Activity-Based Budgeting (ABB) is a budgeting approach that focuses on costs associated with activities instead of departments, products or projects as is common in traditional budgeting. ABB involves thoroughly analyzing and monitoring costs associated with activities and using this information to create a budget. By analyzing activities and their associated costs, ABB provides a more detailed view of a company’s financial performance.

The activity-based budgeting process begins with the identification of all activities necessary for the production and distribution of a product or services. It then distinguishes the cost associated with each of these activities in an effort to determine their overhead costs. ABB recognizes that overhead costs – such as labor, facility costs, or materials – are not a function of a sale, but instead arise from the activities required for production and distribution.

Allocating costs to activities rather than departments or products provides a much more accurate picture of how costs affect profitability. This process centers on understanding the activities, costs and value associated with a budget line item in order to create a budget that is more reflective of the company’s operational reality. For example, if a product requires purchasing supplies and packaging materials in order to sell it, those costs will be properly recognized with ABB, while traditional budgeting processes would not.

Activity-based budgeting (ABB) also takes into account the time and effort associated with each activity involved in creating a product or service. It is important to understand how much time and effort is required to execute a given activity because each activity generates associated costs that must be taken into account when developing a budget.

It is worth noting that ABB requires an investment in infrastructure and personnel, given that the process of setting up and executing each activity and analyzing their associated costs will require a significant amount of data and human resources. However, the savings generated through the implementation of ABB can provide a notable ROI for companies.

Activity-based budgeting (ABB) provides a vastly improved, more detailed budget process than traditional budgeting which requires a more meticulous effort, but provides a more accurate representation of a company’s performance. By taking into account the costs and impact of each activity associated with production and distribution, ABB allows companies to identify greater savings, reduce waste and drive improved profits. Consequently, it is well worth considering for new companies and companies undergoing material changes.