Benefits of Activity-Based Budgeting

Topics: Management accounting, Costs, Cost Pages: 7 (1478 words) Published: December 5, 2006
Along with the development of globalization, companies must have an efficient system to keep the competitive advantage. The broad application of new technology gives a basis to the advent of ABB. Nowadays, more and more companies start to use ABB in the budgeting process. Referring to ABB, companies do well in their budgeting period. This shows that ABB itself has many outstanding characters. In this article we will compare it with traditional budget method, so that it could give us a general survey about the characters and benefits ABB has.

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

resource supply

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...

Bibliography: Bailey, J. (1991), 'Implementation of ABC systems by UK companies ', Management Accounting (CIMA) (February)
Brimson, J.A., Fraser R.(1991), 'The Key Features of ABB ', Management Accounting (London)
Colin Drury (1998), 'Activity-Based Costing ', Cost: An Introduction (International Thomson Publishing), 293-312
Duncan Williamson (1996), 'Activity-based budgeting ', Cost & Management Accounting (Prentice Hall Europe), 178, 197-202 and 488
Dong Ying (2006), "To Complete the Budgeting System" (17 July 2006),
Pan Fei (2006), 'Research on Activity-Based Budgeting ', (26 May 2006),
Jiang Chaohui (2006), 'Research on the Intra-company Budgeting Methods ', (30 Aug
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