it as a zero based approach to determing what gets done as opposed to what needs to be done. Also very helpful analytical framework for re-organizing a group, especially around new technology.

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

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.

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.

ABC was just another business “fad of the year”, those usually based on some academic trying to sell a book, someone who had never worked in a corporate environment. In an effort to be cutting edge, I once tried it briefly. It was an awkward mess involving way too may subjective judgments to allocate costs. Allocating each month's actual activity costs to product/service lines was a major and extended timeline undertaking when there were limited staff resources to do it. Then very few management people used the results to do anything anyway.

The whole ABC concept has gone into decline for at least 10 years now. But it did reaffirm my anti-fad philosophy.

The closest I would ever come to using ABC (or ABB) today, is to measure the costs of activities within the COGS area – e.g. what does a machine tooling operation really cost, or a pre-ship QC step. Those “activity costs” are helpful in measuring costs, but only under more reliable and efficient costing methods.

Since ABB is based on the same concept as ABC -- just budget-based, not actual-based -- I would throw it in the same bucket as ABC, and that bucket is the round bin in the corner of my office.

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