Activity Based Budgeting

Activity Based Budgeting - Transcript

Activity Based Budgeting
Activity Based Budgeting is a method of budgeting in which the activities that incur costs in every functional area of an organization are recorded and their relationships are defined and analyzed Activity based budgeting ABB focuses on the budgeted cost of activities necessary to produce and sell products and services

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

This budget type accounts for how staff members allocate their efforts among activities After calculating the full cost of each task managers can establish mechanisms that link support functions to the primary obligations of the organization for example in a law enforcement environment the main activities would be the direct costs of program delivery e g patrol services investigations tactical operations and traffic control By developing a comprehensive activity based budget executives can create a clear nexus between workload and costs

In developing the activity based budgeting model it is important to understand and identify What activities are being need to be carried out How efficiently the activities are being carried out and to what quality and standard What is driving the level of resource required to perform each activity the activity level volume driver The relationships between the activity level volume driver and its root cause How the root cause may will change and how this can affect the activity resource required

Activity Based Budgeting
Maui Diving included the cost of setup activity in developing the overhead budget In an ABB the costs of the setup activity as well as other activity areas would be separately predicted Assume that Maui Diving produces two products Product A and Product B

Activity Based Budgeting
Product A Product B Units produced 880 200

Labor hours per unit 3 3 Budgeted setup hours 5 5 Total budgeted machine setup related cost is 25 920 per month

Activity Based Budgeting
Total budgeted labor hours are Product A 880 3 2 640 Product B 200 3 600 Total 3 240 What is the allocation rate per labor hour 25 920 3 240 8 00

Activity Based Budgeting
Product A Product B Total cost allocated to each product line 8 00 2 640 8 00 600 1 600

21 120

Activity Based Budgeting
Under ABB the number of setups is the cost driver 25 920 budgeted machine setup cost 10 budgeted machine setup hours 2 592 allocation rate per machine setuphour How much machine setup related costs are allocated to each product line

Activity Based Budgeting
2 592 5 2 592 5 Product A 12 960 Product B 12 960