how activity based budgeting abb works
keeping costs to a minimum is a crucial part of business management when done effectively and not too excessively companies should be able to maintain and keep growing their revenues while squeezing out higher profits from them using activity based budgeting abb can help companies to reduce the activity levels required to generate sales eliminating unnecessary costs should boost profitability the activity based budgeting abb process is broken down into three steps activity based budgeting abb vs traditional budgeting processesactivity based budgeting abb is an alternative budgeting practice traditional methods are more simplistic adjusting prior period budgets to account for inflation or revenue growth rather than using past budgets to calculate how much a firm will spend in the current year activity based budgeting abb digs deeper activity based budgeting abb is not necessary for all companies for example established firms that experience minimal change typically find that applying a flat rate to data from the previous year to reflect business growth and inflation is sufficient in contrast newer companies without access to historical budgeting information cannot consider this an option activity based budgeting abb is also likely to be implemented by firms undergoing material changes such as those with new subsidiaries significant customers business locations or products in these types of cases historical information may no longer be a useful basis for future budgeting example of activity based budgetingcompany a anticipates receiving 50 000 sales orders in the upcoming year with each single order costing 2 to process therefore the activity based budget abb for the expenses relating to processing sales orders for the upcoming year is 100 000 50 000 2 this figure may be compared to a traditional approach to budgeting if last year s budget called for 80 000 of sales order processing expenses and sales were expected to grow 10 only 88 000 80 000 80 000 10 is budgeted advantages and disadvantages of activity based budgetingactivity based budgeting abb systems allow for more control over the budgeting process revenue and expense planning occurs at a precise level that provides useful details regarding projections abb allows for management to have increased control over the budgeting process and to align the budget with overall company goals unfortunately these benefits come at a cost activity based budgeting abb is more expensive to implement and maintain than traditional budgeting techniques and more time consuming as well moreover abb systems need additional assumptions and insight from management which can on occasion result in potential budgeting inaccuracies 