What is Activity based budgeting and briefly describe how it could bring improvements to the budgeting process of an organization

Activity based budgeting(ABB) is a method of budgeting which is based on an activity framework, utilizing cost driver data rather than the more traditional functional cost centres and overhead absorption ratios.

ABB involves defining the activities that underlies the financial figures in each function and using the level of activity to decide how much resource should be allocated, how well it is being managed and to explain variances from budgets.

Some of the improvements that ABB can brings to the budgeting process might include the following:

• costs will be better managed and understood between ABB recognizes that the aim is to control the causes(drivers) of costs rather than the costs themselves
• non-value adding actitivites will be more readily highlighted
• cross-functional co-operation will be improved. By focussing on activities, ABB recognizes that many departmental activities are driven by demands and decisions beyong the immediate control of the manager responsible for the department’s budget
• continuous improvement will be encouraged. Traditional financial measures are unable to fulfil the objectives of continuous improvement. ABB recognizes the need for additional measures which focuson the drivers of cost, the qualty of activities undertaken the responsiblities to change and so on.