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Approaches to budgets

Activity based budgeting (ABB)

ABB uses ABC information to estimate the firm’s future demand for
resources and hence can help the firm to acquire these resources
more efficiently.

 Based on the ABC philosophy that activities drive costs. This is applied to the
budgeting process.

 Generates budgets in such a way that the manager who has control over the
cost drivers is accountable for the costs.

Advantages Disadvantages

Better understanding and It may be difficult to identify clear
management of cost pools and cost responsibility for activities and a
drivers should help manage considerable amount of time and
overhead costs – these can be a effort may be needed for ABB.
significant proportion of total costs.

Illustrations and further practice

Now read Illustration 3 from Chapter 3 of the Study Text

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