Activity Based Budgeting (ABB)

ABB involves defining the activities that underlie the financial figures in each function and using the level of activity to decide how much resources should be allocated, how well it is being managed and to explain variances from budget. At its simplest, activity based budgeting (ABB) in merely the use of costs determined using ABC (Activity Based Costing) as a basis for preparing budgets. Benefits of ABB are:
a) It is activities which drive costs and the aim is to control the causes (drivers) of costs rather than the costs themselves due to which costs will be better managed and better understood.
b) Not all activities are value adding and so activities must be examined in order to eliminate non-valued added activities.
c) Managers are held responsible for the controllable activities which cause the cost.
d) Traditional financial measures of performance enable to fulfill the objective of continuous improvement. Additional measures which focus on drivers of costs should improve the quality of activities undertaken.