Why Should Businesses Use Activity Based Budgeting?

Activity-Based budgeting (ABB) means presenting a budget in terms of the cost of an organization's products and services, rather than the traditional budget that describes cost factors (expense codes) such as compensation, travel, and training" (ABC, ABB, AND Full Cost)

By using this method, business owners analyze each operation that goes on in the business and finds ways to make improvements in order to save money. For example, in a manufacturing business a process may take many steps from start to finish to get the product to the consumers. By eliminating unnecessary steps, the products can be manufactured at a lower cost. In the end, the company gains the competitive advantage by delivering a high quality product to the consumer at a lower cost.

Activity-Based Budgeting, a fairly newer approach to financial planning, is not to be confused with traditional budgeting. In the traditional approach, or Zero-Based Budgeting, each department is given a maximum amount that the department is allowed to spend. This approach takes a long time for the budget to be approved. Each department may have to rewrite it several times before it is finally passed.

Even with final approval with the traditional approach, there is no clear indication of why the departments need the money. "Using ABB management will provide you the opportunity of focusing on questions about why you need to perform certain activities, how often you need to perform them, and their cost...will highlight excess or wasteful activities that you may want to get rid of or reduce and pinpoint potential alternatives to which you could re-deploy resources"(Activity-Based Budgeting) .

Other benefits of Activity-Based Budgeting include:

1. Allows the managers and business owners view the business as a system from start to finish, rather than individual departments

2. Produces a "culture of customer focus is reinforced, when employees understand they are in business to produce products and services for customers" (Strategic Costing Techniques: Activity-Based Budgeting)

3. Strategic Planning is made easier when everybody knows that the consumer is the most important individual in the business

4. The money saved from removing unnecessary process steps can be used for future projects and new products

5. Promotes teamwork within and between departments

6. Bottlenecks-steps that slow down the complete process can be identified and removed

To gain the advantage over the competition is the dream of any business owner. In order to do this, the business must be able to deliver a high quality product or service to the consumer at the lowest cost possible while maintaining a profit for the business. Activity-Based budgeting, allows business owners to evaluate each step involved that is needed to get the product or service to the marketplace. By knowing which steps are unnecessary and by eliminating them, money will be saved and the business will be moving int h e right direction.

Reference:

ABC, ABB, AND Full Cost Retrieved from http://www.ndma.com/resources/fc-4732.htm)

Strategic Costing Techniques: Activity-Based Budgeting. Retrieved from http://findarticles.com/p/articles/mi_qa5377/is_200702/ai_n21282819.

Activity-Based Budgeting. How ABB Will Add More Profits From Your Business. Retrieved from http://www.small-business-accounting-guide.com/activity-based-budgeting.html