216952
Description
Mind Map by Shahid Musthafa, updated more than 1 year ago
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Created by Shahid Musthafa
about 11 years ago
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Activity Based
Budgeting
- ABB is defined as: ‘a method of budgeting based on an activity
framework and utilising cost driver data in the budgetsetting and
variance feedback processes’.
- At its essence, activity-based budgeting begins by looking at results and the
activities that created them, as opposed to cost-based budgeting, which
often begins with raw input and material and works outward. ABB can also
help firms create more accurate financial forecasts.
- At its essence, activity-based budgeting begins by looking at results and the
activities that created them, as opposed to cost-based budgeting, which
often begins with raw input and material and works outward. ABB can also
help firms create more accurate financial forecasts.
- Advantages
- It draws attention to the costs
of ‘overhead activities’ which
can be a large proportion of
total operating costs.
- It recognises that it is activities
which drive costs. If we can control
the causes (drivers) of costs, then
costs should be better managed and
understood.
- ABB can provide useful information
in a total quality management (TQM)
environment, by relating the cost of
an activity to the level of service
provided.
- If an organisation produces many
different types of output using
different combinations of activities
then ABB can provide more
meaningful information for budgetary
control.
- It draws attention to the costs
of ‘overhead activities’ which
can be a large proportion of
total operating costs.
- Disadvantages
- A considerable amount of time and
effort might be needed to establish the
key activities and their cost drivers.
- It may be difficult to identify
clear individual responsibilities
for activities.
- It could be argued that in the shortterm
many overhead costs are not controllable
and do not vary directly with changes in the
volume of activity for the cost driver. The
only cost variances to report would be
fixed overhead expenditure variances for
each activity.
- A considerable amount of time and
effort might be needed to establish the
key activities and their cost drivers.
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