Activity Based Budgeting (ABB) is a form of budgeting based on allocating costs to each and every cost that occurs within the business to produce the product.
A business organization has a variety of departments. Eg: procurement, production, human resources, sales and marketing and so on. Each of these departments incur costs in order to produce the product. Every cost occurred within the business is directly or indirectly related to the output. So it is only fair to consider all these costs in preparing budgets.
When conducting a budget based on the activities of the business, the business should identify cost centers and allocate predicted budgets to each cost center. By breaking down the departments and process into smaller cost centers, the business is able to identify clearly where the unnecessary costs are being occurred. This is a big advantage of ABB.
Examples of activities are; bringing in raw materials (fuel and salaries for drivers), each machinery costs, supervisor salary, cost of hiring new employees, lay off costs, transportation cost of finished goods and so on.
Activity Based Budgeting or Costing is a tedious process, as there could literally be thousands of activities in a production business. So it is quite impractical to implement ABB or ABC into large organizations. It also takes a lot of time to prepare budgets based on this approach. These are a few disadvantages of ABC.
If you have further questions about Activity Based Costing or Activity Based Budgeting comment below.
