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Benefits Of Activity Based Budgeting Essay

1482 words - 6 pages

Along with the development of globalization, companies must have an efficient system to keep the competitive advantage. The broad application of new technology gives a basis to the advent of ABB. Nowadays, more and more companies start to use ABB in the budgeting process. Referring to ABB, companies do well 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 survey about the characters and benefits ABB has.What is Activity-Based Budgeting (ABB)Definition of ABBBrimson says ABB is a managing process that based on the activity level, in order to get lasting improvement on cost and operation (Brimson 1991). It presents a budget in terms of the cost of a company's products and services (NDMA 2006).Background of ABBABB, evolved from ABC (Activity-Based Costing), is the "application of ABC and ABCM principles in a budgetary control setting" (Williamson 1996). ABB is based on products planning to produce and sales that haven't finished. It is activities that bring out costs and is products that create demands for activities. ABB allows us to get the activity needed for quantities of products and sales. We need to know the "historic data by adopting ABC" (learningnet), and with the data we could estimate the resources and costs to each activity.How does ABB workbased on products, quantityand combination of bothcalculate the cost of activity according to theplanned products, quantity and combinationcompare with the currentresource supplydecide the resource cost budgetaccording to the cost of activityBenefits of ABBComparison between Traditional Budgeting Method and ABBBudgeting is information that managerial persons need for decision-making and allocating the cost for each part of producing. So budgeting should offer an advanced material and give a panorama of what will happen in finance.Compared with traditional budgeting method, ABB has many differences at budgeting period:1. Tools for budgeting balanceNormally, with traditional budgeting method, companies refer to the data of previous year and financial statement of the activity plan then "give a new annual budgeting by increasing or decreasing the cost according to predicting or other requirement" (Dong Ying 2006). Company could only achieve budget balance by adjusting quantity of product/service supply or resource capability.While with ABB, company could achieve operating budget balance before financial budget by adjusting "quantity of budgeting annual product/service supply, current resource capability, resource driver rate, activity driver rate" (Pan Fei 2006), etc.2. Allocation on indirect costTraditional budgeting method usually allocates producing cost by labor hour. Since producing cost is various and caused by changing factors rather than just quantity, it will be not reasonable for companies only taking account of cost driver related to quantity.ABB finds...

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