Activity Based Budgeting (ABB) is a way of presenting a budget in terms of an organization’s products and services rather than the traditional way of presenting the cost of inputs such as salaries, travel, fuel, stationery, etc.
ABB is also known as
Unlike traditional budgeting which usually reflects a percentage increment of the previous year’s budget, ABB is based on results expected to be achieved for the year under consideration.
As an overview, developing an activity based budget involves 3 key steps:
- Scrutinizing and prioritizing the activities to be carried out to achieve planned results. Priority is determined by the relative contribution to the achievement of the planned results.
- Determining the inputs required to carry out each activity.
- Costing the inputs for each activity and ultimately arriving at a cumulative cost figure.
For ABB to be effective, it is important that planning and costing of an activity be handled by the people closest to implementation. When handled well, there results a very natural cascade from the Strategic Plan to annual plans of departments, sections, and ultimately individuals.
From our extensive experience in this area, here is how we manage a smooth ABB adoption:
- Guiding all staff in preparing individual work plans with activity schedules.
Scrutinizing individual work plans for:
- Conformity to expected results
- Relevance and priority of activities to be implemented
- Work load
- Approval by management
- Identifying inputs for the approved work plans, along with their costs.
- Coalescing budgeted individual work plans into sectional, departmental and organizational budgets.
- Winning approval for the activity based budget from management and or board.
- Standardizing and assigning accounting codes to recurring costs. This will make costing for the next financial year much easier.
- Exporting the finalized budget to a computerized financial management system.