What is Activity-Based Budgeting (ABB)?
Activity-Based Budgeting (ABB) is a budgeting method that focuses on identifying and analyzing business activities that drive costs. Instead of basing budgets on historical figures, ABB builds a financial plan by forecasting costs based on planned activities and expected demand.
How ABB Works
Identify Key Activities: Determine the major activities necessary to deliver products or services.
Estimate Activity Costs: Assign costs to each activity based on resource requirements.
Forecast Activity Levels: Estimate how frequently each activity will occur.
Develop Budget: Multiply activity costs by the forecasted activity levels to build a budget.
Example
A manufacturing firm forecasts producing 10,000 units next year. ABB calculates costs based on resources needed per unit, like machine hours, labor hours, and raw materials, rather than last year’s production cost.
Benefits
Provides more accurate, activity-based cost visibility
Aligns spending with operational needs
Enhances cost control and profitability analysis