What is Activity-Based Budgeting (ABB)
Definition of ABB
Brimson says ABB is a managing process that based on the activity level, in order to get lasting improvement on cost and operation (Brimson 1991). It presents a budget in terms of the cost of a company's products and services (NDMA 2006).
Background of ABB
ABB, evolved from ABC (Activity-Based Costing), is the "application of ABC and ABCM principles in a budgetary control setting" (Williamson 1996). ABB is based on products planning to produce and sales that haven't finished. It is activities that bring out costs and is products that create demands for activities. ABB allows us to get the activity needed for quantities of products and sales. We need to know the "historic data by adopting ABC" (learningnet), and with the data we could estimate the resources and costs to each activity.
How does ABB work
based on products, quantity
and combination of both
calculate the cost of activity according to the
planned products, quantity and combination
compare with the current
decide the resource cost budget
according to the cost of activity
Benefits of ABB
Comparison between Traditional Budgeting Method and ABB
Budgeting is information that managerial persons need for decision-making and allocating the cost for each part of producing. So budgeting should offer an advanced material and give a panorama of what will happen in finance.
Compared with traditional budgeting method, ABB has many differences at budgeting period:
1. Tools for budgeting balance
Normally, with traditional budgeting method, companies refer to the data of previous year and financial statement of the activity plan then "give a new annual budgeting by increasing or decreasing the cost according to predicting or other requirement" (Dong Ying 2006). Company could only achieve budget balance by adjusting quantity of product/service supply or resource capability.
While with ABB, company could achieve operating budget balance before financial budget by adjusting "quantity of budgeting annual product/service supply, current resource capability, resource driver rate, activity driver rate" (Pan Fei 2006), etc.
2. Allocation on indirect cost
Traditional budgeting method usually allocates producing cost by labor hour. Since producing cost is various and caused by changing factors rather than just quantity, it will be not reasonable for companies only taking account of cost driver related to quantity.
ABB finds out the cost driver with first consideration of accounting the reasonable basic activity which is used for allocating indirect cost. So the fundamental differences of ABB are (a) reduce the scope of indirect cost allocation, and (b) increase the allocating standards.
3. Product pricing
With traditional budgeting method, the costs of high yielding products are overestimated and the profits are undervalued; on the contract, the low yielding costs are underestimated and the profits are overvalued.
But with ABB, the persons in management level could reduce the price of high yielding products to increase the market share and gain more profits, while raise the price of the special and less profitable products. If the customers accept it, companies could earn high profits, and if the customers don't accept it, companies could just reduce the produce and allocate the spare labors to other...