benefits of activity based budgeting essay sample 4127

Along with the development of globalisation. companies must hold an efficient system to maintain the competitory advantage. The wide application of new engineering gives a footing to the coming of ABB. Nowadays. more and more companies start to utilize ABB in the budgeting procedure. Mentioning to ABB. companies do good 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 study about the characters and benefits ABB has.

What is Activity-Based Budgeting ( ABB )

Definition of ABB

Brimson says ABB is a pull offing procedure that based on the activity degree. in order to acquire permanent betterment on cost and operation ( Brimson 1991 ) . It presents a budget in footings of the cost of a company’s merchandises and services ( NDMA 2006 ) .

Background of ABB

ABB. evolved from ABC ( Activity-Based Costing ) . is the “application of ABC and ABCM rules in a budgetary control setting” ( Williamson 1996 ) . ABB is based on merchandises be aftering to bring forth and gross revenues that haven’t finished. It is activities that conveying out costs and is merchandises that create demands for activities. ABB allows us to acquire the activity needed for measures of merchandises and gross revenues. We need to cognize the “historic informations by following ABC” ( learningnet ) . and with the information we could gauge the resources and costs to each activity.

How does ABB work based on merchandises. measure and combination of both calculate the cost of activity harmonizing to the planned merchandises. measure and combination comparison with the current resource supply make up one’s mind the resource cost budget harmonizing to the cost of activity

Benefits of ABB

Comparison between Traditional Budgeting Method and ABB

Budgeting is information that managerial individuals need for decision-making and apportioning the cost for each portion of bring forthing. So budgeting should offer an advanced stuff and give a view of what will go on 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 informations of old twelvemonth and fiscal statement of the activity program so “give a new one-year budgeting by increasing or diminishing the cost harmonizing to predicting or other requirement” ( Dong Ying 2006 ) . Company could merely accomplish budget balance by seting measure of product/service supply or resource capableness.

While with ABB. company could accomplish runing budget balance before fiscal budget by seting “quantity of budgeting one-year product/service supply. current resource capableness. resource driver rate. activity driverrate” ( Pan Fei 2006 ) . etc.

2. Allotment on indirect cost

Traditional budgeting method normally allocates bring forthing cost by labour hr. Since bring forthing cost is assorted and caused by altering factors instead than merely measure. it will be non sensible for companies merely taking history of cost driver related to measure.

ABB finds out the cost driver with first consideration of accounting the sensible BASIC activity which is used for apportioning indirect cost. So the cardinal differences of ABB are ( a ) cut down the range of indirect cost allotment. and ( B ) increase the allocating criterions.

3. Merchandise pricing

With traditional budgeting method. the costs of high giving up merchandises are overestimated and the net incomes are undervalued ; on the contract. the low giving up costs are underestimated and the net incomes are overvalued.

But with ABB. the individuals in direction degree could cut down the monetary value of high giving up merchandises to increase the market portion and derive more net incomes. while raise the monetary value of the particular and less profitable merchandises. If the clients accept it. companies could gain high net incomes. and if the clients don’t accept it. companies could merely cut down the green goods and apportion the trim labours to other merchandises.

4. Chemical reaction about resource ingestion

Under traditional budgeting method. cost is a gross construct. Cost budgeting is merely a simple division of direct stuff. direct labour. mill overhead and period disbursal but can non reflect every resource ingestion point.

Under ABB. the contemplation of each activity resource ingestion point and measure is clear. With this. the resource allotment and activityingestion is crystalline to acquire the optimisation of resource allotment.

5. Organization construction

Traditional budgeting method is located in a perpendicular organisation construction. while ABB dressed ores on level organisation construction. which breaks the separation between sections inside the company. It is good for optimisation of value concatenation.

6. Analysis on fiscal index

Traditional budgeting method analyses fiscal index by organisation construction. while ABB could set fiscal index to every activity individual by the activity characters and do the individual responsible to the index. So that it could apportion the scarce resource more expeditiously.

7. Stationarity

The acute competition requires companies to see the cost variable. But traditional budgeting method separates the cost into variable and fixed. set the accent on the variable cost and see the fixed cost implacable.

ABB believes that in the long tally. most costs are variable. and it “seeks to understand the forces that cause overhead costs to alter over time” ( Colin Drury 1998 ) .

Benefits of ABB

Although there are besides jobs with ABB. such as high work-out costs. complex plan. and can non transport out separately by a individual section of a company. ABB’s benefits are outweighed the jobs. The information about costs is more scientific and relevant by following ABB. and ABB makes green goods. sale. and pricing decision-making more sensible and existent. The tabular array below gives us a brief but clear penetration about the benefits of ABB ( Bailey 1991 ) .

Table 1 Benefits of ABB

Benefits % of sampleProbably taking to:

Greater truth in merchandise costing100Improved pricing. make-or-buy determinations

Greater engagement of production managers90Improved cost consciousness. feeling of ownership. interaction

Improved direction information70Greater consciousness of departmental directors. better merchandise design. scheme improved. direction control. and quality direction

Improved profitableness

Decrease in costs Greater profitableness. improved investing. public presentation enhanced. concern chances

Under ABB. the balance of runing rhythm budget and fiscal rhythm budget can accomplish individually. When companies work out a budget. they can accomplish runing rhythm in progress. and so travel on to the fiscal budget based on the consequence instead than cipher the imbalanced operating rhythm budgeting consequence. More of import. ABB focal point on work out budget straight harmonizing to the activity and resource and it has more nonfinancial cost drivers like sum of proving. and debug clip. This is favourable for clearly analysing the inefficient or imbalanced operating causes when analysing fluctuations. It is benefit for optimising resource allotment. cut downing cost and pricing determination. and offer indispensable information for optimisation of the value concatenation.

ABB. based on “activity” . now is developing into many facets of company direction. ABB removes the jobs of the deficiency of strategic relevancy by linking scheme and budget. and so gives budget control more maps on scheme direction. The strategic direction which based on ABB is an activity concatenation and value concatenation direction in operating procedure. It holds the way of the market demand. procedure of bring forthing and after-sale service. so that companies know how to act in the market hazardous environment.

Companies gain more net incomes by apportioning resource. exercising the co-ordinated map among sections and bring forthing links. and so accomplish the graduated table virtue end of “1+1 & gt ; 2” .

For labours and direction degree. the budgeting informations ABB gives shows them a clear position of the figure of activities they must complete every month during the budgeting twelvemonth. so they understand and accept the budget better and carry out it more expeditiously. This helps staff increase the enthusiasm and passion on working.


The basic rule of ABB is to work out the cost harmonizing to activity or work flow. It is different from traditional budgeting method which is based on the cost factors. The resource demand is from be aftering activity or work load in order to do certain that it meets the frequent alteration of client demands. department’s mark and scheme. alteration in work flow and service. and efficiency addition. etc. Based on the activity. work flow and value concatenation. ABB focuses on the entirely accomplishment. in order to heighten the capableness of covering with the personal businesss between sections. ABB increase the connexion between budgeting and scheme planning. and the forming procedure is good for cut downing costs and inefficient activities.

The usage of ABB makes it possible for companies to reflect the strategic way clearly. Under ABB. there is a budgeting figure for each activity. so when budget is executed. everyone knows how much should he make during the budgeting period. At the same clip. ABB makes the company’s scheme embodied and understood in day-to-day operation.


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

C. T. Horngren. A. Bhimani. S. M. Datar. G. Foster ( 2005 ) . ‘Activity-Based Costing’ . Management and Cost Accounting ( Prentice Hall Europe ) . 345-363

Duncan Williamson ( 1996 ) . ‘Activity-based budgeting’ . Cost & A ; Management Accounting ( Prentice Hall Europe ) . 178. 197-202 and 488

Dong Ying ( 2006 ) . “To Complete the Budgeting System” ( 17 July 2006 ) .

World Wide Web. cma. e521. com/article. php? articleid=1325

Pan Fei ( 2006 ) . ‘Research on Activity-Based Budgeting’ . ( 26 May 2006 ) .

World Wide Web. chengben. net/Article/HTML/600. hypertext markup language

Jiang Chaohui ( 2006 ) . ‘Research on the Intra-company Budgeting Methods’ . ( 30 Aug. 2006 ) . World Wide Web. hnjycpa. cn/news/readnews. asp? newsID=645

Zhang Gang. ‘Comparison and Operation of Traditional Budgeting Method and ABB’ . hypertext transfer protocol: //www. e521. com/magazine/ckyk/200106/0514154123. htm. N/A

World Wide Web. ndma. com/resources/ndm2298. htm. N/A

World Wide Web. learningnet. com. cn/contents/Hmm/budget/core/abb. htm. N/A

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